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Tuesday, December 20, 2005 | Consultants preparing the investigation into alleged wrongdoing at City Hall will likely return to the City Council in January to seek authorization for another $9 million to $11 million to complete the probe. Whether the consultants will be asking for the money or demanding it is a matter for interpretation.
A number of council members who have fully supported the consultants’ work to date have signaled their intent to question whether the payment is worthwhile, as the costs and scope of the investigation have grown dramatically in recent months.
However, the consultants say the resolution the City Council passed in March authorizing the investigation essentially called for them to receive whatever funding necessary to complete the investigation.
“We wanted that empowerment so that they wouldn’t interfere with the investigation improperly,” said Troy Dahlberg, a partner with Kroll, Inc., a private firm conducting the investigation.
The unexpected escalation of the costs and duration of Kroll’s probe underscore the city’s financial mess and the lengthy, costly route it has taken to repair financial disclosure issues that first surfaced in late 2003 and have left it excluded from Wall Street.
The effort to produce an investigative report satisfactory to the Securities and Exchange Commission and outside auditor began in February 2004 after questions arose surrounding the veracity of the city’s financial reporting to investors and the public.
Since then, the cash-strapped city has spent $26 million on 19 different consultants to help untangle its financial mess. The struggle was highlighted last week when council members were told that accountants and attorneys for the audit committee had billed the city for $3.3 million more than they were authorized.
“While I know this isn’t cheap, what price do we put on putting the city’s fiscal house in order?” City Councilman Jim Madaffer said.
The unauthorized billings irked some council members. But Dahlberg pointed to the council’s creation of the audit committee as justification for the new billings.
On March 8, the City Council authorized Dahlberg and two former leaders of the Securities and Exchange Commission to comprise “the Audit Committee of the City as contemplated by the Sarbanes-Oxley Act of 2002.” The resolution cites the sections of Sarbanes-Oxley – federal legislation that tightened financial reporting and accounting regulations in the wake of corporate scandals – that apply to audit committees.
Found within those listed sections of the federal legislation is the following sentence: “Funding – Each issuer shall provide for appropriate funding, as determined by the audit committee, in its capacity as a committee for the board of directors, for payment of compensation.”
Dahlberg said this passage is critical to the independence his group needs to complete the investigation.
“The reason we agreed to do the audit committee thing was the understanding that we would be dealt with under Sarbanes-Oxley. Because if not, it would have been a loser from the start,” he said. “We would not agree to take on a position or responsibility where we would not get the resources to do it completely.”
The issue of independence in an investigator has been key in San Diego. The audit committee’s predecessors, law firm Vinson & Elkins, spent 18 months on the job, collected $6 million and produced two reports that were rejected for their lack of independence by both the SEC and the city’s outside auditors, KPMG.
Audit committee officials have stressed this need for independence, especially in the face of questions surrounding its billing practices. When City Attorney Mike Aguirre expressed concern a number of months ago that Kroll wasn’t complying with the city’s billing procedures and producing detailed bills, Kroll officials said it was necessary to their independence to maintain such austere records.
But that independence can also interfere with financial prudence in a city that has been forced to trim the basic services it provides to residents in order to deal with its problems.
“We certainly do not want to stand in the way of independence, but at the same time we are a city with great financial problems. And there has to be a way to balance this. That attitude that they are authorized to spend anything they want is not a helpful attitude,” said City Councilwoman Donna Frye.
Frye, who voted for the ordinance, said council members were told originally that the audit committee’s investigation would only likely last a few months and cost a few hundred thousand dollars. She called Dahlberg’s interpretation of the resolution “ridiculous.”
“If that is in effect true, they could spend any amount of money they wanted to without having to run it past us,” Frye said.
The council originally authorized the Kroll’s contract for $250,000, but it was understood they would likely come back to seek further funds when the original contract was inked. Now the crew and its attorneys have been authorized for more than $6 million. Former SEC chief Arthur Levitt, who heads the group, bills at $900 an hour.
“They never voted on a number,” Dahlberg said. “But there was never any reason to believe they weren’t going to support it because it was what needed to get done.”
Audit committee officials said their work has essentially been on hold since early November because they had exhausted their authorized funds. However, the new billings indicate that work was done after the authorized funds had been run through.
Audit committee officials say that glitches in the city’s data processing system have delayed the investigation, which had been slated to be finished by this month. The documents are being sorted and Dahlberg said an accurate timeline for completion can be offered once it is known how many e-mails remain to be searched.
“We did not envision originally it would be so difficult to get access to and get our hands on documents that were so important to the investigation,” Dahlberg said.
New Mayor Jerry Sanders has been waiting for specific timeline and budget estimates from Kroll to hold a City Council hearing to authorize additional funding. A special session has been called for Tuesday, but Kroll’s budget won’t be voted on. An update on the investigation will be given to council members and they will be asked to authorize funds for one of the data collection agencies working with Kroll.
City Attorney Mike Aguirre said the audit committee has sufficient information to complete its reports.
“This group of very sophisticated New York operatives are exploiting reform in order to line their pockets with unearned money, and they are making the situation worse,” he said.
Please contact Andrew Donohue directly at