A question lingers in the case of Beaumont’s alleged financial malfeasance – just as it does after problems in Bell, or Vernon, or the City of Industry.
Why is it that, for years, either no one saw red flags or, if they did, never reported them. And agencies that could have acted didn’t.
Answers may be complex and hard to come by, but experts and observers are now pointing to a number of breakdowns that can lead to shackled city officials standing before a judge and taxpayers asking where their money went.
In Beaumont, seven former top city officials stand accused of 94 felony charges of misappropriating $43 million in public funds over two decades. Six of the men were arrested Tuesday, May 17, and the seventh turned himself in Wednesday. No one has yet entered a plea.
Former City Manager Alan Kapanicas and former Finance Director William Aylward are charged with embezzlement, misappropriation of funds and conspiracy. Former Economic Development Director David Dillon, former Public Works Director Deepak Moorjani and former Planning Director Ernest Egger are charged with conflict of interest and embezzlement.
Former City Attorney Joseph Aklufi faces embezzlement charges, and former police Chief Francis Dennis “Frank” Coe was charged with misappropriation of funds and conspiracy.
Most of the charges stem from an alleged scheme in which prosecutors say city officials used bond money for public works projects such as building streets and sidewalks while personally enriching themselves and paying back the debt through tax assessments on homeowners.
WHO’S CHECKING?
The first potential pitfall is that most people think government finance is either too complicated or too boring to spend time on. As a result, few citizens look closely at what local officials are doing with their money.
In Beaumont, several residents repeatedly raised questions about city finances for years but have only now been vindicated by the former officials’ arrests.
Smaller cities, especially those like Bell with significant numbers of immigrant and working class residents, may be less engaged with city government, said Max Neiman, a former UC Riverside professor and senior fellow at UC Berkeley’s Institute of Government Studies.
Most elected officials don’t have a financial background, so they may depend on city officials for information and trust them to make sure the city is following the law.
Riverside City Councilman Mike Soubirous said that, when he took office in 2014, he was faced with an inches-thick annual audit full of complex information. City officials said the finances were in good order, though some in the community told him there were problems.
“There are a lot of people that come into this and they don’t want to look dumb,” so they’re reluctant to ask questions, Soubirous said. “The success of your city relies on how honest and good (staff is).”
Some past Beaumont council members have publicly supported city staff and approved bond issuances they proposed. Former Councilman Roger Berg has said the benefits of the bond spending are clear from the growth the city has experienced.
So who reviews local government finances?
The short answer is the state controller’s office, which requires cities to submit annual reports of their revenues, expenditures and bond debt, said Jennifer Hanson, spokeswoman for state Controller Betty Yee.
But with 58 counties, more than 400 cities and nearly 5,000 special districts across the state, those reports are not reviewed in depth, she said.
The state controller can do a detailed audit – Yee’s office released a scathing review of Beaumont’s past practices in November. Data provided by Hanson shows 259 reports were flagged in 2013-14 for a closer look, up from about 80 that were flagged each of the previous two years.
WHAT ABOUT AUDITS?
State law does not mandate outside audits by an independent firm, but many cities do them as a best practice, in order to receive a bond rating, or because federal funding rules require it, Hanson said.
In keeping their books, the vast majority of government agencies follow rules set by the Governmental Accounting Standards Board, an independent, private sector organization that is considered the authority on accurate and transparent accounting.
The standards don’t include anti-fraud measures, but it’s unlikely any specific rule could stop criminal conduct, board spokesman Kip Betz said.
“We want our standards to result in a fair and accurate representation of the financial picture,” he said. “If people are willfully distorting that, I don’t think that’s something we can address.”
Beaumont was audited by an outside firm, Culver City-based Moss, Levy & Hartzheim, between fiscal 2007-08 and 2012-13, according to audits posted on the city website. Officials at the firm could not be reached for comment Thursday or Friday.
Several experts said auditors should look for the kind of problems alleged in Beaumont. And they were surprised the issues apparently went undiscovered or unaddressed for so long.
For example, Yee’s review of the city’s accounting controls concluded that checks and balances were practically nonexistent, and the Riverside County District Attorney’s investigation found that city officials were signing checks to their own consulting companies that were paid with city-issued bonds.
Auditors are supposed to look at internal controls as a cue for how deep the audit should go, said Richard Savich, a UC Riverside accounting professor. They’re not required to give an opinion of the controls, but the weaker they are, the more financial transactions the auditor should check.
“Professional skepticism is the thing that all auditors are supposed to use,” Savich said. “I would definitely look askance at the external auditors and say, ‘What did you guys do?’”
A required statement included in a 2003 bond issuance noted that Kapanicas, then the city manager, was also serving as a special tax consultant and Public Works Director Deepak Moorjani was the engineer for the projects for which the bonds would pay. That could be seen as a conflict of interest, but it’s not clear whether anyone ever questioned it.
And when an audit uncovers a problem, it’s typically reported to city management or the city council.
But auditors can be discouraged from giving too negative of an opinion “because they’ll lose the client,” said State Sen. John Moorlach, a CPA who was Orange County’s treasurer from 1995 to 2006.
Once auditors deliver their report, they may consider their work done.
Macias Gini & O’Connell, a Bay area firm Beaumont hired for two special audits in 2015, made findings including that the city’s general fund had been running deficits for several years, and there was no clear payback plan for loans made between city funds, said Scott Johnson, a partner at the firm.
He said the firm doesn’t comment publicly on whether anything it finds in audits is illegal, improper or reportable to some other authority.
“We had a contract with the city, we provided reports to the City Council, we made our recommendations to them, and it’s up to the City Council as a governing body to pursue those recommendations,” Johnson said.
NO CLEAR SOLUTION
Figuring out how to address the pitfalls in government financial oversight may be as complex as how they happen in the first place.
Soubirous, the Riverside councilman, said elected officials need to take responsibility.
“I think it’s incumbent on council (members) to really ask a lot of questions and dig down,” raise the alarm if they meet resistance or can’t get answers, he said.
Accounting professor Savich said ethics training and a whistleblower program to protect employees who report concerns could help, but no solution is foolproof. “You can’t think of all the ways people are going to cheat you,” he said.
The state could require local governments to make financial data available to the public in a common format, so it would be easier for citizens to compare and crunch numbers themselves, said Neiman, the Berkeley fellow.
Moorlach, who warned officials before Orange County’s 1994 bankruptcy, said trying to solve the problem with legislation would be seen as the state meddling in local affairs. He suggested the Governmental Accounting Standards Board should look at the issue.
“It’s got to be done nationally,” he said. “If it’s a problem in California, it’s a problem everywhere else.”
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