Monday, Aug. 28, 2006 | The term “audit committee” is being blatantly misused by Kroll, the mayor and the City Council. If you look at the meaning of the term in the federal Sarbanes-Oxley Act, you find that it does not refer to an outside company. This law only mentions corporations, not government bodies. The law describes an “audit committee” being composed of members of the board of directors.
The American Institute of Certified Public Accountants’ regulations also refer to the same type of audit committee. Despite this, Kroll, with the approval of auditor KPMG, refers to itself as an “audit committee.”
There is a good reason for this. Audit committees are given great power to investigate wrongdoing, but they are internal investigations, not external. The San Diego City Council has always been easy to fool – remember the ticket guarantee – and Kroll is just the latest example. Note that the previous consultants – from the law firm Vinson & Elkins – did not call themselves an audit committee. They only got $6 million from us. Kroll named itself an “audit committee” and got $20 million.
Kroll was chosen by former City Manager Lamont Ewell with a no-bid contract. He also hired KPMG without bidding. There was pressure from KPMG to hire Kroll as part of an “illegal acts” investigation, promising that this would speed up their audit. Basically, there was no need to hire either Vinson & Elkins or Kroll. If KPMG insisted, KPMG had the right to leave. Does anyone think they would have given up a soft touch like San Diego? Practically all of the investigation that Kroll did was done by the City Attorney, Mike Aguirre. All done within his budget.
I question whether KPMG really wants to know the details of the “illegal acts.” Since Kroll has no subpoena power or power to make people testify, they cannot get to the truth. In fact, 53 individuals declined to be interviewed. The mayor and council know that but pay them $20 million anyway. KPMG knows it, but doesn’t care.
And, it is noted that both Kroll and KPMG have the same law firm, Wilkie, Farr & Gallagher. This firm got about half of the $20 million we paid for the Kroll report.
The big question is, will KPMG keep their promise to certify the city’s 2003 financial statement. Quote from a September 2005 article in The San Diego Union-Tribune:
“The overdue annual audit will be done 30 days after the consultants from the risk management firm Kroll Inc. finish their investigation, Bill Morris, Western area managing partner for KPMG, told the council.”
Yet, on Aug. 8 of this year, when asked about this, KPMG backed away and would not commit itself to a date.
KPMG now has the Kroll report, but they don’t have something much more important, namely the yet-to-be-released findings of federal investigators. If KPMG accepts the Kroll decision exonerating the council and the FBI or SEC says members of the City council committed criminal acts, KPMG will look incompetent. Nevertheless, they will keep their $5 million fee.
Mel Shapiro is a longtime observer of the city of San Diego. He won two lawsuits – one against the city and another against the Centre City Development Corp. – alleging violations of the state’s open-meeting laws.