SB Auditors Charge More, Deliver Less On Accounting Assignment

SAN BERNARDINO—Not having e- nough money is costing the city of San Bernardino money. Everywhere the city, which filed for Chapter 9 bankruptcy protection in 2012, turns, it seems, a demand is being put upon it. And one of the entities to which it turned for assistance in its darkest hour, the accounting firm of MGO -– an acronym for Macias, Gini and O’Connell LLP – has successfully exploited the city’s financial dilemma in the past and is in the course of doing it again. It appears the city has no choice but to continue to pay – through the nose.
After two decades of mounting financial challenges and almost ten years of deficit spending, San Bernardino in 2012 filed for Chapter 9 bankruptcy protection. It is now in the process of emerging from that status, having submitted its bankruptcy exit plan on May 29 to Federal Bankruptcy Judge Meredith Jury, one day before the May 30 deadline Jury had set for the city to file that plan.
But a number of problems still exist for the city, including the consideration that the plan yet defers payments to a number of its creditors and vendors, many of whom are growing increasingly impatient. Simultaneously the city is playing a strange game of catch-up, as it had striven to include in its exit plan a comprehensive audit of the city’s financial condition that would allow Jury – and the myriad of entities the city has stiffed over the last three years – to have the confidence of knowing that the city is indeed doing all it can do to make those the city owes money whole and know the city in good faith is not hiding any monetary reserves that might be brought to bear on the situation. But as it was, circumstances – extenuating circumstances that include a catalog of profoundly poor management and fiduciary decisions – prevented the city from including the city’s 2012-13 audit, which was due more than a year ago, and the 2013-14 audit that was supposed to be ready no later than last month, with the exit plan it presented to Jury.
San Bernardino’s financial situation, past, current and future, is exceedingly complicated. The city’s previous auditing firm – Rogers, Anderson, Malody and Scott – was unable to get its arms around the matter and the audit it was supposed to complete for fiscal year 2011-12 – just as the city was heading into bankruptcy – literally took two years to complete. That document was not submitted until June 2014.
In the meantime, with questions mounting over the integrity and quality of the financial monitoring, guidance and strategy the city had received in the past, the city ditched Rogers, Anderson, Malody and Scott and brought in the Macias, Gini and O’Connell LLP accounting firm, depending on that company to provide a transparent profile of the city’s financial condition overall as well as its income and outgo, liabilities and assets, investments and rates of return, reserves and balances.
In June 2014, the council approved a contract with Macias, Gini and O’Connell, LLP to perform an independent audit of the city’s financial records for the fiscal year ending June 30, 2013 and the fiscal year ending June 30, 2014. The estimated cost when the contract was executed between the city and the auditing firm was $218,086 for each fiscal year audit, which was to include the annual financial statements, successor agency to the city redevelopment agency financial reports, single audit report (including six major federal grant programs), and an appropriations limit review.
Last year, Macias, Gini and O’Connell represented that the available city financial figures would allow them to carry out the auditing in a timely manner. From all appearances, it seemed the firm understood the urgency of completing the reports expeditiously. That need became manifest in November when Jury told the city the exit plan had to be presented to her by May 30 of this year.
Inexplicably, Macias, Gini and O’Connell did not begin compiling the fiscal year 2012-13 audit until November 2014.
It is not clear whether that tardiness was inadvertent or calculated. Whatever it was, it was extremely lucrative for Macias, Gini and O’Connell.
In March it was reported that the production of the audits was severely behind schedule. In a rather feeble stab at creating accountability over the unfolding debacle, the city fired its finance director, Scott Williams, who had been hired into the position in December and who, allegedly, had control of the information the auditing firm needed to go over to make its report.
According to a report from the city’s finance department for the city council’s March 16, 2015 meeting, Judge Jury’s “deadline necessitates that the city have audited beginning numbers to support the city’s plan and as such, Macias, Gini and O’Connell is auditing both fiscal years simultaneously. Because of the complexity of the city’s audits, the city being in Chapter 9 bankruptcy, the number of transactions that require testing and the tight deadline mandated by the city of April 30, 2015 for completion of the audit reports, it is now estimated that costs will increase $270,000 to $488,086 for fiscal year 2012-13 and will increase $220,000 to $438,086 for fiscal year 2013-14.”
Over a barrel, the city council in accordance with a recommendation in that report amended the city’s contract with Macias, Gini and O’Connell to reflect the estimated increases in costs to perform the auditing services.
Despite the significant increase in the amount the firm was paid, Macias, Gini and O’Connell did not meet the April 30 deadline. Nor did it produce the audits by May 30, which was Judge Jury’s drop-dead deadline. Instead, the city submitted its bankruptcy exit plan without the 2012-13 and 2013-14 audits.
As it turns out, Macias, Gini, and O’Connell were not, in fact, contractually bound to complete the audits by April 30 or even May 30. In May, however, MGO indicated it would meet a July 13 target date for the audits’ completion. And it appeared, for a time, that Macias, Gini, and O’Connell was making reasonable progress toward that goal. Within the last week, however, questions have arisen as to whether that deadline will be met.
Macias, Gini and O’Connell is dependent upon the city and its finance division to provide the data it is processing. It made an unexpected demand for city documents late last week. Vaguely hinted at was the possibility that the firm would need more than the $926,172 already paid to it, which is more than twice the $436.172 of its original contract, to expedite the completion of the audits..
In March, the city fired Williams in response to Macias, Gini and O’Connell’s tardiness, triggering observations that he was being scapegoated for a problem with the accounting firm’s lack of productivity that predated his arrival in the city. Williams, who has since been hired by the city of Upland as its finance director, is not available to shoulder the current blame and the question is whether Nita McKay, San Bernardino’s assistant city manager whose main function is wrestling with the municipality’s intractable financial problems, will insist on Macias, Gini and O’Connell living up to its contractual obligation without further financial inducements beyond the $926,172.
Phone calls from the Sentinel to McKay this week intended to find out from her what the city intended to do to ensure the audits are completed were unreturned at press time.

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