Sleeping With the Auditor

A Controller's Office organization chart, dated January 1999, details the job responsibilities of a dozen controller employees, including Bruce, and the half-dozen KPMG consultants who worked side by side with them keeping the financial accounting system up and running. The chart shows them all reporting to two KPMG LLP partners, Bill Blaustein and Price. In other words, the city official who approved payments to KPMG, Bruce, also reported to KPMG's partners. It is not just the auditor's independence from the city that is called into question by this long-term, multimillion-dollar relationship -- it is the city's ability to act independently from its auditor that is also at risk.

The city maintains a large Department of Telecommunications and Information Service that is staffed with 150 computer technicians and programmers who are, according to the agency's deputy director, available to work for the controller. City regulations prohibit San Francisco from hiring consultants to do jobs that city employees can do, unless the Civil Service Commission approves an exception. To obtain the exception, a KPMG LLP partner wrote the formal document used by the controller to justify hiring full-time KPMG workers at double the cost of city computer programmers. KPMG time sheets show that the firm charged the city for the time it spent filling out forms for the controller and lobbying him for jobs and more money.

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Another overarching principle of accounting forbids auditors to audit their own work. Yet over time KPMG became so deeply enmeshed in daily operations at the San Francisco Assessor's Office that this common-sense rule seems to have fallen by the wayside.

The assessor's job is to determine the value of all taxable property in the city. This task was complicated under the stewardship of Doris Ward after she spent $5 million acquiring a computer system that "lacks demonstrable financial controls and adequate audit trails," according to an insurance company report. In November 1999, KPMG LLP came to her rescue and began "assisting in producing the annual tax roll," according to the auditor's contract. The auditors apparently "directed" the entry of $17 million worth of backlogged assessments into the assessor's database. By January 2000, KPMG LLP employees, working full-time in the Assessor's Office, had billed a quarter-million dollars to "assist" the assessor in doing her job.

When KPMG's supervision of an effort to keep the city's property tax revenue flowing was described to government accounting expert Sharon Russell, she practically recoiled over the telephone. "There is an express prohibition against auditors posting any transactions," she said. "They are not allowed to supervise public employees. And working inside city government full time is prohibited as well."

Despite the independence rules, KPMG LLP subsequently contracted with Ward and the controller to "reengineer" the operations of the Assessor's Office -- for half a million dollars. "Since some past [audit] recommendations have been made but not implemented, KPMG will assume an active role," the contract stated. KPMG Consulting, which took over the contract, eventually recommended that the assessor "improve" the computer system. But the city failed to set aside the cash to pay for the report. A furious KPMG Consulting wrote to the controller last August demanding that he find $406,000 to pay the balance of the firm's bill.

In another appearance of conflict of interest, KPMG agreed to investigate a city commission charged with approving the company's contracts with San Francisco.

In early 2000, Mayor Brown appointed a blue-ribbon panel to look at the Human Rights Commission, in the wake of an FBI raid on the office. The feds were searching for evidence of wrongdoing by the agency, which wields tremendous authority over who is allowed to have a contract with the city. The panel hired KPMG LLP to provide "third-party independence and objectivity" to the panel's probe of HRC contract monitoring practices. KPMG was hardly an independent third party, though. The HRC regularly required KPMG to share its profits with specific minority-owned accounting firms as a condition of keeping its long-term audit contract.

KPMG Consulting issued the final report on the HRC, concluding that the commission's authority over city contracting should be transferred to the "independent" Controller's Office, because the commission habitually violated public contracting laws and was, also, subject to "political influence." (The recommendation was ignored by the mayor and the Board of Supervisors.) The report did not come cheap. It went a quarter-million dollars over budget, costing the city $525,241.

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There are many other instances of KPMG and the city controller simply ignoring the essential principles of auditor independence.

- In 1999, Harrington directed KPMG, his "external" auditor, to work with his internal auditors to study "risky" software systems used by the city -- despite the fact that a U.S. General Accounting Office rule states, "External audit organizations would violate the overarching principles if they provide internal audit services because such services are considered a management function."

- In 2000, KPMG LLP was paid a quarter-million dollars for consulting with Muni, including doing accounting work and selling software services, at the same time it was paid $195,000 to audit the department's accounting system.