Paul Hatfield: Reforming the City Controller's Office

By Paul Hatfield, Special to Mayor Sam's Sister City

I was engaged in an interesting thread on Mayor Sam last weekend. It concerned the role of the City Controller. I would like to close the loop on that with this article. It is only appropriate that this gets posted first on Mayor Sam, since that’s where the discussion started. I’ll post it to Village to Village later.

The Office of the City Controller is the most least understood position in the city.

The position title itself obscures the primary mission of the job – auditing the books and processes used throughout the many departments. Yes, there are other duties assigned to the Office emblematic of what a traditional controller performs. For now, let’s focus on the auditing responsibility.

In the outside world, auditing has nothing to do with controllership, and for good reason. There must be independence between the operations of a business and the responsibility of auditing. It is difficult to perform an objective audit when both sides are intertwined as they are in Los Angeles.

Somehow, the framers of the City Charter thought it would be a great idea to have the Controller’s Office wear two hats. They mistakenly concluded that by paying the city’s bills the City Controller could audit while performing the mechanical operation of staging, funding and cutting the checks.

Well, that amounts to auditing your own work to a degree. I realize other departments originate the demand warrants and assemble the documentation, but one can easily overlook a problem when neck deep in processing transactions. Having a fresh set of eyes, unencumbered by ancillary operational tasks, is essential to ferreting out irregularities.

The current process also insulates the departments from the responsibility of due diligence.

Wendy’s recent audit citing poor cash management practices that lead to lost short term investment opportunities provides some insight into this problem.

For starters, this is not the first time this finding has been raised. Laura Chick flagged it as well.

The fact that departments are not staging their invoices so they can be paid as late as possible (without jeopardizing early payment discounts) is indicative of callous indifference at high levels. I hate to say it, but the Controller needs to publicly ridicule the management responsible for such basic shortcomings. These people do not qualify as adults and should be treated accordingly. It is really sad.

However, I am not heartened when I see the Controller focusing on an issue such as this at a time of crisis. Although managing the flow of payments is desirable, it is less important to delay invoices when short term rates are insignificant as they are today. Where is the prioritization?

More attention needs to be directed at auditing the largest and most sensitive transactions and programs. In other words, the City Controller must clearly delineate audit priorities for the staff – it is part of risk assessment. I’m sure a certain amount of that goes on, but I have not detected a general trend in that direction. I get the sense every audit is a one off affair instead of part of a concerted strategic plan to address overall waste and mismanagement.

I can assure you there are probably much bigger fish to fry in the city then what we’ve seen the Controller address so far. The DWP alone has an abundance of fertile ground to cultivate. Of course, Wendy’s independence would be subject to question were she to involve herself in that particular audit.

Lack of professionalism in the Office hurts as well.

Let’s look at a case close to home.

Even Laura Chick, as good as she was at sniffing out problems, overlooked the obvious implications of what was transpiring at DONE.

While a certain former NC member was spending thousands at casinos, and others were using their purchasing cards as gift rewards, DONE was asking me why I spent $29.95 at Trader Joe’s for snacks to feed our members and guests at NCVV Board meetings. The DONE staff claimed it was a requirement of the City Controller’s Office. Talk about not seeing the forest for the trees.

Turn the clock back a little more. DONE was audited by Chick’s staff a few years ago and serious deficiencies were found when it came to controlling the use of funds. There was no timely follow up by the auditors even when all the elements for fostering fraud were present. No recommendations were made to eliminate the problem. Good auditors make specific recommendations and see them through.

The loss from this form of embezzlement may have been relatively low compared to other transgressions, but it could have been avoided by some simple controls.

How many other DONE style disasters are waiting to explode because city auditors have not bothered to perform basic reviews of internal controls? For that matter, I suspect that weak controls in the Controller’s department itself may have contributed to the $6 million NSF problem a few months ago. I am basing that on my personal knowledge of systems used to manage payments.

How do we transform the Controller’s Office into a financial SWAT team and assure we have the right person at the helm and the right people in the trenches?

I wish I could say it were easy. The best way, and most difficult, would be through a Charter amendment. Specifically, the amendment would require the following:

1. The candidate for the office must not have served as an elected or appointed official within the five years prior to running.
2. The candidate must have X years of financial management or audit experience in a large organization with revenues of at least $X-billion.
3. Only public funding not to exceed $X per registered voter would be permitted for each candidate.
4. All professional staff employees reporting directly or indirectly to the Controller, and who are involved in audits or financial management, must maintain an active CPA license. Note: There are many CPAs that let their licenses lapse. Starting next year, the California Board of Accountancy will require members without an active license to disclose their status. It is very important that members stay abreast of technical developments and take measures to enhance their skills.
5. Peer review of the work performed by the Controller’s staff would be conducted by an outside CPA firm. The results would become public information
6. All processing tasks currently performed by the City Controller must be transferred to X department reporting to the (Mayor, Treasurer, CAO - whatever is most appropriate)
7. The position will be renamed City Auditor.

Points 4 and 5 are to assure the taxpayers of the city that only the most qualified accountants and auditors are in positions requiring professional judgment.

Point 6 is to eliminate the conflict of duties that exist in the Controller’s Office.

I think the most important points are 1 and 3. They relate to independence.

The requirements may sound intimidating, but they are not. There are many talented professionals who would gladly serve in order to protect the taxpayers of our city.

If we want an independent Controller to represent us, this is the route we must take. We can no longer elect people on the basis of how effective they were at fixing potholes, getting the streets repaved on our blocks or adding an extra police patrol in the neighborhood.

If you need a plumber, you don’t hire an electrician. It is as simple as that.

At a minimum, we need to elect new council members who are truly receptive to transparency and oversight before this concept can be launched. Even then, some compromises are to be expected. CD2 gave us a good start on December 8th. Half the Council will be up for reelection before you know it. It is time to make this an issue for the candidates to address.

More importantly, we need to get a healthy dialog going and unite behind any reasonable approach to assure independence and competence in the Office of Controller.

Paul Hatfield runs the Village to Village Blog, is a certified public account with an MBA from Pepperdine University and undergraduate degrees in economics from the University of Richmond and George Washington University.