Hired to Reform, Former Auditor Left Unhappy with Mayor's Control

Monday, Feb. 26, 2007 | John Torell never really settled into his position as the city of San Diego’s auditor. He was hired at the height of the city’s dysfunction by a mayor who would soon resign and he succeeded two former auditors under investigation by the federal government.

But despite the key position that paid $185,000 a year, Torell kept Santa Barbara as his home. He made the five-hour trip from Santa Barbara to San Diego on Amtrak Monday mornings, working on his laptop from 7 a.m. until arriving at noon. He shuttled back to his home midday Friday.

“I have a house in Santa Barbara,” he said in a January 2006 interview. “And if you sell a house in Santa Barbara you can never buy back in again. I’m not going to be here too many more years.”

Last month, much sooner than had been anticipated, Torell hopped the train back to Santa Barbara for the final time. He had promised the City Council he’d work in San Diego for three to five years when he was first hired — but he was out after less than two.

The departure marked the end of a tumultuous tenure for the man brought in to reform a system that had left the city in deep financial trouble and under sanctions from the Securities and Exchange Commission. Known for his no-nonsense, New York attitude, Torell seemed like the perfect fit for the job of reformer and financial watchdog.

But his edge noticeably dulled in the year after his office was placed directly under the supervision of Mayor Jerry Sanders with the implementation of the strong-mayor form of government. The two parties struggled from day one to define Torell’s role, with the auditor seeking to be an independent voice at City Hall and the Mayor’s Office looking for a team player.

In his first interview since leaving last month, Torell last week offered a stinging critique of the internal workings of the Mayor’s Office. He said Sanders’ team chose form over substance, castigated him for not being a team player and “totally missed what the auditor’s role is.”

“It was spin,” he said. “The substance of the transaction was not as important as how … you could look good making it.”

Back home, Torell has taken over as the director of housing and community development for Santa Barbara County. Within weeks of his departure, Torell’s top assistant left City Hall, too. Larry Tomanek, brought from Santa Barbara with Torell, resigned to take a post with the City Attorney’s Office.

“We were told we were being negative about the city,” Tomanek said. “We weren’t being negative, we were telling the truth. We didn’t want to sugarcoat anything. We wanted to say that things were bad if they were bad.”

Added Torell: “The reason [the city] got in trouble in the first place is everyone was on the same team.”

The Mayor’s Office stressed that the City Charter calls for the auditor to be supervised by the mayor. Jay Goldstone, who as chief financial officer oversees the auditor, said Torell never accepted the fact that the charter didn’t call for an independent auditor. He said he thought Torell simply wanted to be in charge.

“The mayor inherited all of these problems. He didn’t create them, so why would he sugarcoat them?” Goldstone said.

Sanders spokesman Fred Sainz said the public shouldn’t judge the mayor’s opinion on an independent auditor based on the statements of two individuals who chose not to be a part of the administration.

“Don’t necessarily believe what you hear from two individuals who may not have hit it off with this current administration. They may have a point of view, that doesn’t necessarily mean that is accurate or that they have good judgment or it is reflective of the truth,” he said.

“It is nothing more than the opinion of a couple of officials who have spent their lives in Santa Barbara and came to the ‘big city’ a few years ago. The mayor is not going to engage in a verbal tit-for-tat with two officials who are no longer in his administration.”

In another environment, the dust up between the elected mayor and the appointed auditor might go unnoticed. But here, financial forthrightness and the role of the auditor have taken on heightened importance as the city, under Sanders’ leadership, tries to pull itself out from beneath the weight of securities fraud sanctions and a two-and-a-half-year banishment from Wall Street. When he was hired in February 2005, Torell was hailed as a critical cog in helping reform financial problems often blamed on the previous Auditor’s Office.

A report prepared for the city by former SEC leaders last year accused Torell and Tomanek’s predecessors — former Auditor Ed Ryan and former Assistant Auditor Terri Webster — of committing securities fraud in releasing misleading information to investors about the city’s looming pension and retiree health care deficits.

The city’s inability to accurately report its financial health has left it without audited financial statements dating back to 2003 and a suspended credit rating. Since 2004, the city has been forced to delay vital capital projects and borrow money more expensively in private markets because of its exclusion from public credit.

The scuffle also comes as the city attempts to grow out of the awkwardness of the first year under the strong-mayor form of government. Under the new structure, approved by voters in 2004 and instituted at the start of 2006, the Auditor & Controller’s Office went from being under the supervision of the City Council to the Mayor’s Office.

The new structure immediately drew criticism from many corners worried that an auditor couldn’t independently review the work of his own boss.

Ann-Marie Hogan, Berkeley’s elected auditor and a board member of the Association of Local Government Auditors, said auditor-mayor relationship was a “fatal flaw” in the city charter. “Auditors are not supposed to be auditing their bosses,” she said.

Change to the city’s auditing structure appears imminent, although it is unclear what will ultimately be settled on. There’s been a push for an elected auditor; the mayor has instead endorsed a structure that would separate the keepers of the city’s books from their auditors.

Private consultants from Kroll Inc. recommended dividing up the responsibilities of the Auditor & Controller’s Office. Under the Kroll proposal, which is being pushed by Sanders, a city comptroller would report to Goldstone and be charged with preparing the city’s financial statements.

An auditor general — who would be responsible for inspecting the mayor’s bookkeeping and management of the city bureaucracy — would be named by the mayor and confirmed by the City Council. The position would report to a panel made up of two mayoral appointees and a council member.

Sanders said the new structure recommended by Kroll would create an independent auditor, but for now he is operating under the arrangement voters approved. “The city charter is the document that governs the city, so we’ve been working with a system that allows that structure,” he said.

As for Torell and Tomanek, the mayor said he “honestly didn’t deal with them that much.” “[Torell] never requested a meeting with me,” Sanders said of the complaints.

The Kroll report took the city to task for continuing to operate without an independent auditor.

Torell and Tomanek didn’t offer many specific tales from their time under the purview of the Mayor’s Office. Instead, they described in broad terms a climate in which employees are discouraged or afraid to speak up.

“Everyone is scared to death,” Torell said.

The telephone hotline that Torell established in 2005 so employees could, in confidence, report fraud and waste was transferred away from his office to the mayor’s newly formed Office of Ethics and Integrity when Sanders took office. The Independent Budget Analyst’s Office noted in a Jan. 25 report that, according to a fall study, “most City employees remain unsure about the City’s ethical standards and about the process for reporting lapses and violations of the City’s ethics policies and procedures.”

The report recommended “that administration of the employee hotline be transferred from [the ethic’s office] to an independent City Auditor.”

Torell, who served under an elected auditor in Santa Barbara County, said he was also chastised by Goldstone for writing a memo to the City Council regarding the structure of the proposed Audit Committee. The Mayor’s Office was pushing for the power to appoint two of the three Audit Committee members.

The Mayor’s Office also began requiring one of its spokespeople to be on the line when employees from the Auditor’s Office conducted telephone interviews with the press.

“My personal opinion is that they didn’t want us to speak up,” Tomanek said.

Council members began to notice, too, beginning with the absence of auditing officials at meetings about their own reports. In their place were officials from the mayor’s financial management team. “It was almost comical to an extent,” said City Councilwoman Donna Frye.

Torell gained notoriety when he issued a critical report of the city’s internal controls in January 2006. A year later, the second edition of the report, by Torell’s own admission, was “kinder and gentler.”

The Jan. 25 report from the Independent Budget Analyst’s Office focused on changes made by the mayor’s management team to Torell’s report and advocated for the establishment of an independent audit function at City Hall.

The IBA report notes that the conclusion of Torell’s report had been “substantially modified.” A draft originally given to the IBA described the city’s internal controls over financial reporting as “minimally adequate to assure timely and accurate preparation of the City’s annual financial statements.”

The final report, after it had been run through the mayor’s staff, said the internal controls “have improved to permit timely and accurate preparation of the City’s annual financial statements.”

Citing Torell, the report states that the mayor’s management team requested the change. “The nature of this type of change concerns the IBA as it is likely that many readers of the Report will focus and rely upon this paragraph,” the IBA report says.

The IBA report goes on to note that the current structure allows the mayor and his management team “the opportunity to review and edit audit reports. … Every financial authority contacted by the IBA recommends independent Auditor and Audit Committee operations that are not subject to real or perceived management influence.”

Goldstone, the CFO, said he didn’t remember specifics of the changes he suggested to the report’s conclusion. However, he said he asked audit officials if his changes were accurate. “And they said, ‘Yeah, we can live with that,’” Goldstone recalled.

“I had no incentive to make things more positive,” Goldstone said, adding that any negative language only reflected poorly on the Auditor & Controller’s Office.

He said Torell made it clear from the beginning that he didn’t like the new form of government. “There was an attitude. Of course, with that kind of attitude, his transition never worked,” Goldstone said.

City Councilwoman Toni Atkins — who along with Frye and Councilman Jim Madaffer served on the committee that selected Torell — said she found the former auditor to be straightforward and forthcoming. Atkins said she and her colleagues were relieved to be getting frank advice from their auditor considering the fallout from city’s past reporting problems.

“I still believe John Torell was an excellent choice,” she said. “I think he set the direction on the right track.”

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