Lax recordkeeping, careless police work and convoluted relationships between top Palo Alto officials and Children's Theatre employees all played a role in the misguided 2007-08 fraud investigation at the theater, a new audit has found. (View the report)

The 20-page audit, performed by independent police auditor Michael Gennaco, looks at the police response to the June 18, 2007, burglary at the theater and analyzes the department's ill-fated probe into possible financial embezzlement by theater employees.

The report states that the review "found no heroes" in the investigation, but it also points out that there was "no evidence that indicated malice on behalf of anyone affiliated with the investigation, either from the Police Department or the City."

According to the report, the litany of mistakes committed during the investigation can be attributed largely to an outdated accounting system at the theater, which made it nearly impossible to carefully track reimbursements for expenses; to an insufficiently trained detective who loaded his police report with conjectures and ignored evidence that could have cleared the subjects he was investigating; and to the police department's questionable decision to release its report on the investigation even after it became clear that no charges would be filed.

In addition, the audit states that the police department did not have to undertake the embezzlement investigation itself but could have contracted with a more-skilled independent auditor, referred the matter to an outside agency or consulted with the Santa Clara County District Attorney's office.

"In retrospect, either of these options, or a combination thereof, may have been the road better taken," the report states.

Though the report doesn't name any police officers, suspects or witnesses, the chief target of criticism is former Sgt. Michael Yore, who spearheaded the department's investigation into financial embezzlement at the theater.

The report points out that the detective failed to question some key witnesses, in one instance because of a vague "scheduling conflict." He also allegedly failed to evaluate all the evidence seized during the investigation, including an assortment of e-mails between theater employees and city staff. Some of these e-mails pertain to costume sales by the nonprofit Friends of the Palo Alto Children's Theatre and to the city's reimbursement system for theater employees. Both subjects were closely scrutinized by Yore during the fraud investigation.

"The existence of this group of documents is most likely fatal to any potential prosecution for the sale of costumes by (theater) staff in that it demonstrates both City authorization and awareness of the costume sale procedures and the intent by (theater) staff to follow any new procedures regarding surplus sales," the report states.

The audit also criticizes the police report on the investigation, which it calls "an amalgam of facts, theories and conjecture." The audit points out that the report included irrelevant statements (including information about expensive trips undertaken by theater managers) and opinions. It also referred to some witnesses by their first names, a practice that gives it a less-than-professional appearance.

The audit points to a Police Department manual on writing reports, which notes that "a police report should be written using facts, not conclusions or opinions. Avoid making inferences about what something means and instead just stick to reporting facts." The police report in this case, the audit states, "did not always subscribe to these admonitions."

The report was released about a year after the police department concluded its nearly year-long probe of the theater. The investigation began in July 2007, after the San Carlos Police Department discovered a bundle of traveler's checks that were made out to former Children's Theatre Director Pat Briggs and Program Assistant Richard Curtis.

Theater staff's failure to disclose the missing checks to the police after the June 18 burglary triggered suspicions of financial impropriety.

The investigation concluded in May 2008, when police announced that there wouldn't be any charges filed against staff.

But though the report outlines the investigators' mistakes, it also notes that the investigation was hindered as much by ambiguous city policies. The tangled relationship among city leaders, the theater staff and the Friends group made it difficult for police to track financial data and ensure that all proper protocols were followed. The report calls the city's system for reimbursing theater employees "an outdated relic that should have been reformed years ago."

"Because the entities were seen as working together for the common good, persons in positions of authority not only tolerated the arrangement but at times endorsed and authorized it, sometimes contrary to City policy," the report stated.

Under the system, employees occasionally sought multiple reimbursements for the same expense, while at other times they didn't seek any reimbursements for legitimate expenses. But the report also points to numerous e-mails between theater staff and City Hall officials that demonstrated the theater staff's efforts to follow the ambiguous rules.

"While miscalculations were made during this investigation, they can be attributable to the milieu in which the suspicions arose and a lack of training and expertise rather than a calculated plan to investigate and attempt to prosecute certain individuals, exculpatory evidence notwithstanding," the report concludes. "In addition, the poor recordkeeping, laxity of control, intermixing between public and private entities, poor and outdated financial practices for reimbursement of (theater) employees, and the toleration of these arrangements by city officials that went outside the bounds of appropriate checks and balances presented a perplexing fact set that was left for PAPD authorities to attempt to sort out."

The audit also offers the city a list of recommendations. The police department should, in the future, consult early with the District Attorney about financial crimes and consider an independent financial audit before launching a full criminal investigation. The report also cautions the city to refrain from making public comments during criminal investigations.

City Manager James Keene called the recommendations reasonable and said he will be discussing them with staff in the coming weeks. Gennaco is also scheduled to present his findings to the City Council on Monday.

"I'm going to ensure staff takes these recommendations seriously and that we act on them," Keene said. "Hopefully, because of the report and the actions it recommends, we can put this difficult episode behind us."

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