As reported in the LA Times on March 29, 2024, an Orange County school official was charged with embezzling $16 million from the school district. This raises the question: How does such a significant fraud occur? The answer lies in inadequate accounting oversight, lack of segregation of duties, non-adherence to written policies and procedures, absence of enforced vacations and duty rotations, and insufficient internal controls, creating an environment ripe for both innocent mistakes and intentional mismanagement.
To date, the Laguna Beach City Council has not received or formally accepted the audited financial statements for the fiscal year ending June 30, 2023. These reports, which took nine months to prepare, were delivered to the finance department in March 2024. What has caused this delay?
Auditors have consistently reported significant findings in previous years, particularly the need for proper closing procedures, controls and oversight over bank accounts. As any CPA auditor will confirm, the goal is to have zero reportable issues. Recurring significant findings are troubling and reflect poorly on our governance.
When will the council be presented with the June 30, 2023 reports? These reports are now 13 months old and are becoming increasingly irrelevant. It is likely staff will once again assure the council that the reported issues have been corrected through procedural and staffing changes, as they have in the past.
It is important to understand that the annual audit represents a snapshot in time. Auditors do not examine everything; they only review internal controls necessary to issue their reports. For an informative and engaging explanation of the auditor’s role, forensic auditing, and how financial issues are uncovered, I recommend viewing minute 30 of the YouTube presentation “Understanding Local Public Finance and the Comprehensive Annual Financial Report (CAFR)” by Larry J. Kosmont, CEO of Kosmont Companies, Julio F. Morales and the USC Price School.
Given the recent unilateral termination of the outside auditors’ contract without input from the audit committee or city council, the ongoing significant issues reported by auditors, delays in releasing the June 30, 2023 audits, and the recent departure of the accounting manager, it would be prudent for council to engage an independent firm to audit the city’s internal controls, accounting/finance department operations, and software systems and to make recommendations.
Robin K. Hall, CPA, Laguna Beach
