On Monday, Dec. 13, city of Seal Beach staff presented its annual Comprehensive Financial Report to the City Council.
This important report lays out in detail how money was spent in the last fiscal year, and how much money is left over.
Attached to the report was a transmittal letter indicating that the report had undergone an independent audit “designed to obtain reasonable assurance about whether the basic financial statements are free of material misstatement.”
Unfortunately, this transmittal letter failed to mention that the auditing firm hired by the city to provide this assurance was the same firm used by the city of Bell.
Mayer Hoffman McCann P.C. conducts audits for a large number of municipalities and does work for Cal/PERS.
However, in recent months, concern regarding possible auditing failures at Bell had led Cal/PERS to suspend use of MHM while the California Controller’s Office completed an investigation of MHM.
That investigation was recently completed with disturbing results. According to California Controller John Chiang, “MHM appears to have been a rubber-stamp rather than a responsible auditor committed to providing the public with the transparency and accountability that could have prevented the mismanagement of the city’s finances,” (according to Los Angeles Times, Dec. 22, 2010).
The investigation found that MHM failed to comply with fieldwork auditing standards resulting in failure to detect numerous problems.
These included illegal loans to employees, significant deficiencies in various fund balances, and the diversion of bond money for non-authorized spending.
While MHM has strongly disputed the Controller’s findings, the final word and the authority to revoke MHM’s license rests with the California Board of Accountancy.
The Board is conducting its own investigation, which will be complete in six to 18 months (LA Times, Dec. 29, 2010).
So where does this leave Seal Beach?
With a very difficult question.
If it is critically important for the city’s financial health to have a reliable and independent annual “check-up,” then the City Council should consider paying for a new audit.
Hopefully, this could be completed before the council begins working in May on the 2011-13 budget.
The alternative is to simply have trust in our City Treasurer Robbeyn Bird. Since being hired in 2008, Bird has received kudos for improving the city’s internal financial controls, and has earned the confidence of the council and the public.
The council could just resolve to use a firm other than MHM to perform the next routine audit scheduled for late 2011.
The only problem with this “trust” approach is that council and the public also had full confidence in her predecessor, Keith Evanoff.
That is, until the day it was discovered in early 2007 that he was embezzling city funds.
I don’t know what the right answer is, and I don’t know how much a new audit would cost. However, I do know that there is an old saying among poker players: “Trust, but cut the cards.”
