More than a-year-and-a-half after the City of San Bernardino turned to the auditing firm of Macias, Gini & O’Connell to carry out critical auditing of the city’s past and ongoing finances, the city has terminated its service arrangement with that firm.
That action comes after several interminable delays with regard to the long-overdue audits for fiscal years 2011-12, 2012-13, 2013-14 and now 2014-15, that were needed as part of the city’s bankruptcy exit plan.
The city turned to Macias, Gini & O’Connell after its previous long term relationship with its former auditing firm – Rogers, Anderson, Malody and Scott – went south. Rogers, Anderson, Malody and Scott proved unable to get its arms around the city’s intractable financial problems 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.
After two decades of mounting financial challenges and almost ten years of deficit spending, San Bernardino in August 2012 filed for Chapter 9 bankruptcy protection.
In 2014, the city parted company with Rogers, Anderson, Malody and Scott and in June of that year brought in the Macias, Gini and O’Connell LLP accounting firm, known by the acronym MGO, 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 city council agreed to pay Macias, Gini and O’Connell, LLP two separate installments of $218,086, one for an independent audit of the city’s financial records for the fiscal year ending June 30, 2013 and another for the fiscal year ending June 30, 2014. Each of the audits 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 for each respective fiscal year, running July 1 through June 30. Upon taking on the assignment, MGO represented that 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 2014 when the federal bankruptcy judge overseeing the city’s filing, Judge Meredith Jury, instructed the city to present its bankruptcy exit plan to her by May 30, 2015.
Inexplicably, Macias, Gini and O’Connell had not begun work on the fiscal year 2012-13 audit until November 2014, within the same time frame Jury had ordered the city to have its exit plan ready for execution. Yet even Jury’s deadline did not seem to particularly enliven the auditing efforts, as the city’s finance division was yet rudderless. David Cain, who had been hired as finance director in March 2013 and resigned in September 2014, seemingly overwhelmed with the task of mapping the city’s way out of its financial morass. In December 2014, the city brought in Scott Williams, who had been the lead financial adviser for the Regional Governmental Services Authority in Napa and the finance director in Sonoma. Straightaway, Williams set to work on a financial discipline plan he calculated would tighten the city’s belt, reduce operating costs and create a modest savings in municipal budgetary operations so that a modicum of revenue could be diverted to making modest payments to the city’s creditors who had been stiffed for so long.
In March 2015 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 Williams, who had been in place for just three months.
Assistant city manager Nita McKay, who had been detailed by city manager Allen Parker to work with city staff and the city attorney’s office on the bankruptcy and accounting issues, blamed – some said scapegoated – Williams for the delay in the delivery of the audits. McKay indicated that Williams had somehow obstructed the delivery of the information the auditing firm needed to go over to make its report.
But Williams’ departure did nothing to ameliorate MGO’s failure to perform. Nevertheless the city doubled down, or very nearly doubled down, on its reliance on Macias, Gini and O’Connell. At the March 16, 2015 city council meeting, the council was informed that 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 MGO to reflect the estimated increases in costs to perform the auditing services.
Despite the significant increase in the amount the firm was to be 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 turned out, MGO was not, in fact, contractually bound to complete the audits by April 30 or even May 30. In May, however, Gini and O’Connell indicated it would meet a July 13 target date for the audits’ completion. July 13 came and went and the audits were not completed. As of December, MGO had finished the 2012-13 audit but had yet to complete the 2013-14 audit. At its December 7 meeting, the city council was presented with a resolution from McKay acknowledging, in understated bureaucratic language, Macias, Gini & O’Connell’s lack of performance.
“The Fiscal Year 2012-13 financial statement audit and Single Audit extended far past
the originally estimated completion dates,” McKay stated, noting that in 2013, both MGO and another firm, the Pun Group, had submitted proposals to do auditing work for the city. McKay then alluded to Macias, Gini & O’Connell’s failure to come through to date and its apparent unwillingness to recommit to completing the audits on a timeline required by the city’s ongoing circumstance in bankruptcy court. She suggested the city substitute in the Pun Group to complete the audits.
“Since the city needs to have the audits completed before the plan of adjustment is approved by the bankruptcy court, staff confirmed with the city attorney’s office that a full request for proposal is not mandated at this time. The city attorney’s office confirmed that the top two audit firms that responded with proposals in 2013 could submit revised proposals to perform the necessary professional auditing services. City staff contacted the top two auditing firms, i.e. The Pun Group and Macias, Gini & O’Connell (MGO), for revised cost proposals, as well as a proposed timeline for completion of the remaining two fiscal year financial statement audits and the remaining one fiscal year single audit. The city received a response from The Pun Group, LLP (formerly Pun & McGeady, LLP). MGO has not responded to the city’s request for updated audit fee estimates and audit completion timelines.”
According to McKay, the Pun Group, LLP agreed to honor its originally submitted not to exceed fee of $374,000 to complete the Fiscal Year 2013-14 audit and its originally submitted not to exceed fee of $374,000 to complete the Fiscal Year 2014-15 audit. In one of his last acts as city manager before he left the city, Allen Parker terminated the contract with Macias, Gini & O’Connell for the provision of the 2013-14 audit. He had previously used $45,000 of his $50,000 independent spending authority to hire the Pun Group to undertake the portion of the 2013-14 audit pertaining to the expenditure of federal funds. The Pun Group, according to city officials, has already moved to complete that document, referred to as a “single audit.” Thus, the city will pay the Pun Group, $329,000 to complete the 2013-14 audit.
“Macias, Gini & O’Connell did complete the 2012-13 financial audit and the single audit of federal grants and we have paid them the full contract amount of $438,086 for that work,” McKay told the Sentinel. “They did not complete the 2013-14 report, so the former city manager terminated their contract in December. We did not pay MGO anything for the 2013-14 audit they did not complete.”