June 12, 2009 Audit Subcommittee of the Taxpayers Oversight Committee Orange County Transportation Authority At your request, I have compiled responses to the questions posed by Mr. Craig Kelsey, Supervising Investigator with the Orange County District Attorney’s Office, in his email of May 23, 2009. I have answered the questions to the best of my ability with information and documentation I have been able to locate in OCTA files, both electronic and paper. I have had numerous conversations with Mr. Kelsey over the last 15 months and I believe these answers are consistent with answers I have provided him either verbally or through email correspondence. As you will see, many of these questions cannot be adequately answered. I assumed my position as the manager of the Internal Audit Department in August 2006 and, therefore, have little insight into some of the events and circumstances prompting these questions. I have not conducted an audit, investigation, interviews of OCTA staff (current or former), or any substantial procedures beyond collecting and reviewing the same documents Mr. Kelsey cites.
2002 Agreed Upon Procedures Audit: 1) Please explain why it appears that there was a failure by independent auditors to have disclosed that the City of Placentia had bonded on their Measure M Turnback Revenue by pledging this revenue as security for the future payment of the Certificates of Participation issued by the City of Placentia in July 2001 which generated $4,309,929 in proceeds to fund expenditures related to ONTRAC. The 2002 Agreed-Upon-Procedures for ten cities were conducted by Ernst & Young. The procedures performed, dictated by Orange County Transportation Authority (OCTA) management and the Citizens Oversight Committee, included testing of the City of Placentia’s Maintenance of Effort (MOE) requirements and Measure M Ordinance expenditures. The auditors tested $245,323, or 26%, of MOE expenditures and $373,009 or 90% of Turnback expenditures. OCTA does not have the auditor workpapers to determine if any of the expenditures related to the Certificates of Participation issued by the City. The procedures called for the auditors to determine that expenditures related to transportation programs. There were no procedures directing auditors to identify or disclose debt related to Measure M and OCTA’s Internal Audit Department is uncertain as to whether the auditors identified any such expenditures. If they did,
OCTA’s Internal Audit Department does not know if the auditors considered these eligible transportation program expenditures. OCTA’s Internal Audit Department manager understands, through conversation with the District Attorney’s office, that Ernst & Young’s legal counsel has refused to cooperate with requests by the District Attorney’s office to view the workpapers, despite OCTA’s Chief Executive Officer having provided authorization to Ernst & Young to do so. 2) Please explain why it appears that there was a failure by independent auditors to have tested any of the expenditures funded by the $4,309,929 in proceeds provided by the above funding even after the auditors were told by city staff on October 1, 2002 that the city had bonded on Measure M Turnback Revenue. City staff even followed up with letter to the auditors dated October 10, 2002 as to the bonding on the Measure M Turnback Revenue OCTA does not have the audit workpapers to determine what expenditures were tested during the 2002 work performed by Ernst & Young. 3) Please explain why it appears that there was a failure to test expenditures of Measure M Turnback revenues to determine if any use for repaying the 2001 Certificates of Participation were made during the fiscal year being audited. OCTA does not have the audit workpapers to determine what expenditures were tested during the 2002 work performed by Ernst & Young. 4) Given that the Auditors reviewed the expenditures for the fiscal year which began July 1, 2001 and ending June 30, 2002, did the auditors contact the OCTA Internal Audit Unit staff on or after October 1, 2002 after being informed by city staff that the City of Placentia had bonded on their Measure M Turnback revenues in July 2001, requesting directions as to testing any of the expenditures of these bonds and/or the use of Measure M Turnback revenue for bond payments during the fiscal year being audited? OCTA’s Internal Audit Department is aware of, and provided the District Attorney’s office, the correspondence dated October 10, 2002 from the City to the auditors regarding the debt. This correspondence appears to have been received by OCTA’s Internal Audit Department on November 22, 2004 based on a fascimile date-stamp. The correspondence appears to have been scanned into Internal Audit’s network disc drive in April 2005. OCTA’s Internal Audit Department is unaware of any communication between independent auditors Ernst & Young and the Internal Audit Department or whether or not these independent auditors sought direction on testing debt payments.
5) Upon receipt by the auditors of the October 10, 2002 memo from the City of Placentia as to bonding on the Measure M Turnback revenues, was a copy forwarded to OCTA Internal Audit Unit staff? As indicated above, OCTA’s Internal Audit Department appears to have received the October 10, 2002 correspondence in November 2004. We have found no documentation suggesting that the Internal Audit Department received a copy prior to that date. 6) Was the OCTA Internal Audit Unit staff provided a copy of the letter dated May 17, 2001 from OCTA to the City of Placentia indicating approval for the City of Placentia to bond on their annual Measure M Turnback revenues and the need to change the Agreed Upon Procedures for the City of Placentia? Like the October 10, 2002 letter from the City to Ernst & Young, the May 17, 2001 letter from OCTA general counsel to the City of Placentia’s bond counsel appears to have been received by the Internal Audit Department in November 2004. It should be noted that OCTA’s Finance and Administration Committee of the Board of Directors has recently instructed staff to amend the Ordinance to provide greater clarification of allowable leveraging of Measure M Turnback revenue. In fact, both the Board of Directors and the Taxpayers Oversight Committee appear to accept the concept of advancing projects through borrowing, so long as Measure M funds are not used to pay interest. 7) Who at the OCTA was aware of the letter dated May 17, 2001 from OCTA to the City of Placentia indicating approval for the City of Placentia to bond on their annual Measure M Turnback revenues and the need to change the Agreed Upon Procedures for the City of Placentia? OCTA’s Internal Audit Department is unable to determine who at OCTA may have been aware of the May 17, 2001 letter from OCTA’s general counsel to the City. However, the Internal Audit Department acknowledges that the Agreed-UponProcedures should be reviewed to consider procedures related to debt. 8) Where in the Agreed Upon Procedures does it state that the listing of Ordinance payments obtained from the Authority for the three years ended June 30, 2002 were verified for deposit to the separate general ledger fund established by the City of Placentia? The Agreed-Upon-Procedures did not include verification of deposit of all Measure M Turnback payments into a separate general ledger fund. While a separate general ledger fund is not required, procedure E.1. on page 5 of the report indicates that auditors concluded, based on observation of the general ledger and discussion with the City’s Financial Services Manager, that a separate general ledger fund had been established for the Ordinance monies and that interest earned on these monies was returned to the fund.
Agreed-Upon-Procedures could be amended to include verification of deposits, whether or not funds are deposited to a separate Measure M general ledger fund. 9) What steps have been taken to eliminate a perceived conflict of interest that exists between the OCTA, City of Placentia and the law firm of Woodruff, Spradlin & Smart? Firm represents OCTA, City of Placentia and other municipal entities? Woodruff, Spradlin & Smart have recently asserted to OCTA that the firm no longer represents the City of Placentia.
2004 Agreed Upon Procedures Audit: 10) Please explain why it appears that there was a failure by the independent auditors to have disclosed if any of the expenditures out of the Measure M Local Turnback Revenue Fund was used for repaying the 2001 Certificates of Participation? The 2004 Agreed-Upon-Procedures were performed by Macias Gini & Company. OCTA’s Internal Audit Department is in possession of some of the firm’s workpapers, including a testing sheet of Measure M expenditures. It appears OCTA’s Internal Audit Department came into possession of these workpapers in November 2004. The workpapers indicate that independent auditors were aware of, and tested, expenditures related to the debt, specifically, an interest payment of $74,670, and other ON-TRAC related expenditures. The independent auditors concluded in these workpapers that “Based on testwork performed, the City of Placentia’s Measure M Ordinance expenditures appear to be related to transportation program/projects included in the City of Placentia’s Seven-Year Capital Improvement Program.” While OCTA’s Internal Audit Department does not know why independent auditors did not disclose the debt in their report, it appears that they considered the debt service an eligible transportation project expenditure. 11) On November 22, 2004, a copy of the October 10, 2002 memo from the City of Placenta to Ernst & Young was faxed to the OCTA. Who received that document? Was a copy of the fax provided to OCTA Internal Audit Unit staff for consideration to ask the auditors to test the expenditures of Measure M Turnback revenues used to make the bond payments of the 2001 Certificates of Participation? It appears that this document was received by OCTA’s Internal Audit Department as the fax number of 7145605706 noted on the document is assigned to the department. The documents were electronically stored in a former staff’s electronic files. According to a current Internal Audit Department staff member (formerly an auditor with Macias Gini & Company), the documents were requested by a former OCTA Internal Audit Department staff member. He does not know why these documents were requested. OCTA’s current Internal Audit Department manager is
also unaware of the reason for this fax transmission, who reviewed it and why it may have been requested. 12) Where in the Agreed Upon Procedures Audit does it state that the listing of Ordinance payments obtained from the Authority for the three years ended June 30, 2004 were verified for deposit to the separate general ledger fund established by the City of Placentia? Please see response to item 8 above.
2005 Combined Transportation Funding Programs (CTFP) Audit: 13) Please explain why it appears that there was a failure by OCTA staff to provide copies of the 2005 CTFP Audit Report to the members of the Taxpayers Oversight Committee. Per an Internal Audit Unit interoffice memo dated October 4, 2005, this audit along with other 2005 CTFP Audit Reports appears to have been distributed to OCTA staff, but there is no indication that this and the other Audit Reports were provided to the Taxpayers Oversight Committee. OCTA’s Internal Audit Department has been unable to locate documentation establishing that the 2005 CTFP audit reports were provided to the Taxpayers Oversight Committee. The CTFP audits were provided to the Board of Directors on January 9, 2006 and it is typical protocol for the Taxpayers Oversight Committee to receive communications only after their transmittal to the Board of Directors. The Internal Audit Department manager resigned on April 11, 2006. 14) Please explain why it appears that there was a failure by OCTA staff to send a written letter to City of Placentia staff indicating that no further charges for these noncompetitively selected professional services firms were to be funded from Measure M Turnback Revenues and CTFP monies. Current OCTA staff does not know if the City was contacted about the audit findings. At the time of the audit, the CTFP guidelines did not specifically require that contracts be competitively awarded. Based on the independent auditor’s recommendations, OCTA staff amended the guidelines to require the competitive award of contracts. 15) Please explain why it appears that there was a failure by OCTA to notify Caltrans of CTFP audit findings. OCTA cannot establish whether or not the CTFP findings were communicated to Caltrans. 16) Please explain why it appears that there was a failure by the OCTA to have assisted in the Caltrans audit once OCTA staff became aware of the Caltrans audit. Given
the amount of Measure M Turnback Revenue and CTFP funds, why wouldn’t the OCTA Internal Audit Unit want to assist Caltrans considering the findings in the 2005 CTFP Audit Report and the likelihood that Caltrans would make similar discoveries. OCTA’s Internal Audit Department is unable to establish that Caltrans notified OCTA of its intent to conduct an audit or request participation by OCTA in such an effort. OCTA’s Internal Audit Department is also unable to establish that there was no communication between OCTA and Caltrans related to this matter. 17) Please explain why it appears that there was a failure by the OCTA and the Taxpayer Oversight Committee to have initiated an audit into the expenditures of $4,309,929 in proceeds provided by the 2001 Certificates of participation once becoming aware of this issue? OCTA’s current Internal Audit Department staff was not aware, prior to the District Attorney’s inquiries of the last 15 months, that Certificates of Participation were issued secured by Measure M Turnback revenue or that the proceeds thereof were expended. Internal Audit has not been able to locate evidence to suggest the Taxpayer Oversight Committee was aware of the receipt or expenditure of these proceeds. 18) When did the auditors who conducted the CTFP audits first bring to the attention of OCTA staff the findings that costs for non-competitively bid professional services firms were being charged to Measure M – CTFP funding? Current OCTA Internal Audit Department staff have been unable to locate any communication from independent auditors of the CTFP program prior to the finalization of their audit report dated April 27, 2005. 19) Given that the audit report disclosed that federal and state funding was being provided to the ONTRAC project and the findings noted above, did the auditors recommend to the OCTA staff or the OCTA Internal Audit Unit staff as to contacting Caltrans for possible abuses of the federal and state funding? Current OCTA Internal Audit Department staff have not located any documentation to suggest any such recommendation was made by the auditors. 20) Please explain why OCTA staff failed to notify Caltrans of the CTFP audit findings when the District 12 Caltrans Director is a member of the OCTA Board of directors? Current OCTA Internal Audit Department staff is unable to determine if Caltrans was notified of the CTFP audit findings, however, the CTFP audit report was provided to the Board of Directors on January 9, 2006.
21) When did OCTA staff, and which OCTA staff first become aware of the audit of the City of Placentia’s ONTRAC project by Caltrans and why the apparent failure to provide Caltrans a copy of the 2005 CTFP Audit for the City of Placentia? It would be difficult for OCTA to accurately identify which OCTA staff first became aware of Caltrans’ audit of the City of Placentia’s ONTRAC project or when they may have become aware of it. OCTA’s current Internal Audit Department manager learned of the audit when it was substantially complete. In fact, a confidential draft of the audit report was provided to the Internal Audit Department manager by the District Attorney’s Office in early 2008. 22) Please explain why the Independent Accountant’s Report for the 2005 CTFP Audit is addressed to the OCTA Internal Audit Manager when compared to the Independent Accountant’s Report being addressed to the Orange County Local Transportation Authority for the 2002 and 2004 Agreed Upon Procedures Audits. OCTA has been unable to locate any documentation directing the independent auditors as to how to address their report; however, general industry practice, especially for financial statement audits, is to address the report to the legal entity and/or its governing body, as was done for the Agreed-Upon-Procedures report. However, it is also not uncommon for contract auditors to address reports to the individual with signature authority on their contracts. Unlike the Agreed-Upon-Procedures, this was the first audit of CTFP projects. The audit contracts were with several firms and this contract auditor, unlike Ernst & Young and Macias Gini & Company, has not performed financial statement audits of OCTA, at least not to the knowledge of current Internal Audit Department staff.
Measure M Local Turnback Fund: 23) Would future audits of cities and county, and the audits of the internal operations of OCTA for Measure M tax administration be improved or result in increased accountability to the taxpayers if audits were conducted by using Government Auditing Standard in addition to the current practice of AICPA Agreed Upon Procedures? OCTA’s Internal Audit Department has recently adopted Government Auditing Standards and requires that its audit contractors be compliant with these standards. These standards are in place to provide quality assurance, whereas the AICPA’s Agreed-Upon-Procedures represent a “type” of audit. OCTA’s Internal Audit Department will explore audit options with the Board of Directors and Taxpayer Oversight Committee to improve oversight and accountability. This could include improved Agreed-Upon-Procedures, or, perhaps, full-scope financial audits of Measure M funds. The Board of Directors and Taxpayers Oversight Committee will
need to weigh the relative costs and benefits of various audit options, as well as the coverage that could be obtained under various scenarios. Combined Transportation Funding Programs (CTFP): 24) Should the OCTA have included in the Agreed Upon Procedures for the annual audits of the Measure M Local Turnback revenues the verification that all CTFP payments to cities and county during the fiscal year under audit were deposited to either the Measure M Local Turnback Fund or a separate Fund for only the CTFP payments? Current Agreed-Upon-Procedures require independent auditors to determine that Measure M funds are separately accounted for, which is the Ordinance requirement. The Ordinance does not specifically require a separate accounting entity, or Fund. OCTA will consider deposit verification in future Agreed-Upon-Procedures. However, like other audit procedures, Agreed-Upon-Procedures are conducted at a point in time. Verifying deposits into any Fund does not guarantee that monies remain in that Fund the following day, week or year. In fact, we know that cities do transfer money to their capital projects fund or similar funds as projects get underway. 25) Without including verification of CTFP Payments in the annual audits, what assurances does the OCTA have that all cities and county are depositing these payments to either of the Funds mentioned above? As stated above, cities are not required by the Measure M Ordinance to maintain a separate Fund. It would be costly for OCTA to audit each city and county each year to ensure that deposits are occurring as represented to auditors during periodic city and county audits. Instead, OCTA’s Internal Audit Department, at the direction of the Taxpayers Oversight Committee, selects a sample of cities to audit each year. 26) How have “desk top audits” verified that all CTFP payments are being deposited to either the Measure M Local Turnbaback Fund or a separate Fund to insure to the taxpayers that interest has and will be earned on all advance CTFP payments funded by Measure M taxes? The procedures performed by OCTA’s Planning Section related to the CTFP do not include verification of payments being deposited into the Measure M Local Turnback Fund or a separate Fund. 27) Do these “desk top audits” of cities and county require as part of the requested information how much in interest earnings were generated from any advanced CTFP payments as a means to continually monitor that interest is being earned on all advanced CTFP payments? No, the Planning Section’s procedures do not include a request for such information.
Internal Audits of the Administration of the Measure M Taxes: 28) Explain what internal (operational) audits have been conducted to evaluate the performance of the OCTA’s management into the administration of the Measure M taxes since July 2005. At the direction of the Taxpayers Oversight Committee, Agreed-Upon-Procedures are performed annually for a sample of cities related to the cities’ use of Turnback Funds. The audits conducted in 2005 of CTFP projects were the first audits conducted of this program. OCTA’s Internal Audit Department has recently awarded a contract to a local audit firm to conduct a second round of CTFP project audits. In addition, many of the audits conducted by the Internal Audit Department have bearing on the Measure M program. The Internal Audit Department’s annual audit plan, and quarterly updates to the Board of Directors on the status of the Plan, can be found on OCTA’ website (www.octa.net). These audits include contract compliance, operational, internal control and financial type audits, many impacting the Measure M program.
Taxpayer Oversight Committee 29) Should all current and future annual internal (operational) and external audits initiated by the OCTA of any activities funded by Measure M Taxes for the OCTA, cities and county whether performed by external audit firms and/or the OCTA Internal Audit Unit staff be provided to the Taxpayers Oversight Committee for review? OCTA’s Internal Audit Department performs approximately 30 audits each year and OCTA’s external auditors prepare an additional 12 audit reports. In addition, OCTA is subject to audits by state and federal agencies and other organizations such as labor unions, insurance carriers and taxing authorities. While the Taxpayers Oversight Committee may wish to consider reviewing the Internal Audit Department’s annual audit plan and quarterly updates thereon, including a summary of its activities, findings and recommendations, it could be burdensome to the Taxpayers Oversight Committee to be expected to read all such reports. OCTA’s Internal Audit Department provides the Taxpayers Oversight Committee only the most relevant reports but would be pleased, at their direction, to provide all reports.
Measure M Taxes 30) Given that OCTA can require what ever accounting is necessary for Measure M taxes, should cities and county account for all revenues generated from the Measure
M taxes (Turnback, CTFP, Bonds, Loans, etc.) be accounted for in the required Measure M Local Turnback Fund? The Measure M Ordinance requires that cities and county receiving funding maintain a separate accounting of such funds. This means that cities must be able to identify Measure M funds and expenditures, but does not necessarily require a separate accounting entity, or Fund. While current Internal Audit Department staff do not know why this has not been historically required, we do know that some cities account for Measure M funds by subfunds, project numbers or other distinctive characteristics. 31) If all revenues had been required to be accounted for out of one Fund, would the proceeds made available by the City of Placentia bonding on the Measure M Turnback revenues have been subject to being audited back in October 2002? As indicated under item 1 above, OCTA is not aware that the proceeds were not audited in October 2002, as Ernst and Young has not provided detail of their expenditure testing. 32) If accounted for in one Fund, would this not provide any member of the public to only look to one Fund in cities and county to be informed as to the total revenues made available and the total expenditures made during any fiscal year of Measure M taxes? As indicated above, Fund accounting is only one manner of separately identifying revenue or expenditures. Regardless of the convention used by a city in identifying and tracking Measure M funds and expenditures, the public is entitled to that information. It should be noted that Measure M projects are usually funded with other sources of revenue that are part of a city’s Capital Improvement Program. As such, the expenditure of funds may occur in other Funds, with monies transferred from a Measure M fund. As such, it is likely that a complete accounting of all Measure M funds would necessitate a greater view of a city’s general ledger than a single Fund.
Interest Earnings on Advanced CTFP Payments 33) In light of the fact that not all of the Measure M funded CTFP payments may have been accounted for in either the Measure M Turnback Fund or a separate Fund for only CTFP payments, what assurance can be provided to the taxpayers/voters that no interest has been lost to fund transportation projects? The Agreed-Upon-Procedures were designed to give taxpayers such assurances. Generally, cities credit interest to Funds, subfunds or projects based on an interest allocation plan which is often a system-driven mathematical exercise, but may
require manual interest calculations and postings. Auditors are directed to review the methodology of the interest allocation plan to ensure that it is reasonable and will result in the appropriate amount of interest being credited to Measure M funds. 34) If it is determined that one or more cities accounting of the CTFP payments, including advances, did not take into considerations the earning of interest on advanced CTFP payments, what is the OCTA plan to recover lost interest earnings on behalf of the taxpayers? If OCTA were to learn, through Agreed-Upon-Procedures or otherwise, that cities did not credit the appropriate amount of interest to Measure M funds, cities would be notified of this finding and asked to post the appropriate amount. 35) In the future, if all further Measure M taxes are not accounted for in the same Fund, could the Agreed Upon Procedures used for the audits of the Turnback revenues be amended to include verifying that CTFP payments are deposited to a separate Fund for only CTFP payments to insure the proper accounting of interest earned on advanced CTFP payments? Again, separate Fund accounting is not required for the Turnback funds. Currently, Agreed-Upon-Procedures relate only to Turnback funds and CTFP projects have only been audited once, with another sample of projects currently under audit. Should the Taxpayers Oversight Committee wish to conduct Agreed-UponProcedures for the CTFP projects, the Internal Audit Department will assist in their development. 36) Since the inception of the Measure M tax what assurances can be provided that all cities and the County properly earned interest on all advance CTFP payments and that the interest earned was properly applied as a funding source to the respective project? The CTFP project audits require that auditors assess the reasonableness of interest allocations. I will be available at the June 16, 2009 meeting of the Audit Subcommittee to respond to any questions. Sincerely,
Kathleen O’Connell Executive Director, Internal Audit (714) 560-5669