Risk & Compliance

San Diego Report Eyes Expanded CFO Role

In the midst of the city's devastating financial crisis, an independent audit committee chaired by Arthur Levitt calls for private-sector-style gov...
Stephen Taub and David KatzAugust 10, 2006

Among a bevy of recommendations to cure the ills that they say led to widespread mismanagement and legal violations within San Diego’s government, the authors of an independent audit committee report are calling on the city to strengthen the role and accountability of its chief financial officer.

“The CFO should be the individual primarily responsible and accountable for the accuracy and timeliness of the City’s financial management, reporting and disclosure functions,” the authors of the 266-page report by Kroll Inc., a New York City-based risk management consulting firm, assert.

The city’s finance should supervise its comptroller, director of financial reporting, and director of budget and planning, according to the report, which was commissioned by a three-member audit committee chaired by former Securities and Exchange Commission Chairman Arthur Levitt and including former SEC chief accountant Lynn Turner, and Troy Dahlberg, Kroll’s national director of forensic accounting and litigation consulting.

In remarks based on the report, Levitt told the San Diego City Council on Tuesday that the “evidence suggests that at root San Diego City officials fell prey to the same type of corruption of financial management and reporting that afflicted municipalities such as Orange County and such private sector companies as Enron, HealthSouth and any number of other public corporations,” the report states.

The upshot is that the city now faces an unfunded actuarial pension liability of $1.4 billion and an inability to tap the financial markets, according to Levitt. Further, in failing to comply with wastewater mandates, the city illegally took money from San Diego homeowners and now must return $265 million, he said.

San Diego’s pension board and the city itself “acted illegally and improperly and thereby allowed the City, with full knowledge and acquiescence of numerous participants in the approval process, to avoid financial obligations imposed by state and local law,” he added.

The report about San Diego’s fiscal crisis, which reportedly took Kroll 18 months to prepare, blamed government officials and outside “gatekeepers” for many failures to conform to the law, adhere to sound governance and financial reporting principals, and protect the financial integrity of the city’s pension system.

The report, however, doesn’t assert that anyone deliberately broke the law: “While this conduct was plainly unlawful, the evidence does not demonstrate that city officials set out with the objective of defying legal mandates,” it said.

Even so, the report singles out a number of individuals, including finance executives, for acting with unlawful intent. They include city treasurer Mary Vattimo, auditor and comptroller Ed Ryan, and deputy auditor and comptroller Terri Webster.

The report also recommends that each year the mayor and the CFO should include with the city’s financials “a statement of the City’s responsibility for establishing and maintaining an effective system of internal control over financial reporting. Similarly, certain heads of each City unit, including its pension board, should be required to certify their stand-alone financial statements.”

The authors also suggest that San Diego should create a permanent three-member audit committee with the power to hire the city’s independent auditors and to set up and monitor a “whistleblower” system. Two members of the committee should be independent of the city “and have significant financial expertise in accounting, auditing and financial reporting,” they say.