Rose-Colored Glasses Fail Pasadena

PERSPECTIVE-A city with $1.8 billion of assets and no internal audit manager since 2011.

Is anyone surprised that an independent audit report has uncovered everything from sloppy accounting practices to outright fraud? 

It was recently reported that an employee with Pasadena’s Public Works department had siphoned $6.4 million over the last 11 years. But his methods are what made the fraud more shocking than even the amount of his take.   

Preparing fake invoices, altering check amounts and bypassing approval policies are as blatant techniques as a white collar criminal can use. Only in an environment where management incompetence is the norm can this occur, as long as it did and with the degree of damage. 

Whenever I read about financial problems, fraud or waste in a government entity, I first look at its financial statements to get a sense of the scope with respect to the size of the organization and its components. 

Pasadena is structurally much smaller than Los Angeles and quieter, but its finances are definitely not minor league. The Fiscal Year 2013 Comprehensive Annual Financial Report (CAFR) has assets at $1.8 billion and revenue of $626 million. Not to digress, but over $100 million of pension bonds are on the books. That is over 10% of the city’s long-term debt. $65 million of that was issued in 2011 to plug a funding gap that would have threatened the city’s solvency. This is an indication that the city may not have the brightest bulbs in the ceiling managing fiscal matters.   

It’s a large enough bureaucracy to allow wiggle room for an unscrupulous employee in the right position to navigate and bypass procedures. But for eleven years? 

The perpetrator, Danny Wooten (photo), was hired in 2002 and held positions with payment authorization delegations. According to the Pasadena Star News’s article, he had a criminal record and several run-ins with his supervisors. Not the type of person you want around a checkbook, yet no one at City Hall seemed to care. It didn’t seem to bother officials to leave the internal audit post vacant either. 

Pasadena, as Los Angeles, has a host of special funds, including the one Wooten controlled. These funds are like cells, with limited oversight. You will recall that a Los Angeles special transportation fund accumulated $43 million over 17 years, completely unnoticed by former controllers Wendy Greuel and Laura Chick. The DWP Joint Trusts accumulated $13 million over 10 years without attracting attention from management-appointed trustees such as Ron Nichols.   

City Manager Michael Beck’s job is on the line, as it should, but nothing short of his immediate dismissal – without pay – should be tolerated by the residents. 

After the District Attorney completes an investigation, a recall effort would seem to be in order for the mayor and certain members of the City Council, mainly those on the finance committee. 

Other culprits will be uncovered, some will fit the category of unwitting. Regardless, they will have to go in order to send a message to others to take their jobs seriously. 

Lastly, the outside accounting firm of Brown Armstrong should be replaced and a complaint filed with the State Board of Accountancy. 

As part of its audit, the firm should have conducted a review of internal controls and tested the degree of compliance. Separation of duties appears to be one policy you could have driven a Rose parade float through. Did Brown Armstrong even look at the bank reconciliations for Public Works? 

All of this points to the potential for waste, fraud and abuse above and beyond Wooten’s scheme.

Like the scandal at Bell, this story has legs.

 

(Paul Hatfield is a CPA and former NC Valley Village board member and treasurer.  He blogs at Village to Village and contributes to CityWatch. He can be reached at: [email protected])

–cw

 

 

 

CityWatch

Vol 12 Issue 3

Pub: Jan 9, 2015