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San Diego
Thursday, May 30, 2024

Costs Mounting as City Tries to Finish Audit

Making sense of the bills paid to consultants hired by the city of San Diego to resolve its billion-dollar pension scandal is like falling into a pit of quicksand. The more you move around, the deeper it gets.

Earlier this month, the City Council approved an additional $10 million be paid to Kroll Inc., a New York-based risk management firm and the city’s de facto audit committee, to complete an investigation into the city’s pension mess. The city needs to produce an outside report on the pension problem to satisfy outside auditor, KPMG, that the accounting firm is not culpable for errors and mistakes made in the past. The firm has told the city it can’t sign off on annual audits for three previous fiscal years until the Kroll audit is done.

And without the annual audits, the city cannot issue municipal bonds to pay for now dormant projects such as sewer and water upgrades.

Elected city officials wring their hands publicly about the escalating costs for outside consultants, but in the end they say they have no choice. The process is required because of ongoing criminal probes by federal, state and city investigators, along with serious doubts by Wall Street rating agencies about the veracity of the city’s financial condition, said City Councilman Scott Peters.

“It’s painful but necessary,” he said of the process that has cost the city more than $26 million as of Jan. 17, according to a report on the costs prepared by the City Attorney’s Office.

The bill for Kroll’s work alone surpassed $4.6 million, but combined with costs incurred by a contracted law firm, Willkie Farr & Gallagher, it’s above $8 million.

The costs include $5 million billed by the accounting firm KPMG; $6.3 million billed by law firm Vinson & Elkins; $973,000 by the San Diego law firm of Luce Forward; and millions more from dozens of law firms and service providers engaged in the audit.

Outdated Systems To Blame

Troy Dahlberg, a Kroll Inc. managing director, lays a large part of blame for the escalating costs directly on older, outdated systems used by the city and a lack of cooperation by some city officials, specifically City Attorney Michael Aguirre.

“The level the city is messed up on this stuff is titanic,” said Dahlberg, whose firm was hired in February 2005. “Their accounting systems are basically garbage.”

Aguirre has openly criticized Kroll for months in public council meetings and charges that the firm has not provided the city with any details of its billable hours and continues to charge the city for work that shows no results.

“They were supposed to be done (with the investigation) in December, and they’ve changed the dates for it so often, I don’t know if they’ll ever produce a report,” Aguirre said.

“They’re stringing us on indefinitely and I think they’ll find some pretext to quit after they’ve sucked the bone marrow out of us.”

Stiffer Regulations

Contributing to the higher costs San Diego has incurred is a far different and tougher regulatory environment that exists today than before numerous corporate scandals and the passage in 2002 of the Sarbanes-Oxley Act.

While the law doesn’t apply to cities and public agencies, consultants convinced the city that in order to right past mistakes and errors, satisfy government investigators and assuage doubts by bond rating agencies, it should hire a completely independent outside auditor (in addition to an existing outside accountant) to look at every aspect of its pension fund, and the reasons behind a $1.4 billion deficit as of June 30, 2003.

In February 2004, the city hired the Houston law firm of Vinson & Elkins to investigate the pension under-funding and related matters. After some 18 months, the firm completed two reports that essentially absolved city officials and staffers of criminal culpability and laid blame to the city’s inadequate financial reporting policies and procedures.

Dahlberg said the Vinson & Elkins reports were woefully inadequate and missing practically any documentation to back up their findings.

“We found incredibly bad to no documentation, and they missed 30 to 40 percent of what they said they looked at,” he said. “There were holes (in the two reports) you could drive a truck through.”

Pricey Consultants

Hired primarily to review the Vinson & Elkins reports, Kroll found more mistakes and told the city these weren’t going to satisfy either government investigators or Wall Street. In March, the city designated Kroll representatives Arthur Levitt, a former chairman of the Securities and Exchange Commission, Lynn Turner, the SEC’s former chief accountant, and Dahlberg, a career public accountant, as its audit committee.

The trio earns between $750 to $900 an hour for their work, with Levitt taking the most.

As part of Kroll’s probe, it requested virtually all of the city’s electronic documents for the affected years, including millions of e-mails and spreadsheets, from city staffers’ hard drives.

Dahlberg said from a universe of some 4 million to 5 million electronic documents, his firm has zeroed in on about 400,000 of them.

In addition to sifting through the thousands of e-mails that contain key words and phrases that may be relevant to the investigation, Kroll expects to interview some 30 city employees and other people connected to the pension plan; delve into the city’s internal control systems and the auditor’s report on how to improve the systems; review all the recent criminal indictments issued by the U.S. attorney’s office, and the district attorney’s office affecting pension board members; and write a comprehensive report that will take four to five weeks.

Dahlberg won’t apologize for what some say looks like a firm taking advantage of a city that appears to be on the brink of bankruptcy.

“The city had bad systems, bad people running it, and it made a gamble that didn’t work out (hiring Vinson & Elkins), and we’re cleaning up the mess,” he said.

As for when his firm’s audit will be finished, Dahlberg refused to be pinned down. He said the revised schedule is for the project to be completed “by late spring, early summer.”

Dave Ellrich, a Florida-based forensic accountant and a former special agent for the Internal Revenue Service, said Kroll’s reputation in the industry is impeccable, but also one of the most expensive.

“They’re going to go in there, make copies of every piece of paper and interview as many people as they can,” said Ellrich, senior partner with Ellrich, Moore and Neal in Palm Beach Gardens, Fla. “It’s a very large organization, and very expensive. Their billing rates are high, top of the line.”


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