A proposal to reform Palo Alto's Office of the City Auditor is facing pushback — and a threat of a lawsuit — from employees of the small department, which has been hobbled in recent years by leadership turnover and internal bickering.
The City Council will be considering in the coming weeks a report from Kevin W. Harper CPA & Associates, a firm that was commissioned to survey other cities and make recommendations about best practices for internal auditing operations. The most controversial recommendation in the report calls for shifting the reporting structure so that the auditor's office, which is now independent, would fall under the city manager's "administrative oversight."
The report recommends a dual-reporting relationship, wherein an independent committee (in this case, the City Council) would make decisions about audits that need to be conducted, audit timing, city auditor appointment, termination, evaluation and compensation. The city manager, meanwhile, would provide administrative oversight such as "review of time sheets and expense reports, consultation about timing of audits based on operational considerations, and involvement in discussion of cost versus benefit decisions of audit recommendations."
While the Harper report purports to comply with the standards of the Institute of Internal Auditors, a national organization that develops guidelines for auditors, the institute itself was quick to distance itself from the recommendation to have the auditor report to the city manager for administrative oversight.
Richard Chambers, CEO of the Institute of Internal Auditors, wrote in a letter to the council that the proposed shift would "undermine the independence and critically important role of internal audit in Palo Alto, negatively."
"To achieve the degree of independence necessary to effectively carry out these responsibilities, the chief audit executive must have direct and unrestricted access to both city management and the City Council," Chambers wrote. "The city auditor must also be free from any undue influence of city management."
"This influence can appear in many forms, including inappropriate administrative or functional reporting relationships, budgetary constraints, and decision-making around personnel issues (e.g. hiring/firing and compensation)," the letter states.
Today, the city auditor is one of four positions that report directly to the council (the city manager, the city attorney and the city clerk are the other three). The office, however, has been without a leader since February 2019, when the last city auditor resigned following a prolonged conflict with a group of three auditors on her staff. The council last year appointed a consultant, Don Rhoads, to oversee the office on a temporary basis. His contract expired in November, and the office, now down to three employees, remains without a leader.
While the council has not discussed the personnel conflicts publicly, the Weekly has learned that employees in the city auditor's office had filed at least two complaints against Richardson, prompting investigations that did not uncover any wrongdoing on her part. Three employees had also briefly considered suing the city in 2018, after the council discussed eliminating all of the positions in the office except the city auditor and contracting out auditing services. (After voting to do so, the council's Finance Committee changed its mind and decided against the outsourcing.)
Now, one of these auditors, Senior Performance Auditor Houman Boussina, is fighting back against the Harper report and taking shots at his former boss. Boussina's attorney, Karl Olson of the firm Cannata, O'Toole, Fickes & Olson, submitted a letter to the council last week that calls the Harper report "fundamentally flawed" and that blames Richardson for damaging the office's productivity. The Harper report concluded that compared to other cities, Palo Alto's auditing operation has the lowest productivity (with a rate of 0.7 audits per year per full-time position) and the highest costs per audit ($417,000).
Olson argued in the letter that the report "fails to identify or acknowledge years of mismanagement under Richardson, as reported by staff auditors and whistleblowers, and does not identify who was accountable or responsible for the negative outcome it alleges, including low office productivity and high cost."
"This has unfairly exposed the office staff, who have not had a supervisor since November 2018, to direct criticism and blame for the report's conclusions," Olson's letter states.
The letter alludes to a complaint that Boussina and others provided to the council in August 2018, alleging that Richardson had publicly issued audit reports that were inaccurate and misleading and that she had engaged in "retaliation against the office staff who had in good faith met their ethical obligations to report the issues to city management."
"Unfortunately, to our knowledge, the city has not acknowledged or taken corrective action to address the wrongdoing," Olson wrote. "Instead, the city made working conditions extremely difficult for the entire office starting in 2018 by denying supervision, performance evaluations, and the opportunity for merit-based pay increases that are provided to other city employees," Olson wrote.
While council members do not comment on personnel issues, some of them have told the Weekly in the past that they don't believe Richardson has done anything wrong and have pointed to the investigations that vindicated her. Their account was corroborated by a former employee of the office.
Olson's letter on behalf of Boussina noted that two staff auditors had terminated their employment with the city since October 2018. Olson wrote that Boussina is recommending that the council recruit and appoint a permanent city auditor who can "restore leadership and supervision and work with the City Council to restore operations at this office."
"We hope the City Council will take this letter in the constructive spirit in which it is intended and will not take any actions which undermine the important role of the City Auditor's Office and/or lead to employment litigation exposure for the city," Olson wrote.
Boussina isn't the only employee who is critical of the Harper report. Mimi Nguyen, lead senior performance auditor, submitted her own letter that argued that the report is "flawed in many areas." This includes its failure to "acknowledge the complexity of the performance auditing process" as dictated by the city's currently adopted industry standard. The Harper report, she wrote, also "does not reflect decisions made at the City Auditor and City Manager level, which directly affects the scope, cost and duration of audits, and the completion of audit recommendations." She also argued that Harper used a flawed benchmark comparison and that the report "draws conclusions pre-emptively rather than offering an understanding of root causes to inform and assist council in designing an effective office structure and plan moving forward."
"Based upon the lack of and incomplete information in the report, I believe that the conclusions are significantly skewed and misleading," Nguyen’s letter states.
Today, the Office of the City Auditor follows the Government Auditing Standards, which are geared toward government auditing. Nguyen noted that the Harper report fails to acknowledge the complexity of the auditing standards under these rules, which she calls "the gold standard."
The Association of Local Government Auditors, a national auditing group, made a similar point in its Dec. 19 letter, which argued that Harper relied on internal standards that are oriented toward the private sector rather than governing auditing. Given that Government Auditing Standards require auditors to be independent, having the city auditor report to the city manager in an administrative manner is "a significant structural threat to the independence of the City Auditor's Office and not appropriate for an external government audit function," Douglas Jones, chairman of the group's Advocacy Committee wrote to the council.
"Some of the administrative reporting examples outlined by the consultant could result in management inappropriately exerting control over audit work," Jones wrote. "The council can exercise functional and administrative oversight of the city auditor and City Auditor's Office as a body and/or through an Audit Committee that does not include anyone from management."
The City Council was scheduled to discuss the Harper report and its recommendations on Tuesday night, Jan. 21, but members agreed to postpone the hearing to a later date.