Auditors Find Fault With Pension System’s Bookkeeping

Thursday, September 22, 2005 | The firm hired to diagnose the pension system’s fiscal bill of health found more than two dozen problems with the retirement system’s accounting practices, but then revised its findings for a public report to the pension board.

After penning a list of concerns regarding the pension system’s books in a February draft memo, auditors from Brown Armstrong were apparently satisfied enough in May to withdraw statements that the firm could not fully verify the finances of the $4 billion system.

In February, auditors said in a draft report that they discovered that the San Diego City Employees’ Retirement System had not squared its cash account with the city of San Diego since June 2003. As a result, the auditing firm said it could not certify the retirement system’s financial statements without an asterisk.

Until now, the city has been a depository for the SDCERS cash account.

But after pension officials pledged they would separate the cash they use for operating and paying benefits from the city of San Diego’s account, Brown Armstrong decided it could wholeheartedly support the audits.

The May report only discussed that the cash hadn’t been reconciled “on a timely basis,” leaving out the June 30 date mentioned in the February draft. Also, 29 problems were reported in the earlier version, compared to 26 in May.

The final audit opinion of the pension system’s fiscal year 2004 financial statements has not been released. It is expected to be certified within one or two months, a pension official said.

City Attorney Mike Aguirre said that the May revision shows that Brown Armstrong “caved in,” likening the firm to lawyers who told the council members that underfunding the pension system was OK after discouraging such a decision.

“These people came in and tried to tell us the truth, and then they got pressured so they backed off,” Aguirre said. “It reinforces the concerns I have that the city and the pension system are not getting strong, independent advice.”

Calls placed to Brown Armstrong’s Bakersfield headquarters were not returned by press time. The firm was hired to conduct audits for fiscal years 2004 through 2006.

Society of California Accountants President David Tolkan said that he doubted that an outside auditor would ignore a flagrant accounting infraction like not balancing the system’s cash flow for over two years, especially in the wake of Enron-like scandals where auditors were also punished.

“The auditor doesn’t want to be on the hook, I can tell you that,” Tolkan said. “That doesn’t mean it didn’t happen.”

Pension trustee Bill Lopez, who represents the city administration, said that any criticism is premature until the final judgment has been made by the auditors.

“The management’s responses, I believe, are complete and the proof of that will be in the final audit,” Lopez said. “To draw conclusions, question and criticize after releasing a draft of the report is a bit unfair.”

Lopez said he was equally cautious when pension officials submitted the final version of their annual financial reports to the auditor. It was a notable milestone but not yet the intended destination, he said.

Bob Fellmeth, a public interest law professor at University of San Diego School of Law, said that the discrepancies reported by Brown Armstrong show a culture of incompetence.

“If they can’t do simple things like putting money in the right account in a timely fashion, than you wonder how they’re doing the big things,” Fellmeth said. “This really is the gang that can’t count.”

City Auditor John Torell, the official in charge of preparing the city’s financial reports before they are sent to an outside firm for certification, said not balancing the pension plan’s account with the city for that long was “quite substantial.”

“They are always going to find operational-type improvements that management can make, but there’s quite a bit of stuff in here.” Torell said.

The city of San Diego’s financial statements have not been certified by an auditor since 2002. Financial statements have been delayed pending the release of an investigation into alleged wrongdoing by city officials, as well as ongoing questions surrounding city accounting and the overstatement of city assets.

Torell announced in August a plan to decentralize his department, requiring accountants assigned to specific departments to work on-site alongside other officials in that entity, as a corrective measure. He said his office and SDCERS are almost ready to move accountants over to the pension system.

Torell said he recognized that the Auditor’s Office, which he has supervised since February, has to make changes in the day-to-day accounting, but that most of the weaknesses the outside auditor identified were questions of SDCERS policy.

“From going through it, it seems to me that the bulk of what needs to be changed is under their purview,” Torell said.