By Mary Locatelli
While Laguna Beach City Council faces many important and competing issues, none are more important than the health of the city’s finances. As Jackie Kennedy once said about raising children, “If you don’t get that right, nothing else matters.” The same is true of council stewardship of city resources.
There have been rumblings about city finances going back at least to 2016 when residents began to notice a number of recurring audit adjustments. Then, starting in 2018 and continuing through today, the auditors have given the city a series of first Significant Deficiencies and, for the last two years, Material Weaknesses regarding financial reporting and closing procedures. My Bank Audit Committee would have considered that unacceptable.
What has been the city’s response to the red flags raised by the auditors? Surprisingly, the first action, apparently taken unilaterally by the City Finance Officer (CFO), who oversaw most of the areas criticized by the auditors, was to change auditors. Why? Because the existing auditors could not meet an accelerated timeline demanded by the CFO. Never mind the fact that the timeline was as much or more affected by the finance department’s inability to deliver auditable financial statements to the auditors on a timely basis.
As the process unfolded, the CFO conducted a flawed request for proposal process, with no approvals or authorization, no segregation of duties and no review or oversight until a final list of candidates was presented to the Audit Committee. The committee was given the list of finalists and asked to choose one. The committee did not question the process. In the end, they selected a firm that could not deliver financial statements any earlier than the firm being replaced.
It’s worth remembering a bit of Audit Committee history here. The council created an Audit Committee in 2018 to assist in reviewing audit issues. But the committee has always had other responsibilities and never totally focused on audit. Although the council has appointed very knowledgeable and diligent people to the committee, it has never provided the committee with a single member who has accounting and auditing expertise.
What was the council’s reaction when asked to decide on the new audit firm? Most expressed some discomfort with the process. One said the CFO should not have done what he did, and this was not one of the city’s finer moments. Another, while expressing concern for how the city found itself in the position it was in, stated that he had to rely on the Audit Committee. Perhaps he had forgotten that the council had not provided the Audit Committee with the expertise that would have helped them in dealing with this situation. In the end, given the choice of staying with the existing firm or changing to the new firm, all but one councilmember voted to change. A bit like snatching defeat from the jaws of victory.
On a positive note, City Manager Dave Kiff has made a commitment to addressing the weaknesses in the internal controls in the Finance Department. To that end, he obtained approval from the council to hire an outside consultant to provide assistance. While applauding the idea, there is a concern that the consultant was not selected through a competitive bidding process, and the selected firm’s website does not focus on internal controls as a core competency. It’s human nature to want to hire people you know and trust. But when dealing with other people’s money, it is imperative that organizations follow good internal control practices. And good internal controls start with the tone at the top.
Let’s end where we started. Nothing else matters if you don’t get the finances right.
Mary Locatelli was a partner at Ernst & Young, an executive vice president and director of audit and compliance at a regional bank, had her own internal controls consulting company, and was a deputy director in management and finance at an international organization headquartered in Vienna, Austria.
If the City Council can’t effectively manage something as critical as the finance department, what does that say about their ability to handle other important responsibilities? Financial management is the foundation of good governance—it’s what ensures that public services are funded, infrastructure projects are completed, and the community’s trust is maintained. When the Council fails in this area, it raises serious concerns about their competence in managing everything else. If they can’t get the finances right, it calls into question their ability to lead on anything else that truly matters to the residents of Laguna Beach.
I want to express my gratitude to City Manager Dave Kiff for his commitment to tackling the weaknesses in the Finance Department’s internal controls. As someone new to the role, he’s already shown great leadership by securing Council approval to bring in an outside consultant to assist with these issues. While there are some concerns about the selection process for the consultant, it’s clear that Dave is focused on making necessary improvements. We are thankful to have someone like him on board who is taking these challenges seriously and working to strengthen the foundation of our city’s financial management. With his dedication, I’m confident that we’re moving in the right direction. Can anyone tell me which council member had the foresight to recruit Dave and do we know who voted for him?
Thank you Mary Locatelli for sharing this information and telling it like it is. Here’s more support for being alarmed – August 16, 2024 Clara Beard INDY article/council quotes:
Quote: “Mayor Sue Kempf, the audit committee liaison, said that after talking to Eide Bailly representatives last Friday, they conveyed that recent turnover within the city’s finance department affected their ability to submit financial statements in a timely manner.”
My response: Mayor Kempf, the root of the problem (Finance Dept.) brought to the Council’s attention by our contracted outside Auditor Firm should have warranted some immediate attention. Not voting out the firm creating awareness of an internal problem. Baffling approach.
Quotes: “Councilmember Bob Whalen said if he could rewind it all, he’d leave Eide Bailly in place, but since the city has already gone through the RFP process, they should take the Audit Committee’s recommendation and go with LSL.
“I think we’re in a tough spot,” Councilmember Bob Whalen said. “With all due respect to Gavin (Curran), we had a three-year contract (with Eide Bailly) that was awarded by council, and it shouldn’t have been terminated unilaterally by staff. That shouldn’t happen, but it did. Then, this process was unrolled and came back to the council for the first time tonight.
“I think we should recognize this wasn’t our finest moment,” Whalen continued. “This wasn’t a great process.”
My response: Agree this should never have gotten to this point Council member Whalen. it would seem that after serving 12 years in office the responsibility of overseeing our finances/auditing would be a top priority and have improved not gone backwards. Alarming.
Fact is, City finances and staffing issues have been in question since 2018. The current uncovering of the unilateral action taken by the ACM is concerning and poses the question of what other City transactions have been handed in this same manner? If any area of City government needs a micro-managing approach its Finances/Budget. Where has the oversight been by Council members, the Auditing Committee and Liaisons (now Mayor Kempf) and the former City Manager/acting CM’s included?
Hopefully, enlisting a third party auditing firm reporting to City Manager Dave Kiff and a deeper dive into the Finance Department supervision, reporting and high employee turnover rate will help resolve the issues and restore the public trust in our overall city governing. It’s a start.
Who keeps electing the uneducated? And why do the uneducated keep running? Because the educated people in this town don’t want to waste the time and energy dealing with penny ante locals who rant and complain about every little thing in the name of ‘the people’. So quit embarrassing yourselves local Laguna ranters and get educated, so we can have educated people fill the council spots.