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Sleeping With the Auditor 

Why San Francisco and its outside accountants are a little too close for comfort -- and how it could threaten the city's financial integrity

Wednesday, Jun 26 2002
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KPMG's selling of the software to the city it audits was by itself a violation of basic accounting tenets, say several experts. The rules of the American Institute of Certified Public Accountants, which KPMG promises to abide by in its city contracts, say, in no uncertain terms: "If the audit organization has been responsible for designing, developing, and/or installing the entity's accounting system, or is operating the system and then performed a financial statement audit of the entity, the audit organization would clearly be in violation of the two overarching principles of the independence standard."

Van Daniker, of the National Association of State Auditors, Controllers, and Treasurers, states point-blank that audit firms should not sell software to their clients. "Whether it is an independent action in fact or not -- it looks bad," he asserts.

Gregory Newington, the chief of enforcement for the California Board of Accountancy, which licenses certified public accountants, says it is more than a conflict of independence: It could be against the law.

"There is a law in California that expressly forbids audit firms from recommending products, such as Hewlett-Packard or Oracle, to their audit clients when they receive financial remuneration from the sale."

Ethics aside, KPMG's outdated software is apparently also riddled with problems. For many years, KPMG auditors and consultants have been finding terrible flaws in FAMIS and then recommending that the controller buy "upgrades" from KPMG. For instance, FAMIS has trouble "effectively" accounting in the general ledger for capital expenses, especially federal grants, according to KPMG's reports to the controller. Last year, the auditor found that, for some departments, "The existing general ledger payment data are based on contracted amounts and may not match actual expenditures," which means, rather shockingly, that the city may not be accurately accounting for projects that go over budget -- as many contracts do, including KPMG's. Harrington's response has been to pump more money into FAMIS, instead of looking for a superior system.

In April 2000, a KPMG LLP partner, Marc S. Diamond, drafted a report asserting that the city's financial information often had to be transferred from one database to another by hand. He questioned whether FAMIS "is capable of capturing financial data that is of a sufficiently high degree of resolution to support an effective capital management reporting capability."

Diamond revealed that, throughout the city, finance officers had set up "shadow systems," essentially second sets of books, in an attempt to keep track of transactions that FAMIS missed. The shadow systems, Diamond wrote, "can result in degradation of the integrity of the financial and management reporting process ... as transaction data travels in a circuitous route throughout the various systems employed by ... the city." Diamond asked for $480,000 to keep working on the problem.

Diamond's report seemed to infuriate a manager in the Controller's Office, Harold Guetersloh, who, in an amazingly frank e-mail to KPMG LLP, asked for "evidence that FAMIS can't be trusted or assure me that you will remove that statement from your report. It is possible that whoever you talked to had productive [work] to do so they decided to set up a competing set of books." Guetersloh, who recently retired, blamed humans for FAMIS's shortcomings.

"I can give you hundreds of examples where PUC, DPW, and DPT engineers charge jobs which have been completed for months," Guetersloh wrote. "Project Managers never catch these errors. It is left to the accountants to clean the messes up. I do, however, realize that online updating of salaries is sexy and highly desirable to the engineers."

The computer system's troubles left plenty of room for financial shenanigans. Last year, KPMG Consulting's Dwayne McKinley sent a long list of FAMIS glitches to the Controller's Office. He said FAMIS has difficulty correlating revenue and expense data; the system is clogged with duplicate data; it is unable to process some contract payments and cost overruns; some information must be transferred by hand within the system's databases, instead of by automated processes; and FAMIS cannot track cash payments by contract number or vendor name. In other words, city officials cannot use the general ledger software to determine how much money has been paid out over any period of time for a particular contract, or to a particular person, company, or nonprofit organization.

(McKinley did not propose a solution; he did recommend that the controller pump up his firm's consulting budget.)

Accounting expert Hildreth says FAMIS was a state-of-the-art system in the mid-1980s, but that it is missing modern "bells and whistles." Other experts say that any decent accounting software should automatically track payments by vendor name and contract number.

"I am surprised that San Francisco has that old system," says Steve Balsam, one of the federal government's leading experts in computer accounting systems. He says FAMIS is a "legacy system"; he compares it to an old car, which will run past its prime if it is well maintained, even though it might not drive very efficiently.

Balsam tests accounting software for the Joint Financial Management Improvement Program, which is chaired by the secretary of the treasury and the comptroller general of the United States. In 1998, KPMG stopped submitting FAMIS to Balsam's agency for testing because, he says, it had become outmoded. Consequently, FAMIS is no longer approved by the federal government for use by federal agencies.

Rowan Miranda, director of research and consulting for the Government Finance Officers Association, says that FAMIS, which runs on mainframe computers, is not Internet friendly, although it can be "buttressed" with more advanced software. He also points out that Santa Clara County is scrapping FAMIS for a more modern system. (Santa Clara decided to junk FAMIS on the recommendation of KPMG Consulting, according to the county's controller-treasurer, Dave Elledge. San Francisco has yet to receive the same advice.)

In July 2001, long after FAMIS was buttressed with millions of dollars' worth of more modern software, including Oracle and Microsoft products, KPMG Consulting's Jerry Palombi wrote that FAMIS still generates "incorrect reports," and that there are "problems with the payroll system" due to the existence of "out of date information in FAMIS."

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Peter Byrne

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