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Monday, December 21, 2009

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.

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Anonymous Anonymous said:

Paul wrote: "5. Peer review of the work performed by the Controller’s staff would be conducted by an outside CPA firm."

Who would select the outside CPA firm?

December 21, 2009 3:55 AM  

Anonymous Anonymous said:

The City Attorney has to be a qualified lawyer. The Controller should be a CPA.

Greuel has started off weak and very much under the influence of her prior relationships with other councilmembers. She has not once made any references to the inadequacies of Ed Reyes' chairmanship of PLUM when it was Reyes who was too stupid to realize that he was being played by an unpaid lobbyist for the Marijuana Shop industry. Reye's mishandling of PLUM's oversight should be the focus of an audit as it has caused an explosion of Marijuana Shops in LA, and closing them down will now cost the City of Los Angeles millions.
But Greuel, who has already hired John Shallman for her 2013 campaign for Mayor, does not want to upset the little man of City Hall, so she's said and done nothing.

December 21, 2009 7:30 AM  

Anonymous Anonymous said:

Very indepth assessment Paul, too bad you tainted it with the photo that included the president of the LA City Counil.

Right from the get go you did yourself and us a diservice by letting your political bias get in your way.


December 21, 2009 9:15 AM  

Anonymous Anonymous said:

Greuel is too weak to do anything meaningful in this role. It's obviously just a stepping stone for her to some other office.

How is she at chasing unlicensed dogs that are not on a leash?

December 21, 2009 9:25 AM  

Blogger Michael Higby said:

I selected that photo not Paul.

December 21, 2009 10:07 AM  

Anonymous Anonymous said:

She still looks like a pixie.

December 21, 2009 10:23 AM  

Anonymous Anonymous said:

7:30, you're the one "being played" for believing the propaganda put out by the L A Weekly on that, especially by Dennis Romero and Patrick. Every legit journalist sees that the paper is a pro-Trutanich rag that puts out his and Cooley's spins as though they were fact. No one takes the Weakly or Jill Stewart seriously any more EXCEPT people like you, the Ron Kaye crowd who have axes to grind from a particular, narrow point of view.

December 21, 2009 10:52 AM  

Anonymous Paul Hatfield said:


The selection of a CPA firm to perform the peer review would be by the City Council. Both price and capability would be considered.
CPAs must adhere to a higher code of ethics. They must recuse themselves in cases where there is a conflict of interest that could compromise their independence.
CPA firms themselves are subject to peer reviews.
The report would go directly to the Council and the public. The Controller would have no say in the content of the report.

December 21, 2009 11:13 AM  

Anonymous Anonymous said:

That's good work Paul. It's nice to see someone go beyond complaining and take the time to come up solutions.

A couple of thoughts as we begin this discussion.

1. As long as the Controller is elected, there will be conflicts of interest because it takes money to run a campaign, and you can't control independent expenditures. Consider having the Controller appointed by multiple sources.

2. You said that the Controller's audit of DONE didn't include any recommendations. It included 25. The need to follow-up on a day-to-day belongs to the Ed. and Neighborood Committee (new chair will be Krekorian), or the Audits Committee (chair is Koretz). It would be a good time for the committee to review how things are going with those recommendations.

3. Requiring outside reviews of audits will be difficult because of the costs involved. This isn't the right time for proposals that cost money. Before the new Charter will passed, when Keith Comrie was the CAO, the CAO did the audits using their own staff, but largely outside firms. In a case saving measure, this duty was given to the Controller. If you are proposing that both the Controller and outside firms get involved in audits, there will be a cost involved. The Controller does use outside firms to help with audits, as it did with the DONE audit.


December 21, 2009 11:33 AM  

Anonymous Paul Hatfield said:

Thank you for your thoughts. They need to be part of the dialog we need to have to change how the Controller and city operate.

While the Controller makes recommendations after an audit, it is critical that the office aggressively follows up - especially where conditions are ripe for fraud, as was the case at DONE. If the department or the City Council does not cooperate, then it is time to take the issue public and go to the press.
Just as a bad audit report reaches the shareholders of a company, so must reports dealing with serious problems reach the stakeholders and taxpayers.
There is a definite reluctance by the Controller's Office to use its political clout if necessary to embarass the city into taking action. By not aggressively following up on serious deficiencies, the Controller is almost as complicit as the City Council itself.
A true professional in the office would make certain to pursue and publicize these matters before they caused major damage.
I would like to see external CPA firms handle the audits of the proprietary departments exclusively and have the Controller's Office focus on internal audits of the regular departments.
These are issues that require much more space than just the comments thread.

December 21, 2009 12:58 PM  

Anonymous Anonymous said:

Independence is more perception than reality.

Electing a controller who hasn't been elected or appointed in 5 years doesn't make them independent. Much like creating a ratepayer advocate position that's elected or appointed doesn't suddenly make the person elected there independent.

December 21, 2009 1:06 PM  

Anonymous Anonymous said:

Do you feel better? There are so many flaws as to why this will never happen, it's not even worth discussion. But idealistic thoughts of perfection are always nice because it makes you feel like something is happening.

December 21, 2009 1:24 PM  

Anonymous Paul Hatfield said:

124 -
So what do you have to offer? The status quo?
That's not working very well.

December 21, 2009 5:52 PM  

Anonymous Anonymous said:

Thank you Paul.

I completely agree with you on this. Good call.


3:55 AM

December 21, 2009 5:57 PM  

Blogger Kim-SubMeter Maid said:

To the poster at 11:33 AM:

I think that Clean Money is the only thing that will make IE's moot. Or a non-issue.

Eventually, as in Arizona, everybody is definitely onto the idea of independent expenditures and whether the average constituent knows who is paying for them or not, they know that it's not good when a candidate gets them and with real Clean Money, all candidates get the same amount of money so any IE will be noticed.

December 21, 2009 11:38 PM  

Anonymous Anonymous said:

It sounds like you're advocating an "office of Inspector General!" Or is that the Controllers job already? Is the DWP Commission supposed to be the voice of the people or do we need to create a rate payer advocate to get their attention? Sounds like we're gonna spend a bundle creating new positons, when its our controller and commissions who are supposed to do this stuff. Mayor AV--are you listening? Either lead, follow or get out of the way!

December 23, 2009 8:27 PM  

Anonymous Paul Hatfield said:

I'm advocating turning the Controller's position into the City Auditor. That's the most important part of the current job. The operational aspects of the office should be performed by the executive side of government. So, the staff Wendy currently has paying bills would report up through a true Controller. I totally agree with you when you say it is time for the Mayor to either lead or get out of the way. Wendy and I agreed that the Mayor has to light a fire under the GMs to implement audit recommendations. It's sad that it takes that kind of approach.

December 23, 2009 9:18 PM  

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