Responses to the Audit
March 3, 2016
Ms. Elaine M. Howle
California State Auditor
621 Capitol Mall, Ste. 1200
Sacramento, CA 95814
Re: California State Auditor Report re: Great Park Review
Dear Ms. Howle:
On behalf of four of the five members of the Irvine City Council (Councilmember Krom dissenting), this letter constitutes the City of Irvine’s (“Irvine” or the “city”) response to the June 24, 2016 draft of the California State Auditor’s (“CSA”) Report titled “City of Irvine: Poor Governance of the $1.7 Million Review of the Orange County Great Park Needlessly Compromised the Review’s Credibility” (the “Report”).
It is important that the city provide context that is not adequately conveyed in the Report. While the Report acknowledges that more than $200 million was spent planning and developing the Orange County Great Park over the last decade, the Report does not sufficiently convey the magnitude of constituents’ concerns about those expenditures. Irvine’s constituents have repeatedly and forcefully called on the city to explain and justify the extraordinary cost. The public’s interest in those questions was particularly acute during the 2012 election cycle. Therefore, the newly-constituted City Council of the City of Irvine (“City Council”) responded to the public’s concerns by unanimously approving a review and analysis of Great Park expenditures (the “Great Park Review”) at the first substantive City Council meeting after the November 6, 2012 election. As it has done on many prior occasions, the City Council also unanimously voted to form a subcommittee to oversee the review.
These circumstances and the Great Park Review were extraordinary and unique. The city retained the accounting firm Hagan, Streiff, Newton & Oshiro Accountants, PC (“HSNO”) and special counsel Aleshire & Wynder, LLP (“Aleshire”) to conduct the Great Park Review. They were asked to review more than $200 million in expenditures, the performance and cost of third party contractors, and the performance of city staff and officials who worked on the Great Park. HSNO & Aleshire reviewed tens of thousands of pages of documents, analyzed scores of contracts, and conducted hundreds of hours of interviews and depositions over approximately two years. The assignment was enormous. Using a comparison to illustrate the point, the CSA has spent six months and thousands of hours fulfilling its audit objectives—which focus on three contracts performed over two years—and preparing its Report.
Another undertaking like the Great Park Review is highly unlikely. Consequently, the Great Park Review is a poor case study upon which to recommend sweeping changes to the city’s policies, procedures, and practices. The city’s responses to the CSA’s recommendations reflect this reality.
Next, the city has considered the Report’s findings and recommendations in the context of the CSA’s audit objectives. As indicated in Table 2 of the Report, the Joint Legislative Audit Committee directed the CSA to study nine discreet “audit objectives,” and one “catch all” objective that the CSA used to analyze two more issues. Out of eleven issues, the CSA has made ten recommendations that primarily pertain to two general topics: (1) issues related to whether the services of HSNO and Aleshire conformed to appropriate audit standards; and (2) issues related to the city’s procurement and oversight of the contractors.
But the Report also includes important facts that validate the city’s governance:
- The CSA did not find any violation of relevant state laws and regulations;
- The CSA did not identify any violations of law pertaining to the selection of accountants, attorneys, and the private judge who assisted the city with the Great Park Review;
- The CSA did not find that the audit subcommittee unfairly characterized the nature of work performed by HSNO and Aleshire;
- The CSA did not find that the city violated any open meeting laws;
- The CSA did not find that the city used its subpoena power in a manner that violated applicable laws, regulations, and policies;
- The CSA did not find that the city misused state funds in connection with the Great Park Review;
- The CSA did not find any evidence that the city released the results of the Great Park review and related deposition transcripts to influence the 2014 election;
- The CSA did not find any violations of whistle-blower laws;
- The CSA did not find any evidence that the City paid for work of a retired judge that was outside the scope of her contract; and
- Nothing in the Report challenges, questions, or undermines the accuracy of the conclusions reached by HSNO and Aleshire in their March 2015 reports.
In light of these important findings, the Report’s title—“City of Irvine: Poor Governance of the $1.7 Million Review of the Orange County Great Park Needlessly Compromised the Review’s Credibility”—does not reflect the totality of the Report and is unnecessarily incendiary.
The CSA also concludes in the Report that various aspects of the city’s procurement of HSNO and Aleshire, including the standards to which they were directed to adhere, undermined public confidence in the audit process by decreasing transparency. These conclusions are outside the scope of the CSA’s prescribed audit objectives. Nothing in the audit objectives calls upon the CSA to measure or opine on public confidence in the Great Park Review.
The conclusions regarding public confidence are also unsubstantiated. The Report does not include any data demonstrating either (1) an actual erosion of public confidence in the Great Park Review; or (2) a causal link between the circumstances addressed in the Report and public confidence. As an example, the CSA has not identified any data or facts demonstrating that HSNO’s adherence to the American Institute of Certified Public Accountants (“AICPA”) standards either diminished public confidence or compromised HSNO’s objectivity.
Moreover, the Great Park Review was highly transparent. The City Council conducted several public meetings to address preliminary reports of HSNO and Aleshire that were broadcast on television. In response to Public Records Act requests, the city produced thousands of pages of documents related to the Great Park Review. Witness testimony was made available on the city’s website on a rolling basis. During the review, no one raised concerns about the transparency of city’s procurement of HSNO or Aleshire. Finally, the CSA itself did not find any instance in which the city violated open meeting laws and regulations.
Hence, although it may be the CSA’s opinion that adopting the recommendations in the Report might enhance transparency or public confidence, Irvine does not accept the CSA’s over-arching theme that the city’s actions compromised the integrity of, or diminished public confidence in, the Great Park Review.
Similarly, many of the recommendations in the Report are presented as “best practices.” It is unclear what sources the CSA has used to identify purported “best practices,” and the Report often does not include supporting data or authorities on these points. Indeed, the Report is want of references to treatises, journal articles, or theses on city governance, and it provides only a few specific examples of practices used in other cities. It is also not clear that any members of the audit team have acquired practical experience managing the day-to-day operations or serving on the governing body of a city comparable to Irvine.
Finally, the Report states twice that the members of the subcommittee failed to “add value” to the Great Park Review. These statements are both outside the scope of the CSA’s audit objectives and too vague to constitute a credible finding or conclusion under Generally Accepted Auditing Standards (“GAGAS”).1 The audit objectives do not contemplate a subjective “value-added” assessment of the subcommittee’s performance. The Report does not indicate what other “value” the subcommittee could and should have contributed to the review, what methodology the CSA used to objectively assess the subcommittee’s “value,” or the CSA’s qualifications to subjectively evaluate the subcommittee members’ contributions to the Great Park Review. Moreover, the city disagrees with the CSA. The subcommittee fulfilled its responsibility to oversee HSNO & Aleshire during the Great Park Review.
The City of Irvine’s Initial Responses To The CSA’s Recommendations
Recommendation No. 1:
To ensure that local government audits are conducted with independence and rigor, beginning immediately Irvine should incorporate into its RFPs and contracts the requirement that consultants follow appropriate, sufficient audit standards when performing audit services.
Irvine will implement Recommendation No. 1 by ensuring that, when applicable, future requests for proposals (“RFPs”) for auditing and consulting services expressly identify the specific standard that Irvine intends for the contractor to apply. In so doing, Irvine will require contractors to perform work in accordance with GAGAS when appropriate.
To be clear, however, Irvine’s decision to conduct the Great Park Review pursuant to AICPA standards did not violate any state laws and was reasonable under the circumstances. Although several state laws provide that certain audit activities must be conducted under either GAGAS or standards prescribed by the Institute of Internal Auditors, none of those laws governed the Great Park Review conducted by HSNO and Aleshire (see, e.g., Gov’t. Code §§ 1236 (audits conducted by city employees); 15286 (school bond monies); 53130 (federally-mandated block grant funds); § 12410.5 (audits prepared for transmission to the State Controller)). Furthermore, as noted in the Report, Irvine contracted for “consulting services,” as opposed to auditing services.
Moreover, the CSA did not find that HSNO failed to operate as a neutral, independent analyst, when adhering to the AICPA standards. As noted in Table 3 of the Report, the AICPA standards “require objectivity, which is the obligation to be impartial, intellectually honest, and free of conflicts of interest.” In addition, HSNO has a legal obligation to comply with applicable professional standards and to be truthful regardless of whether it is conducting an audit or a review. To Irvine’s knowledge, HSNO complied with all of these obligations.
Recommendation No. 2:
To improve fiscal accountability and to ensure that audits are performed to appropriate standards, Irvine should adopt an internal audit function by December 2017.
The Report concludes that an internal audit function would have improved the Great Park Review. The Great Park Review, however, was itself an endeavor to improve fiscal accountability. It was conducted by a public accounting firm and law firm, in accordance with agreed-upon standards and procedures developed with the guidance and advice of external public accountants and auditors. After the city received this outside input, the City Council approved the RFP through which HSNO was retained and then HSNO’s contract. Because the city adhered to this process, it is not apparent that an internal auditor would have performed unfilled functions or added demonstrable value.
Furthermore, as noted above, the Great Park Review was unique and the city is unlikely to undertake similar endeavors. Thus, Irvine does not agree that its experiences in this instance are a sufficient basis to expend public resources establishing and maintaining an internal audit function.
Recommendation No. 3:
To make certain that it conducts its competitive bidding process in a more transparent and fair manner, Irvine should do the following by December 2016:
a) Require city staff to include in every RFP the specified methodology for selecting contractors, and not to deviate from it without adequate notice to potential bidders. Further, Irvine should include this requirement in its contracting manual.
b) Examine and update its preferred selection criteria listed in its contracting manual and abide by this criteria when creating RFPs and evaluating bidders.
c) Irvine should further clarify the manner in which an interview may factor into the decision regarding how it will award a contract. Specifically, Irvine should include in its procedures whether an interview may change scores from an earlier phase of the proposal review process. Further, Irvine should include the details of how it will use interviews in its review process in the published RFP.
Irvine has already, and will continue to, implement Recommendation No. 3.
Although the city had procedures in place during the relevant timeframe, the city has since reviewed and enhanced its procurement procedures and supporting documents. Through these efforts, the city has already implemented the steps noted in subsections (a) and (b) of Recommendation No. 3. In September 2014, the city added detailed instructions regarding RFP selection criteria to the city’s RFP checklist. These enhancements include providing the recommended weight to be given to preferred selection criteria. To ensure that the city’s methodology and criteria are followed, staff members responsible for city purchasing now collaborate with project managers during the preparation of each and every RFP, by providing training and guidance and overseeing the procurement process.
To further implement Recommendation No. 3, the city will clarify its uniform procedures for addressing interviews in RFPs so that bidders will understand that an interview may affect the evaluation of their bids. This recommendation will be implemented by December 2016.
Recommendation No. 4:
To make certain that Irvine complies with the intent of competitive bidding for professional services, beginning immediately it should not include provisions in its RFPs for potential future services that are above and beyond the desired scopes of work.
At the outset of the Great Park Review process, the City Council and staff members knew that the city would need additional reviews after the initial survey of contracts was completed. Therefore, even if the city had adhered to Recommendation No. 4, the city still would have retained HSNO to perform additional work on the Great Park Review.
The city disagrees with the CSA’s conclusion that the RFP impacted the likelihood that HSNO would be selected for the additional work. The decision to award additional work to HSNO was the direct result of three factors—(1) HSNO’s successful response to the initial RFP; (2) the City Council’s assessment of HSNO’s performance of the initial work; and (3) the reality that HSNO acquired unique knowledge in the course of performing the initial work, which made HSNO an attractive candidate capable of efficiently performing subsequent projects. The RFP did not preclude the city from contracting with another entity if the City Council was dissatisfied with HSNO’s performance. The City Council’s assessment of HSNO’s performance was transparent. Before it allowed HSNO to perform additional services, the City Council reviewed HSNO’s work product and awarded HSNO additional work during a televised public meetings.
The city’s RFP also possessed advantages that would not exist in an RFP based on Recommendation No. 4. First, the city’s RFP allowed the city to set rates when bidders were competing for the initial work and had an incentive to provide competitive pricing. Second, the city mitigated risk by preventing HSNO from raising its rates and diminishing efficiencies created by HSNO’s knowledge of the underlying facts. In other words, in some instances, adherence to Recommendation No. 4 could eliminate efficiencies by giving leverage to a repeat bidder. Third, the RFP allowed the city to avoid the time and expenses associated with needlessly changing contractors.
In light of the foregoing, Irvine is not inclined to adopt Recommendation No. 4 as a policy. The city will, however, continue evaluating whether future service provisions should be included in RFPs on a case-by-case basis.
Recommendation No. 5:
To prevent contractors from exceeding their scope of service, Irvine should periodically review ongoing contract invoices and compare billed activities to the contractor's scope of work to be certain that they reflect the work Irvine expects the contractors to perform. Irvine should also ensure that it assigns to projects a staff project manager who can sufficiently and appropriately monitor contractors' work. In the future, if the council decides to limit or modify the existing authority of city officials relating to contract oversight, it should ensure that its resolutions explicitly delineate the limits or modifications to that authority.
Irvine has, and will continue to, review contract invoices and compare billed activities to the contractors’ scope of work. When doing so, Irvine will continue to utilize employees who can appropriately monitor contractors’ work.
The staff took reasonable and appropriate steps to monitor contract performance during the Great Park Review. As acknowledged in the Report, the city monitored contract invoices and warned HSNO in June 2014 that the firm was not authorized to perform work in excess of $400,000 without the City Council’s approval. In so doing, the city explained to HSNO that it would risk not being paid if it performed unauthorized work. The city manager also prepared a specific form for monitoring HSNO’s and Aleshire’s work. The city manager intended for the form to allow staff to assist the subcommittee with budget management without interfering with the Great Park Review. When the contractors’ nevertheless performed unauthorized work, the city refused to pay for the unauthorized work.
In the unlikely event that the City Council again limits or modifies the staff’s authority to oversee contracts, the City Council will clarify the modified roles of all involved so that the city can continue to manage its contractors effectively.
Recommendation No. 6:
To ensure that it receives the services for which it has contracted and to avoid conflicts with its contractors, Irvine should monitor and enforce its contract provisions requiring that work not be performed in advance of issuing a signed contract and approved purchase order.
Irvine has, at all relevant times, monitored and enforced its contract provisions requiring that work n¬ot be performed in advance of issuing a signed contract and approved purchase order. Irvine will continue to monitor and enforce these provisions.
To be clear, the city did not allow the contractors to breach any provision of their service agreements during the Great Park Review. The Report does not include facts that suggest otherwise. As noted above, the Report specifically acknowledges that Irvine warned HSNO not to perform work outside the scope of services in June 2014. The Report also acknowledges that Irvine enforced the contracts by denying requests for payments of $67,257.09 from HSNO and $114,672 from Aleshire. By doing so, the city adequately protected its interests.
Recommendation No. 7:
To maintain appropriate, transparent fiscal accountability, Irvine should amend city contracting and purchasing policies by December 2016 to make certain that all of its contracts and contract amendments with a proposed cost exceeding the threshold requiring city council or other approval receive the appropriate approvals, including approval for sole-source contracts. Further, city policies should require appropriate approvals when increases in spending• authority are accomplished through a purchase order or other means.
Irvine agrees that all city contracts and contract amendments should be approved by the appropriate persons or governing bodies. Irvine also agrees that appropriate approvals should be obtained when increases in spending authority are provided through a purchase order or other means. Currently, the city’s contract management system blocks the issuance of a purchase order where prior approval was not obtained.
Irvine, however, disagrees that the city’s contracting or purchasing policies need to be amended to ensure that the requisite approval is acquired. The CSA’s audit findings do not indicate any reason to amend the city’s contracting or purchasing policies. The Report instead indicates that the city’s processes for selecting the law firms involved in the park review was reasonable:
“According to the city manager, Irvine typically does not solicit competitive bids for legal services except when selecting its city attorney. Further, state law relevant to local government procurement does not require competitive bidding for legal services. Finally, state entities that follow the State Contracting Manual are not required to obtain legal services through competitive bidding. Thus, we did not expect Irvine to go through a competitive process when obtaining special legal services for the park review.”
The report further admits that Irvine acted within its authority when it originally issued the contract and $30,000 purchase order to Aleshire. The CSA’s claim that City Council approval was necessary to authorize Aleshire to perform more than $100,000 of work on the Great Park Review is incorrect. The budget authorization to exceed $100,000 had been approved by the City Council during a public meeting and the terms of the contract were not otherwise changed. Having secured the budget authorization, the city manager was authorized to approve the contract, pursuant to City Council Resolution No. 95-145 and Irvine’s Financial Policies & Procedures.
Recommendation No. 8:
To provide the public with adequate information regarding the city council's spending decisions, Irvine's city council should, by December 2016, include in its policies a requirement that motions by the council to appropriate revenues to fund a specific contract should name the recipients and proposed use of the funds.
The Report does not identify a violation of law or city policy. Rather, Recommendation No. 8 is based on the CSA’s unsubstantiated opinion regarding best practices and fails to address or anticipate the myriad circumstances when the City Council could better serve the community by providing broader authority and wider discretion. As the elected governing body of Irvine, the City Council is best equipped to exercise its discretion when it makes funding allocations, and it is held accountable by its constituents. The City Council sees no reason why it should limit that discretion as a result of the Report.
For example, the City Council recently voted to appropriate $100,000 to assist city’s efforts to have a Veterans Cemetery developed at the Great Park. In making that appropriation, the City Council purposefully declined to provide a specific funding allocation because it was not yet apparent how to best deploy those funds to further the City Council’s intended objectives. The CSA’s Recommendation No. 8 will unnecessarily constrain the City Council’s ability to govern in similar circumstances.
Recommendation No. 9:
To foster public confidence in its processes and findings, Irvine should conduct self-initiated investigations, reviews, or audits in an open and transparent manner that ensures independence. Specifically, Irvine should not establish advisory bodies exempt from open meeting laws to oversee these investigations, reviews, or audits. Instead, any required reports from contractors conducting such investigations, reviews, or audits should go to the city council or a standing committee of the city council to be discussed in either open or closed session, as appropriate.
Under the Brown Act, this City Council retains the right to judiciously appoint ad hoc subcommittees of its membership to give focused attention to a particular matter for a temporary period. The City Council has historically formed subcommittees to allow two councilmembers (whom have been appointed by a majority of their colleagues at a public meeting) to examine specific subject matters in detail. Subcommittees have been appointed to address issues ranging from the obviously important to the seemingly mundane. In some instances, the subcommittee provides interim reports; in other instances, only a final report is issued. When the subcommittee’s assignment is concluded, it is dissolved.
In this instance, the City Council unanimously determined that the unique nature of this matter necessitated the appointment of a subcommittee. The circumstances surrounding the Great Park required an extraordinary commitment of time and effort by the subcommittee and its agents. The City Council formed the subcommittee in a lawful manner.
The CSA has not identified—and cannot identify—any instance where the subcommittee either acted unlawfully when exercising its responsibilities during the Great Park Review, or needlessly interfered with transparency. In fact, the City Council, including the subcommittee, handled the Great Park Review similarly to the CSA’s review of Irvine. In both cases, the initial investigatory stages of the audit were conducted in confidence. The CSA has not had any public meetings or made any public status reports during any phase of the CSA’s audit. Indeed, California law requires that the CSA’s activities remain confidential until the report is completed. (See, e.g.,Gov’t. Code § 8545.1). Rather, the Report will not be made public until it is completed to the CSA’s satisfaction.
The reports by HSNO and Aleshire were ultimately revealed, discussed at length by the full City Council in public, and subjected to public scrutiny. The city sees no basis for the criticism of the city’s handling of the Great Park Review when the CSA handles audits similarly while adhering to GAGAS.
Finally, implementation of the “one size fits all” recommendation that Irvine refrain from forming advisory bodies that fall within the Brown Act’s exemptions to open meeting requirements would be poor policy. Investigations, reviews, and audits are performed for a variety of reasons under a variety of circumstances. They may relate to sensitive personnel issues; they may touch on issues that expose the city to potential litigation, or they may (as was the case here) involve complex factual, contractual, policy, and legal issues that require private analysis before public disclosure. Irvine sees no reason to force those discussions to occur in public when neither the Brown Act nor sound public policy interests would be advanced by doing so.
Recommendation No. 10:
To ensure that Irvine follows best practices related to depositions as outlined in state law, the city council should adopt a policy requiring that Irvine post deposition transcripts for the public after the deponents have had adequate opportunity to correct and sign their depositions.
Irvine will implement the CSA’s recommendation and adopt a policy not to publicly post deposition transcripts until the deponent has either signed, or failed to sign, the deposition transcript in a manner consistent with California Code of Civil Procedure section 2025.520.
Irvine appreciates the opportunity to provide this response, and hopes that this letter is helpful to the CSA’s completion of the Report. This response is not an exhaustive discussion of the city’s concerns, and the city’s decision not to expressly address something herein does not constitute, and should not be construed as, either an admission of fact or agreement with the CSA’s findings, conclusions, or recommendations.Sincerely, Steven S. Choi, Ph.D. Mayor cc: Irvine City Council
1Aleshire advised the subcommittee it would use the form, although the city does not have any specific knowledge regarding whether this occurred.
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CITY OF IRVINE
To provide clarity and perspective, we are commenting on the city of Irvine’s response to our audit. The numbers below correspond to the numbers we placed in the margin of Irvine’s response.
The city is incorrect in indicating that we did not provide adequate context. We explain the magnitude of the Orange County Great Park (Great Park) project in the Introduction. We further include a statement by city officials in the Audit Results that the reason for the performance review of Great Park contracts (park review) was to determine how Irvine had spent the money for Great Park. Finally, we note on that same page that the standards used to conduct the park review were not rigorous enough for the type of review Irvine was seeking to procure.
Irvine is disingenuous in its characterization of our scope. We performed the audit according to the audit objectives approved by the Joint Legislative Audit Committee and outlined in Table 2 beginning on page 14. In addition to contracting, the objectives required that we conduct audit work on the areas relating to audit standards, sources of funds used for the park review, subpoena power, and other areas beyond the three contracts Irvine references in its response. Further, we find it somewhat ironic that Irvine would imply that our audit was narrowly focused when, it lists ten areas we reviewed, clearly reflecting the breadth and depth of our audit. Finally, we disagree that the recommendations we have made constitute sweeping changes to Irvine’s policies. Specifically, in conducting our work we identified inadequacies and weaknesses in Irvine’s processes and policies that are highlighted throughout the Audit Results, which begins on page 17. To address these issues, we have made specific recommendations beginning in the Audit Results that, if implemented, have application far beyond the park review and will improve Irvine’s operations and increase transparency.
The city is generally correct in identifying what we did not find; however, some of the bullet points warrant clarification. First, although we did not question the legality of the process by which Irvine selected its consultants, we note in the Audit Results that the process for choosing Hagan, Streiff, Newton & Oshiro, Accountants PC (HSNO) was flawed. Further, although we did not find that Irvine violated any open meeting laws in handling the park review, we did identify areas where Irvine could have been more transparent. For example, in the Audit Results we conclude that Irvine did not obtain city council approval through an open meeting when it authorized a high-value contract for special counsel, and in the Audit Results we note that Irvine created an unnecessary two-member advisory committee that was not subject to state open meeting laws. Moreover, we agree that the city exercised its subpoena power according to state law; however, in the Audit Results we state that, although the deposition transcripts resulting from the subpoenas may not have been intended for use in court, we believe that following procedural requirements outlined in state law constitutes a best practice. Specifically, Irvine should have published, signed, and dated deposition transcripts to demonstrate that it followed established procedures for ensuring the accuracy of the transcripts by giving the person deposed adequate time to review and make any needed changes to the transcripts. Further, we state in the Audit Results that, although we did not identify any evidence that discussions took place about timing the release of depositions or reports with the election, we question whether the public release of findings related to the park review that was still ongoing in October 2014 was warranted. Specifically, as we describe in the Audit Results, by permitting Aleshire & Wynder, LLC (Aleshire) to publicly disclose preliminary findings so close to the November 2014 election, the city council created an opportunity to influence public opinion in advance of an election. Finally, Irvine’s last bullet point states that our report did not question the accuracy of the conclusions of Irvine’s consultants. Our office is charged under the California Government Code with auditing publicly created entities such as Irvine. As such, our focus in this report was not on the actions of the park review consultants; rather, our focus was on the activities of Irvine, including how it did or did not respond to the actions of its consultants.
We follow generally accepted government auditing standards (GAGAS) in conducting our work. These standards do not permit us to base conclusions on suppositions, but rather on facts. Facts led to our conclusion that Irvine’s poor governance of the park review needlessly compromised the review’s credibility. Thus, we stand by our report’s title, which is based on clear and convincing evidence. For example, as we describe in the Audit Results, Irvine did not ensure that the consultant it selected to conduct the park review would follow standards and procedures that would result in the thorough, independent evaluation of Great Park contracts that the city council members had described to the public. Additionally, in the Audit Results we conclude that Irvine’s selection process for the consultant to conduct the park review was flawed and lacked transparency; for reasons it could not adequately explain, Irvine modified its selection process after it had accepted and reviewed bidders’ proposals and interviewed potential consultants, casting significant doubt on the fairness and impartiality of the selection process. Further, in the Audit Results we conclude that the city council elected to form a two‑member advisory subcommittee that it tasked with overseeing the park review; however, this subcommittee did not meet openly and the city council did not adequately ensure the subcommittee undertook the activities it was tasked with performing. We believe Irvine would have been better served had the city council chosen not to establish a subcommittee for this high‑profile review and instead chosen to conduct its deliberations and decisions regarding the park review through a standing committee or at the full city council level, meeting openly and increasing transparency. When these types of decisions are viewed together, they demonstrate Irvine’s poor governance of the park review, which reduced its credibility.
Irvine is incorrect in indicating that our conclusions related to public confidence and transparency are outside the scope of our audit and are unsubstantiated. As noted in Table 2, Objective 5 requires that we determine whether the audit subcommittee conducted the park review in a transparent and open manner. Public confidence is affected by transparency. Our statements regarding public confidence are predicated on comments made in the media and in public meetings both in support of and in opposition to the park review, as well as our professional judgment.
We disagree. We identified several actions by Irvine that decreased the transparency of the park review. For instance, in the Audit Results we describe that Irvine modified and finalized its selection process of consultants to conduct the park review after it had accepted and reviewed bidders’ proposals and interviewed selected firms. Also in the Audit Results we state that Irvine changed its selection criteria and the weight it gave to them without notifying bidders and after evaluating their proposals. We believe these actions cast significant doubt on the fairness and impartiality of Irvine’s selection of the park review consultant. As another example, we note in the Audit Results that the subcommittee tasked with overseeing the park review was not bound by state open meeting laws. Thus, management of the park review was not as transparent as it could have been.
Irvine is incorrect when it states that no one raised concerns about the transparency of Irvine’s procurement of Aleshire during the park review. On the contrary, as we note in the Audit Results, in a July 2014 city council meeting two council members were critical about the fact that they did not have information or input into hiring Aleshire.
Irvine’s response is overly general and ignores evidence we present in the report. The response states that “many” of the recommendations in our report are presented as “best practices” and that our sources are unclear. However, throughout its response Irvine only makes reference to Recommendation 8 on page 59 as related to best practices. Further, in contrast to Irvine’s assertion, we do provide support for those recommendations that could be construed as best practices. For example, we note other cities with characteristics similar to Irvine that have internal audit functions in the Audit Results. We identify best practices related to requests for proposals (RFP) in the State Contracting Manual in the Audit Results. Finally, in the last recommendation in the Audit Results, we identify a best practice related to handling depositions. We base our recommendation on a process outlined in state law that we describe in the Audit Results.
Irvine’s comments about our audit staff are inappropriate. Our office follows GAGAS requirements, which specify that the staff assigned to conduct an audit in accordance with those standards collectively possess the technical knowledge, skills, and experience necessary to be competent for the type of work being performed. We fully met those standards.
Irvine is incorrect that our statements regarding the value of the subcommittee are outside the scope of our audit objectives and vague. As noted in Table 2, Objective 5 requires that we determine whether the city council and the audit subcommittee conducted the park review in a transparent and open manner. Given that the city council chose to create an advisory subcommittee that was tasked with overseeing the park review and not bound by state open meeting laws, as described in the Audit Results, it is absolutely within our scope to assess the relevance and utility of such a structure. Also, although Irvine states that the subcommittee fulfilled its responsibility to oversee the firms performing the review, we describe in the Audit Results that the firms undertook many of the oversight activities that the subcommittee should have performed.
Irvine is attempting to obfuscate our point. As we state in the Audit Results, the type of engagement—consulting services—for which Irvine ultimately contracted was not nearly as rigorous an assignment as the descriptions of the park review that members of the city council conveyed publicly. As we indicate in the Audit Results, Irvine would have been better served had it directed consultants to conduct the park review using more robust standards that require independence. We also not in the Audit Results, that when the city council considered the request to approve the park review, four of the five council members explicitly stressed the importance of an independent audit. Nevertheless, Irvine did not ultimately require or contract for an audit; in fact, we refer to the project throughout the report as the “park review.”
As we state earlier in comment number 3, our focus in this report was not on the actions of the park review consultants; rather, our focus was on the activities of Irvine, including how it did or did not respond to the actions of its consultants.
We are disappointed that Irvine is choosing not to implement this recommendation. As we state in the Audit Results, an internal audit function could have conducted the park review itself, or it could have ensured that audits performed by an external auditor had an appropriate scope and that contracts were subject to rigorous monitoring. Such activities could have eliminated the expressed concerns of the city manager and one subcommittee member about the appearance of a conflict of interest that prevented staff from helping to manage the park review and simultaneously functioning as subjects of that same review.
As we describe in the Audit Results, although Irvine had procedures in place at the time of our review for selecting the most qualified bidder for a given proposal, its selection process for the park review consultant contradicted some of those practices. For example, in the Audit Results we note that Irvine did not follow its contracting manual that states the city should determine each selection criterion and assign it a weight before reviewing bidders’ proposals. We also acknowledge in the Audit Results that Irvine updated its policies in September 2014 for its proposal review and selection process, but commented that more needs to be done to clarify how proposals are scored. We are therefore pleased that Irvine acknowledges in its response the need to ensure staff has the training and guidance necessary to oversee the procurement process and that it will include the details of how it will use interviews in its review process in published RFPs.
We stand by our recommendation and remain concerned that the park review RFP was structured in such a way as to encourage the winning bidder to develop opportunities for future work, as we describe in the Audit Results. Irvine argues in its response that structuring its RFP in the way it did created various advantages for the city. We acknowledge in the Audit Results that when a contractor is already familiar with the work it will need to accomplish, a no‑bid contract may be more efficient. Nevertheless, we note that most of HSNO’s 29 recommendations in its January 2014 report were recommendations for additional work. The structure of Irvine’s RFP encouraged such a result by stating that the consultant might need to perform procedures of a more forensic nature depending on the findings in the consultant’s final report.
Irvine’s response ignores the fact that there was a lack of clarity regarding who was managing the park review. As stated in the Audit Results, the city manager understood he was not to direct Aleshire and that the park review was exclusively the province of the subcommittee. However, in the Audit Results the subcommittee members gave us conflicting answers when we asked them whether they were overseeing the park review. One member stated that the subcommittee’s function was to oversee the park review while the other explained that the overall direction and work of the park review was determined by the two consultants hired to conduct the review. Irvine does not address the need to ensure that it assigns to projects a staff project manager who can sufficiently and appropriately monitor contractors’ work as we recommend.
We disagree. As we note in the Audit Results both HSNO and Aleshire performed work in advance of authorization to do so in 2014. Both received payment for this advance work from appropriations after the fact. We also note in the Audit Results that in July 2014 Aleshire received additional spending authority of $255,000 and had exceeded that authority by $119,000 as of December 2014.We acknowledge in the Audit Results that Irvine finally did refuse to pay for some work performed.
We stand by our recommendation that Irvine needs to amend its policies. As we note in the Audit Results, Irvine’s policies do not explicitly allow for or prohibit using a purchase order to avoid the need for an amendment. In our judgment this creates an opportunity to circumvent city council approval. Further, as explained in the Audit Results, we believe the budget increase relating to Aleshire’s contract should have been approved by the city council because it both exceeded the budgetary authority of city staff and exceeded the threshold requiring city council review and approval of sole‑source contracts. We also question whether the budget authorization to exceed $100,000—specifically the city council’s action to increase the budget of the park review by $333,000—provided the level of clarity necessary to further fund Aleshire’s contract. As we note in the Audit Results, the motion to appropriate the funds did not specify who was to receive the money from the budget increase. It was not at all clear in the July 2014 meeting that three‑quarters of the appropriation was to go to Aleshire. This lack of specificity, although not expressly a violation of Irvine’s policies, reduces the transparency of the city’s and the city council’s decision making. As we conclude in the Audit Results, Irvine’s actions effectively meant that the city made a decision to increase the funding for the two park review consultants partially outside of the public eye.
Irvine misses the point. Our recommendation is specific to instances where the council appropriates revenue to fund a specific contract. In those instances, ensuring that the public is aware of who is to receive funding and how much they are to receive is reasonable and prudent. The example Irvine cites related to a vote to appropriate funds for a veterans cemetery, where Irvine states it was “not yet apparent how to best deploy those funds to further the city council’s intended objectives,” is not relevant to the recommendation.
The city confuses the need for transparency in managing the park review with the need for confidentially regarding the content of the park review while it was in progress. We would expect decisions regarding the management of the park review, such as establishment of the scope, budget, and general reports on progress to be handled in an open and transparent manner, and acknowledge that some such discussions took place before the full city council. For example, in the Audit Results we discuss the council’s consideration of a budget increase for the park review. Further, as we state in the Audit Results, according to available information, the subcommittee’s actions did not exceed the authority of an advisory committee. Nevertheless, the presence of a two‑member subcommittee, not subject to state open meeting laws, creates the appearance that representatives of Irvine may have been able to influence the scope or direction of the review. Furthermore, the fact that the subcommittee did not maintain any public documents regarding its activities and discussions, such as agendas or meeting minutes, prevents Irvine from demonstrating to the public the extent to which the subcommittee adequately carried out its assigned tasks. Finally, it undermines the credibility of the process by making it less transparent.
On the other hand, while the park review was still in progress, we would expect that findings and recommendations related to the review would remain confidential, but that did not happen. As we note in the Audit Results, Aleshire reported on findings of its investigation while the work was still under way in October 2014—the report would not be released until March 2015. In contrast, our office conducts its work according to the law as cited by Irvine. Those laws ensure the confidentiality of an audit while it is under way.
Irvine’s response ignores a portion of the recommendation. In its response, Irvine suggests that there may be investigations, reviews, or audits that relate to sensitive issues related to personnel matters, litigation, or other complex issues. It is precisely for that reason that our recommendation in the Audit Results states that such investigations, reviews, or audits should go to the city council or a standing committee of the city council to be discussed in either open or closed session, as appropriate.