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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

Page 4 of 5

"It is not readily clear that ... a solution can be designed, but [a] 'long-term' approach is probably worth pursuing," Palombi concluded as he submitted his monthly bill.

KPMG has also chosen to overlook another overarching principle of accounting: that auditors should not be involved in making management decisions, creating budgets, and setting policies for their clients. KPMG partners chair two committees composed of high-ranking city officials charged with monitoring San Francisco's financial accounting system and making information technology policy.

Controller Harrington says there are no minutes of these committees' meetings, only agendas; nor does he have any correspondence or written records of conversations with anyone from KPMG LLP or KPMG Consulting from 1998 to the present. The record shows, however, that the controller personally approved most of KPMG LLP's and KPMG Consulting's contracts. He appears to have otherwise insulated himself from KPMG by requiring Evangeline Bruce, the director of his Accounting Operations and Systems Division, to sign off on KPMG LLP's and KPMG Consulting's contract amendments, invoices, expense reports, and, curiously, their draft reports.

"I would also like to receive copies of your draft reports before actual circulation," Bruce told KPMG. "Our interest is to ensure that no recommendations are made that conflict with any of the city's strategic directions or policies."

KPMG LLP partner Denise Price agreed to abide by this apparent restriction on her firm's ability to independently critique the city. She was hardly out of the loop, though. She often traded e-mail messages with Bruce in a joint effort to find extra money in the controller's budget to pay for KPMG's chronic cost overruns. In 2000, Bruce started paying for consulting work with money budgeted for auditing work. Then she tapped into hundreds of thousands of dollars in city money appropriated by the Board of Supervisors to pay city employees. By this point in the long relationship, the audit firm and the Controller's Office had, in many ways, merged into a single entity.

A Controller's Office organization chart, dated January 1999, details the job responsibilities of a dozen controller employees, including Bruce, and the half-dozen KPMG consultants who worked side by side with them keeping the financial accounting system up and running. The chart shows them all reporting to two KPMG LLP partners, Bill Blaustein and Price. In other words, the city official who approved payments to KPMG, Bruce, also reported to KPMG's partners. It is not just the auditor's independence from the city that is called into question by this long-term, multimillion-dollar relationship -- it is the city's ability to act independently from its auditor that is also at risk.

The city maintains a large Department of Telecommunications and Information Service that is staffed with 150 computer technicians and programmers who are, according to the agency's deputy director, available to work for the controller. City regulations prohibit San Francisco from hiring consultants to do jobs that city employees can do, unless the Civil Service Commission approves an exception. To obtain the exception, a KPMG LLP partner wrote the formal document used by the controller to justify hiring full-time KPMG workers at double the cost of city computer programmers. KPMG time sheets show that the firm charged the city for the time it spent filling out forms for the controller and lobbying him for jobs and more money.

Another overarching principle of accounting forbids auditors to audit their own work. Yet over time KPMG became so deeply enmeshed in daily operations at the San Francisco Assessor's Office that this common-sense rule seems to have fallen by the wayside.

The assessor's job is to determine the value of all taxable property in the city. This task was complicated under the stewardship of Doris Ward after she spent $5 million acquiring a computer system that "lacks demonstrable financial controls and adequate audit trails," according to an insurance company report. In November 1999, KPMG LLP came to her rescue and began "assisting in producing the annual tax roll," according to the auditor's contract. The auditors apparently "directed" the entry of $17 million worth of backlogged assessments into the assessor's database. By January 2000, KPMG LLP employees, working full-time in the Assessor's Office, had billed a quarter-million dollars to "assist" the assessor in doing her job.

When KPMG's supervision of an effort to keep the city's property tax revenue flowing was described to government accounting expert Sharon Russell, she practically recoiled over the telephone. "There is an express prohibition against auditors posting any transactions," she said. "They are not allowed to supervise public employees. And working inside city government full time is prohibited as well."

Despite the independence rules, KPMG LLP subsequently contracted with Ward and the controller to "reengineer" the operations of the Assessor's Office -- for half a million dollars. "Since some past [audit] recommendations have been made but not implemented, KPMG will assume an active role," the contract stated. KPMG Consulting, which took over the contract, eventually recommended that the assessor "improve" the computer system. But the city failed to set aside the cash to pay for the report. A furious KPMG Consulting wrote to the controller last August demanding that he find $406,000 to pay the balance of the firm's bill.

In another appearance of conflict of interest, KPMG agreed to investigate a city commission charged with approving the company's contracts with San Francisco.

In early 2000, Mayor Brown appointed a blue-ribbon panel to look at the Human Rights Commission, in the wake of an FBI raid on the office. The feds were searching for evidence of wrongdoing by the agency, which wields tremendous authority over who is allowed to have a contract with the city. The panel hired KPMG LLP to provide "third-party independence and objectivity" to the panel's probe of HRC contract monitoring practices. KPMG was hardly an independent third party, though. The HRC regularly required KPMG to share its profits with specific minority-owned accounting firms as a condition of keeping its long-term audit contract.

About The Author

Peter Byrne


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