More info on the financial condition of the city of San Bernardino

The city of San Bernardino is the fourth in California to file for bankruptcy protection. That city is not too far from where I live.

Part of the news about the bankruptcy filing is accusations by the city attorney that budgets have been falsified in 13 of the last 16 years. That story has gotten lots of play. Check out this article from my local paper.

A couple of days after the story blew up, the city’s auditor had some comments. We CPAs would typically be quiet in such a situation so I found it interesting and encouraging that the auditors are saying something.

Keep the discussion in this post in the back of your mind when you start to hear the Where was the auditor? questions.

I describe the following article because it is a rare illustration of an auditor explaining to a reporter what an audit involves.

Before I continue, it’s time for the full disclosures.

I am a CPA providing audits to organizations. Therefore you can tell I have a natural bias to defend auditors. I do not audit any cities or other government entities. I’ve never had any involvement with the audit of the city of San Bernardino. I cannot recall anyone that I’ve ever known that worked at the firm currently providing the audit. Perhaps I’ve forgotten someone I met along the way who works there, but if so, it has slipped my mind. This is actually the first time that I can recall coming across the name of this firm.

Okay, you can now decide for yourself whether you want to pay attention to anything else I have to say.

The article San Bernardino auditor reports deficits, no sign of falsification by Ryan Hagen of the Daily Bulletin, provides more background on the audit of the city.

Here is the accusation against the city finance staff in one sentence:

At Tuesday’s City Council meeting authorizing a filing for bankruptcy protection in the face of a $45 million deficit, City Attorney James F. Penman said that 13 of 16 years of budgets were falsified to indicate a surplus when there was a deficit.

Here is a comment from the CPA firm, which quite accurately describes what an audit does and does not involve:

San Bernardino-based Rogers, Anderson, Malody & Scott LLP was hired to make sure the city’s financial statements were free from material misstatement and that controls were in place to prevent fraud, said Terry Shea, a partner at the firm.

“We don’t audit the budget, the preparation of the budget or what’s in the budget,” said Shea, who was on the team that prepared San Bernardino’s Comprehensive Annual Financial Report.

An auditor looks at the actual financial transactions for the year that has been completed and prepares an audit report on that historical information. The budget is a forward-looking document making projections about what will happen in the next year in terms of revenue and how to structure the organization’s expenses.

In the audited financial statements, the auditor does not report on the budget or other planning documents. Maybe I’m missing the boat on government auditing, but the focus is historical documents.

Here are just a few tidbits regarding the 2010 audit. The CPA firm attended a city council meeting and made a verbal presentation. The article says:

While the firm is not required to emphasize deficit problems, Shea said then-City Manager Charles McNeely asked him to attend an Aug. 23, 2010, council meeting to explain to the council the depth of the financial problems.

The reporter did some digging and verified the partner’s comment:

Tape of the meeting shows them attending and presenting information including growing deficits.

The article has a very informative graph of the balances in the general fund. Check it out for yourself. Eyeballing the graph gives the following picture: The balance of the general fund was fluctuating between about $16M and $20M from 2005 through 2008. In 2009 it dropped dramatically to about $2.5M. In 2010 it’s close to zero.

The article provides the following written narrative:

The city’s general fund balance shrank from $16.1 million at the end of 2007-2008 to $2.7 million at the end of 2008-2009, according to the firm’s report. At the end of 2009-2010, the firm reported the general fund’s balance as $410,000.

I have no information on what the budget reports show. Based on information in that written description and in the graph, it should not be a surprise to anyone that the city’s financial condition deteriorated dramatically in 2009.

By the way, if anyone is interested, I think the audited financial statements along with the mandatory single audit reports are public documents.  I’m sure you can find them with a few minutes searching on the ‘net.  I’ve not looked for them yet.

You can be sure we will be hearing more about this. I’ll try to have some followup.

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