Auditors Cite Bankruptcy’s Lessons in Fund Request

One of the biggest lessons learned from Orange County’s 1994 bankruptcy was the danger of lax financial controls and lackadaisical auditing of county government’s far-flung agencies and departments. But the Board of Supervisors’ commitment to aggressive oversight will be tested over the next few months as county auditors seek more money and staffing in next year’s budget for what they consider crucial upgrades of their auditing efforts.

The additional funds would allow the county to perform more frequent audits of county departments--some of which undergo scrutiny only once every six years--and resume making full-scale audits of the county’s Superior Court and five Municipal Courts.

The county stopped auditing the courts, and instead began conducting more cursory “reviews” as a cost-saving measure during a state funding crisis brought on by the economic recession of the early 1990s.

But the county’s financial watchdogs now believe full-scale audits are needed, especially in light of a highly publicized scandal in which a court clerk is accused of embezzling $240,000 from the Pomona Municipal Court in Los Angeles County.

The case prompted Los Angeles County to reexamine the relatively weak controls it had over cash handling in its courthouses. Though no irregularities have been uncovered in Orange County, officials here said greater controls are needed.

“Based on what happened in Los Angeles, we decided we should get back to the full-scope auditing,” said Chuck Hulse, chief assistant auditor-controller. “It gives us more testing. We have a better chance of catching problems.”

The additional auditors would cost the county less than $500,000. But the availability of funds is very much in question, especially because the county chief executive is predicting a lean 1997-98 budget, with little room for new spending.

The tight budget constraints are one of the lingering effects of the county’s bankruptcy, which was triggered by $1.64 billion in securities trading losses by the county-run investment pool--losses that were blamed on the risky investment practices of former Treasurer Robert L. Citron.

But Auditor-Controller Steve E. Lewis also came under fire in connection with the bankruptcy.

While Lewis’ audits had detected problems in the treasurer’s office, his critical findings were buried deep in bureaucratic reports. Lewis, originally credited with discovering the irregularities, was instead harshly criticized for failing to sound the alarm.

Lewis also was criticized for failing to detect and draw attention to the skimming of nearly $90 million in interest earnings from the accounts of outside pool investors.

In 1995, the Board of Supervisors stripped Lewis of most of his auditing duties and created a new office of internal audits, now headed by former California State University auditor David E. Sundstrom.

As an elected official, Lewis retains oversight controls over some state-mandated audits, but the actual work will be done by the internal audits office.

The office was originally staffed with 13 workers, enough to perform the audits required by state law as well as less-thorough “reviews.” But the workload meant that some audits could only be performed once every six years.

In February, the supervisors voted to hire four more auditors for the internal audits office, so that the six-year lag between some department audits would be cut to three years. If supervisors approve Sundstrom’s latest request for four more employees, the audits could be performed every two years.

“We don’t want to wait six years to let problems fester,” Sundstrom said. “You can’t look at everything all the time. But I think you cover your risks better if you can do it more frequently.”

The courts now undergo “limited reviews” of their handling of finances every two years. But both Sundstrom’s office and the auditor-controller’s office support a return to full-scale audits, which are more labor-intensive.

Reviews analyze the accounts of the courts and determine whether financial statements meet general accounting practices. Yet they don’t include the rigorous testing and cross-checking of a full audit, such as calling debtors to make sure accounts matched.

Supervisor Jim Silva said the extra expense of full-scale audits is a small price to pay. “Whenever you have public money and the potential for abuse, we have to make sure nothing falls through the cracks,” he said.

In the Pomona Municipal Court case, county auditors said they lacked the resources to conduct the kind of comprehensive audits needed to detect the embezzlement of court cash. Previous audit reports urged the courts to add more safeguards, but the auditors’ calls went unheeded.

Sundstrom said full-scale auditing would make it more likely that any fraudulent activity would be detected. “It would give us a more thorough look behind the numbers.”

But county officials are bracing for a tight 1997-98 budget. Already, budget analysts are predicting that money left over from this year’s budget will total $33 million--about half the amount available last year. Moreover, the county might have to increase its funding to the county’s trial courts.