Metro Rail Accounting Found to Be Off by Millions

Metro Rail project managers have not accounted accurately for millions of dollars spent designing and building the first phase of the $3.5-billion subway project, according to Southern California Rapid Transit District internal documents obtained by The Times.

The transit district’s systems for tracking Metro Rail expenditures has been so full of inaccuracies, discrepancies and misinformation that the district’s accountants cannot be certain how much the builders are spending, the documents say.

The principal documents consist of two versions of an internal audit prepared by the Arthur Young accounting firm for the district inspector general, who is in charge of fiscal oversight. They come to light at a time when the RTD’s management of the massive subway project is under fire for allowing substantial cost overruns during the first of two construction phases.

There is no indication in the audit reports of any illegal activity. They suggest the accounting problem has its roots in tangled lines of authority and the failure of computerized accounting systems to keep track of who is spending what, how much and when.

Aware of Problems, Documents Show

Meanwhile, additional RTD documents obtained by The Times indicate that for more than a year the district’s staff has been aware there are problems “reconciling and validating” the expenditures of tens of millions of dollars. These documents show the accounting discrepancies may run as high as $100 million or more.

District officials admit accounting errors of “several million” dollars may have occurred on some big contracts but insist the project is still under control.

Though they disputed some of the Young audit findings, district officials did acknowledge generally in interviews that the RTD accounting and construction management systems have been plagued with problems. They blame computer program flaws and procedural errors, which they say are being remedied.

The Young audit reports note that Metro Rail has “inaccurately reported” how much money it owes contractors. Specifically, there are inconsistencies in the RTD books between how much has been paid out and how much is still owed.

The accounting system is so haphazard, the audits state, that it is possible that the fiscal records do not always reflect when costly changes in the construction process have been ordered. If so, it would mean the district could be caught unawares when the contractors’ final bills pile in.

The Young auditors blame in part RTD’s reliance on separate computer systems to record its Metro Rail books. The dual systems are so incompatible and error prone that the various departments refuse to use the computer data and instead spend hours maintaining accounts and records manually. And even these hand-recorded ledgers do not always balance, the reports state.

‘Confusion, Misunderstandings’

“The discrepancies between reported amounts in the . . . (computer) systems causes confusion, misunderstandings between departments and excessive manual checking and updating,” the Young report states.

Because these systems can be bypassed by managers wanting to make rapid decisions on the job, some transactions are never entered, creating further inaccuracies in the reports on how much is owed a specific contractor.

The bottom line is that the district winds up reporting “inaccurate financial obligations” in its internal management reports, the audit reports state.

Disclosure of the internal accounting problems comes as transit district managers are being criticized because the first $1.2-billion phase of the 17.3-mile subway project is reported to be as much as $135 million over budget and running about two years behind schedule.

An audit by the Los Angeles County Transportation Commission released last month indicated part of the budget problems was caused by the transit district’s cumbersome bureaucratic management structures. RTD officials denied that they were bogged down in red tape and fired their own broadside at the commission, contending its light-rail projects were also way over budget.

Power Struggle

The two agencies are locked in a power struggle over which should oversee construction of the next 13 miles of the Metro Rail project, and in this context the Young reports almost certainly will fuel the controversy.

Neil Peterson, transportation commission executive director, was quick to respond to the new reports.

“There is no way you can manage a major construction project . . . without having your finger on the budget,” he said. “This may in part explain the tremendous delay in RTD’s ability to project cost overruns.”

In the complex Metro Rail funding agreements, the transit district received money from the federal government, the county commission and the city of Los Angeles to build the first 4.4-mile section of the project. However, the commission is the overall funding authority for the entire project and all of the funds are channeled through it to the RTD.

Independent Watchdog

The current reports were ordered by the district’s inspector general, Ernesto Fuentes, who acts an an independent watchdog on all RTD finances. Fuentes said he hired the Arthur Young firm in 1988 to investigate rumors that Metro Rail contractors were not being promptly paid, as required.

By August, 1988, a draft report warned RTD officials that the district’s cost-accounting systems were in serious trouble. A final report was issued in November, 1988, but, according to Fuentes, top district officials were not satisfied with it. RTD Executive Director Alan Pegg ordered the independent auditors to include more detailed district responses to the critical findings, Fuentes said.

The final version was sent to the RTD board of directors Thursday night after The Times requested a copy.

Fuentes said the final copy of the report has taken nearly a year to produce “because of the gravity of the subject matter.”

In response to the report, Pegg ordered a task force formed to take corrective action, Fuentes said. The task force, headed by Controller-Treasurer Thomas A. Rubin, has been at work since June, according to Fuentes. Rubin could not be reached for comment.

Fuentes said he was “satisfied with what the controller-treasurer is doing. He is going after the issues aggressively.” The inspector general said it will be three or four months before the task force can complete the process of reconciling the financial records and determining if any money had been wasted.

‘Accurate and Consistent’

RTD Assistant General Manager John W. Richeson, in a June memo to Rubin, said the current accounting system system is working and “will remain accurate and consistent.”

Mike Butler, the district financial officer, said he did not consider the problems reported by the Young auditors to be “serious.” Rather, he said, the report was “procedural” and helped the district find the problems and come up with some needed corrections. He said his auditors have looked over the books and found that “most of the systems do balance.”