D&O, GRC and Accountant Update 9.17.10, LA DPW and DOT Audits of Stimulus Funds

D&O, Governance, Risk, Compliance and Accountant Update
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September 17, 2010
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Dave Tate, Esq. (San Francisco)
Litigation & Trials, Governance, Investigations, Mediator
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In this issue: the Good, the Bad and the Maybe—the Controller’s Audits of the Los Angeles Departments of Transportation and Public Works Use of Stimulus Funds

The following are the City of Los Angeles Controller’s audit of the City’s Departments of Transportation and Public Works use of stimulus funds, Click Here and Click Here. And the following are my comments.

Initially, let me commend the audits and the fact that they are available for viewing on the internet. The audits identify internal control, compliance, governance, accounting and reporting deficiencies. For the people involved it would have been easier if the audits in some manner did not identify the deficiencies, or if the audits were not made available for public viewing. Hopefully the audits truly identify all of the significant deficiencies. In truth, the Controller’s comments about the deficiencies are watered down, based on my experience with governmental fund audits that are performed by outside independent auditors. For example, the Controller states that “The DPW has made a good faith effort in having processes that will help ensure it complies with ARRA [the American Recovery and Reinvestment Act] requirements and provides complete and accurate reporting.” No the DPW hasn’t—and there really is no place for such a “good faith” statement in an audit. Either there is compliance or there isn’t—“good faith” is irrelevant unless perhaps you are looking at an issue of liability. Simply put, deficiencies are deficiencies, and they need to be fixed. And, how did the Controller determine that there was a good faith effort to comply anyway? If there was a good faith effort to comply, whatever that means, then the lack of compliance must be attributable to an inability to comply or incompetency. Nevertheless, it is noteworthy that the Controller’s comments are made, even in their watered down form, as clearly greater governmental oversight, audit, disclosure and transparency should be encouraged and required.

The Controller states that in March 2010 the City was awarded $594 million of the $1.5 billion that were requested in ARRA funds. The controller’s report/letter is dated September 16, 2010. The DPW projected that it would create or retain only 238 jobs during the life of the projects funded through the ARRA. Those comments by themselves strongly suggest or indicate that the program was a job creation failure from the get go. Where was the initial planning and governance oversight?

At the time of the Controller’s review, the DPW had received $70.65 million in ARRA funding, and had created 45.46 jobs (7.76 new jobs and the remainder are jobs retained or saved). I am not sure how you create .46 of a job. Nevertheless, 45 jobs created or retained for $70.65 million is a job creation failure. Do the math. Where was the initial job creation planning and oversight?

The Department of Transportation had been awarded $40.8 million, planned to create 26 jobs, but had created or saved only 9 public jobs.

Focusing on the DPW, the audit in part states or evidences that the DPW has been slow to provide project funding and create jobs, whereas the creation of jobs was the whole idea behind the stimulus funds; lacks internal, compliance and transparency controls; improperly records and reports transactions; needs to improve its cost billing processes; and overpays for the services and projects for which ARRA money was used. It might also be questioned whether internal controls are even sufficient to allow the performance of an audit.

Where would we go from here? Given the seriousness of the deficiency findings, and that most likely more problems exist than were found (given the statistical extrapolation of deficiencies that were identified), I recommend that the Departments of Transportation and Public Works, and the people who are charged with governance oversight over those departments, go back to the drawing board; review, correct and implement proper transactional, accounting, reporting and internal control processes; and objectively evaluate each proposed ARRA project to determine which of those projects, if any, truly are worthwhile. And then, return to the federal government the money that Los Angeles cannot effectively use to produce jobs of high value as was intended by the stimulus.

And, is there any oversight from Washington?

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