Audits of Bell were ‘rubber-stamp,’ state controller says

A prominent accounting firm’s audits of Bell’s city finances amounted to a “rubber-stamp,” according to a state controller’s study concluding that much of the alleged wrongdoing would have been detected earlier had the firm done its job.

The long-awaited report is being closely watched because Mayer Hoffman McCann audits the books of dozens of government agencies in California and has 30 offices nationwide. Officials at several agencies, including California’s public employee retirement board, have said they were awaiting the controller’s study to help determine whether they would consider changes in their auditing contracts.

The controller’s office found that MHM failed to comply with 13 of 17 “fieldwork auditing standards” when reviewing Bell’s books in the 2008-09 fiscal year. The firm focused mostly on comparing financial numbers year to year rather than looking at potential for inappropriate or illegal activities, the controller’s report said.

MHM’s review gave clean audits to Bell, where eight current and former city officials were charged this fall in what prosecutors called a widespread corruption scheme that occurred over several years. The controller’s report said that MHM did not find any city funds that had “significant deficiencies.” The report said auditors did not explain why deficit balances of three funds totaling $8.89 million “were not considered significant.”

“MHM appears to have been a rubber-stamp rather than a responsible auditor committed to providing the public with the transparency and accountability that could have prevented the mismanagement of the city’s finances by Bell officials,” said Controller John Chiang in a statement. “Had MHM fully complied with the 17 applicable fieldwork standards, it would have led them to identify some — if not all — of the problems.”

Chiang said his office is forwarding the report to the state Board of Accountancy, which regulates accounting firms in California. A board official has said it would open an investigation. If significant problems are found, penalties could range from fines to the loss of licenses. The controller also sent copies of the study to the Los Angeles County district attorney’s office and state attorney general, which have been investigating the city.

MHM strongly disputed the controller’s findings, suggesting that Bell officials deceived the firm. “Recent evidence disclosed by the controller’s office shows that Mayer Hoffman was subjected to a massive scheme of collusion that reached through every layer of city government, to undermine the audit process and deceive the auditors,” the firm said in its response.

Bill Hancock, president of the firm, said in a statement that his firm “adheres to the highest standards…. But in those 50 years we have never seen anything like the pervasive collusion of so many individuals acting in concert to deceive auditors, as happened at Bell.”

The report is likely to fuel debate about whether the state’s laws covering local government audits need to be strengthened. A Times review of state and local records found that the independent audits required of cities and other government bodies frequently fail to uncover fraud and mismanagement. Many cities hit with corruption or mismanagement over the last decade, including San Diego, Compton and South Gate, received clean audits, even in cases in which officials later were sent to prison. About one-fourth of the state’s municipal redevelopment agencies do not file annual reports as the law requires.

A spokeswoman for Chiang, Hallye Jordan, said the controller and others are looking at ways to ensure that auditors of public agencies do a better job. She said Chiang has spoken to Gov.-elect Jerry Brown and others about legislation to improve local fiscal responsibility.

“The fact that an accounting firm may be unable to uncover fiscal mismanagement is a concern and points out an inherent problem of not having centralized oversight of thousands of local agencies,” she said. “The controller believes this is a vivid illustration of a problem that needs to be addressed.”

Chiang’s report is the latest critical look at a city that has been enveloped by scandal since The Times revealed the enormous salaries paid to administrators and part-time politicians in one of L.A. County’s poorest cities. An earlier controller’s audit found that the city had overcharged property owners and businesses more than $6 million in fees and had mysteriously placed $23.5 million in bond funds in a checking account that paid no interest, costing the city about $1.7 million in potential earnings.

Bell is now teetering on the edge of insolvency and may have to take drastic steps, such as disbanding its Police Department, to balance the city’s finances.

Prosecutors have alleged that top Bell officials misappropriated $5.5 million in public funds. Robert Rizzo, Bell’s former city administrator, has been charged with 53 counts of misappropriation of public funds, conflicts of interest and other offenses. The Times revealed that Rizzo issued loans to other city officials and that the city ran highly unusual programs to generate revenue by towing cars and demanding high fees from business owners.

Mayer Hoffman, based in Leawood, Kan., has been Bell’s independent auditor since 2006, when it bought Conrad and Associates, the independent auditor for the city since 1994.

The controller’s office said it found that the MHM “firm assessed risk of fraud [in Bell] as low, concluded that it could rely on the city’s internal controls, and reduced its substantive testing to consist primarily of analytical procedures.”

But in its response, MHM disputes all the findings aside from some “minor documentation issues.”

“Could we turn back the clock with the benefit of hindsight, of course we would have done things differently,” Hancock said in a statement. “But hindsight is not the test.”

Bell’s interim chief administrative officer, Pedro Carrillo, said the controller’s audit “further highlights the corrective actions that are necessary to reform the practices of the past.”

jeff.gottlieb@latimes.com