The Morning Report
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Tuesday, Jan. 30, 2007 | The auditing firm working on the city of San Diego’s overdue 2003 audits predicted that it could complete its work by Feb. 16 at a council committee meeting Monday, but city officials dismissed the latest deadline because of uncertainty surrounding the long-awaited review. Instead, they agreed to require greater oversight of the company’s work.
The council’s newly formed Audit Committee asked that auditing firm KPMG provide regular updates and attend council meetings regarding its anticipated blessing of the 2003 annual financial statements, a crucial missing piece to the city’s reentry to Wall Street and its overall financial recovery.
“Frustration is not the word. I am beyond frustration,” said Councilwoman Toni Atkins, a member of the Audit Committee. “At some point we have to figure out what these milestones are.”
By a unanimous vote, the panel approved requiring the government’s in-house audit staff to provide weekly progress reports until the audit is completed. KPMG officials, whose Monday appearance was the first council meeting they’ve attended since August, will also be required to report at council hearings more frequently.
It has been nearly six months since the release of the Kroll Inc. investigative report, which was hailed as the final step in the release of the 2003 audit. KPMG’s blessing for the 2003 report is needed before the city can receive its other outstanding audits, for 2004 and 2005. Those certified reports are essential before the city can regain its footing on public bond markets, where borrowing for much-needed water and sewer system upgrades is cheaper and easier.
Some city officials have hinted that their displeasure with KPMG could result in a lawsuit, noting that the city’s continued expulsion from Wall Street has left it unable to borrow on the public markets and paying higher interest rates in private loans. The firm, which was brought on in April 2004, also forced the hiring of $26 million worth of investigators as part of the completion of its work, but it continues to miss deadlines six months after the probes were completed.
Since the release of the Kroll report, KPMG has corresponded with the city’s audit staff to regularly discuss corrections to the financial report. The report lays out the city’s holdings and debts and is used by investors to assess the city’s fiscal health. However, city staff members said the firm’s process for reviewing the reports is flawed, calling into question KPMG’s estimate that the audit would be certified in the next three weeks.
“I can’t express a lot of confidence that this timeline will be met,” said Deputy Auditor and Comptroller Greg Levin, who is managing the audits for the city.
Staff members criticized the firm for raising questions from months-old versions of the audit. They said the practice gives the appearance that many of the firm’s criticisms are new, but in reality are simply revisited from earlier versions after being skipped over for many months. The city’s latest version, sent Jan. 5, was the 15th draft of the 2003 audit.
“Clearly, it has not produced the desired result,” Levin said.
KPMG auditor Steven DeVetter based his Feb. 16 prediction on the city providing the firm with a 16th version by Friday. It would take the firm one week to review and vet the document and another week to issue an opinion letter, DeVetter said.
DeVetter defended KPMG’s work so far, saying that the firm discovered a loose set of financial controls when it assumed the job nearly three years ago and that it has already forced the city to make more than $1 billion in alterations. He said he knew of six questions that remain unanswered by the city and some footnotes that need clarification.
Fred Sainz, Mayor Jerry Sanders’ spokesman, said the timeline was unrealistic because the city has not received comments from the Jan. 5 version. The city staff would have to take five days to prepare a new draft of the report and another five days to review it, which would bust KPMG’s proposed goal.
“That date presumes that all of the issues are known, and Steve admitted that this Friday they will get another list of issues,” Sainz said. “So there’s not a chance in the world. That date was dead on arrival.”
Levin recommended that the city hold off on preparing another draft until KPMG guarantees that there is a final list of issues that need to be resolved so that no new concerns surprise the city.
The audit has proved elusive for the city government, which has hired several additional consultants at a cost of more than $26 million at the behest of KPMG. The firm determined a September 2004 report by Vinson & Elkins lacked adequate independence from the city. Kroll, which was later assigned to take over the investigation, charged the city $20.3 million for its work, and also surpassed a number of time and cost estimates.
Sanders predicted after the Kroll report that KPMG would conclude its work by Oct. 27, but the firm presented a list of 114 questions to the city a week earlier. KPMG later set Dec. 22 as its anticipated completion date after requesting $2.2 million more for its work, but informed the city Dec. 21 the audit would continue being withheld.