Auditor failed standards with Bell, state claims

The firm that audits Newport Beach and Costa Mesa failed to follow generally accepted standards when it assessed records for the city of Bell, according to a report released Tuesday by the office of state Controller John Chiang.

The Newport-Mesa governments are among dozens of Southern California agencies whose books are audited by Mayer Hoffman McCann. Upcoming auditing contracts may be affected by the controller's report, which calls into question specific practices by the firm.

"It's pretty shocking," said Costa Mesa Assistant Finance Director Colleen O'Donoghue. "I was definitely surprised at the number of findings."

The controller's report said the firm failed to fully comply with 13 of 17 applicable fieldwork auditing standards. It found that Mayer Hoffman did not adequately look for documentation and evidence to support Bell's records, the firm did not document the reason for deficit balances, and there were other problems.

"[Mayer Hoffman McCann] appears to have been a rubberstamp 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," Chiang said in a statement.

Eight current and former Bell city officials were charged this fall in what prosecutors said was a pervasive climate of corruption. Bell officials misappropriated $5.5 million in public funds, prosecutors said. The city overcharged property owners and businesses more than $6 million in fees and made other questionable financial decisions, an earlier controller's audit found.

Since 2006, Mayer Hoffman audited Bell's books; the controller's review focused on the firm's latest audit of the city and the redevelopment agency's 2008-09 financial statements

In a response to the controller's Bell report issued Tuesday, Mayer Hoffman said that the firm "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 has been the independent auditor of Newport Beach for about the past 10 years and Costa Mesa for about the past 20 years, officials said.

Newport Beach Deputy Director of Administrative Services Dan Matusiewicz said that his division is waiting for the results of an independent peer review of Mayer Hoffman's California audit practice, so he can get another perspective.

He's comfortable with Newport's past audits by Mayer Hoffman.

"We continue to stand by the City of Newport Beach financial statements and the related audit opinion issued upon them," Matusiewicz wrote in an e-mail.

Before the controller's report was released, recently elected Newport Beach Mayor Mike Henn said that he was also confident with Newport's auditing process.

"I would not draw any conclusions from Bell that relate to Newport Beach," he said.

Costa Mesa's contract with Mayer Hoffman is up for renewal in 2011, and the city will seek new proposals. Newport Beach's contract is also up in 2011.

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