The South San Luis Obispo County Sanitation District

Conclusions 6

• CL1
  The District Administrator, John Wallace, and his company, the Wallace Group, have a pervasive presence in all facets of the District’s operation, from executing Board policy and exercising oversight responsibility for daily operations and to providing numerous financial services, including budget preparation and financial reporting. There are few District activities that the District Administrator or the Wallace Group does not manage, provide or control.
• CL2
  The Board should consider independent management for the District. An independent District Administrator could become familiar with District operations and finances, and then develop and recommend to the Board an organizational structure and plan to transition to the new organization.
• CL3
  As long as the District Administrator’s conflict of interest exists, the Board must demand and receive a level of information that allows it to manage and mitigate the conflict. 2010-2011 San Luis Obispo County Grand Jury Page 24 Because this conflict of interest has not been a focus of the Board, the current budget and budget tracking process is not adequate to mitigate it. The budget and budget monitoring process provides inadequate information about Wallace Group charges. Appropriate controls should be designed, independent of the District Administrator. The District Administrator has had 25 years to put appropriate budget controls in place and has not done so.
• CL4
  The Board should evaluate and compare operational alternatives for the District. This would include a review of all services provided to operate the District below the level of the Board. The District and Wallace Group have been molded together for 25 years, with no independent evaluation of what has evolved. This review should be done independently of the involvement or influence of the District Administrator because of his conflict of interest.
• CL5
  The County’s Audit Division would provide considerable benefit to the District and the public if it were to conduct an audit. The result would be an independent professional opinion regarding the adequacy of the District’s internal controls to mitigate a conflict of interest.
• CL6
  “This investigation found no reason to suspect that (Wallace) or his firm would take advantage of the District in billing unnecessary work.” The report states that the sources of the facts uncovered in this investigation were interviews with the Plant Superintendent and the District Administrator, as well as the available related documentation. The Plant Superintendent is quoted by the investigator as saying he “...has never questioned the need for the work performed.” That left the District Administrator as the only interviewed source of evidence regarding the necessity of the work he assigned to his own company. 2010-2011 San Luis Obispo County Grand Jury Page 21 The investigator also failed to evaluate whether the Board was provided the information to determine if Wallace Group charges to this project were reasonable and appropriate. The final section of the report titled General Comments states: “…the arrangement of John Wallace being both the District Administrator and his firm providing engineering and project management services to the District presents an easy target to critics (on District Staff and the community), and can provide the ’appearance’ of a conflict of interest.” The report then deals with the Board’s management of this potential conflict in a single sentence: “The investigation into this matter reveals that the project was completed within regulations and District policy with full Board approval.” The facts indicate something quite different. The $16,921 paid to the Wallace Group was made in a series of seven individual payments occurring over a two fiscal year period. The project was budgeted and the Board authorized payments as follows: Budget Actual Charges Fiscal Year 2007-08: Original budget $40,000 Wallace Group charges $10,007 Total Charges: FY 2008-09 $10,007 Fiscal Year 2008-09: Amended budget $47,672 Wallace Group charges 6,914 Total painting contract 38,812 Total Miscellaneous charges 1,894 Budget $47,672 Total Charges: FY 2008-09 $47,620 Total: All years $57,627 As can be seen from this table, the project total charges exceeded the amended budget by approximately $10,000. However, the Board did not realize this because, when approving the $47,672 as the amended budget in FY 2008-09, it was not given the information that $10,007 2010-2011 San Luis Obispo County Grand Jury Page 22 had been paid the prior year to the Wallace Group. The budget and payment process never informed the Board at any point in time that total Wallace Group costs were $16,921. The investigation states the Wallace Group payments were made with “full Board approval,” but fails to recognize or understand that the budget and payment process did not inform the Board what the total Wallace Group actual charges were. A meaningful investigation is one performed by an independent expert who is technically qualified to look at the design and management work the Wallace Group performed and render an opinion whether the work and related billings are appropriate and reasonable. That is precisely what this investigation did not do. Responsibility to Audit the District’s Accounts and Records Among the primary functions of the County of San Luis Obispo Office of Auditor-Controller (Audit Division) is the audit of accounts and records of County Special Districts. In recent years, the Audit Division has fulfilled this responsibility by obtaining a copy of the District’s financial statements as certified by an external auditor and maintaining a copy of the statements in its files. The Audit Division is authorized to conduct an audit of the District, if it chooses to do so, in order to carry out this responsibility. The same principal auditor has audited the District’s financial statements since 1998. Federal law (Sarbanes-Oxley act of 2002) mandates that the principal auditor be rotated every five years. Although this mandate applies to publicly owned companies, local government agencies have also followed this standard. One of the reasons for this is so that a longer-term association does not compromise the auditor’s independence. 2010-2011 San Luis Obispo County Grand Jury Page 23