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Compton's fragile finances take another hit as audit firm quits

The move by Mayer Hoffman McCann may further undermine Compton's hopes of getting a line of credit to help pay its bills and could endanger its ability to receive federal grants.

July 10, 2012|By Abby Sewell, Los Angeles Times
  • Visitors enter Compton City Hall. The city's already fragile finances became even more so when its independent audit firm, Mayer Hoffman McCann, quit late last month and refused to sign off on the city's financial statements.
Visitors enter Compton City Hall. The city's already fragile finances… (Mel Melcon, Los Angeles…)

Compton's already fragile finances became even more so when its independent audit firm quit and refused to sign off on the city's financial statements.

The move late last month by Mayer Hoffman McCann may further undermine Compton's hopes of getting a line of credit to help pay its bills and could endanger the city's ability to receive federal grants.

Compton has accrued a more than $40-million deficit over the last several years, largely by borrowing money from other city accounts to pay its general fund expenses. The city has struggled to pay its bills on time and last year slashed its workforce by 15%.

The latest problems date to December, when Mayor Eric Perrodin sent a letter to the state controller's office alleging that fraud may have led to Compton's financial troubles and asking for a forensic audit of the city.

The controller's office has not launched an audit or decided whether it will, spokesman Jacob Roper said. But the allegation of fraud delayed the routine annual audit of the city's financial statements by the independent firm and shut down efforts to secure a line of credit.

"Audit inquiries made to the Mayor went unanswered; therefore, we were unable to determine the financial impact of this allegation on the City of Compton financial statements," Mayer Hoffman McCann wrote in its report.

Because of that, the firm concluded, "the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements." It also declined to give an opinion on the city's compliance with federal program requirements.

Auditors did not return a call seeking comment.

Mayer Hoffman McCann served as the audit firm for Bell before that city's corruption scandal erupted in 2010 and was recently fined $300,000 for failing to detect financial irregularities there.

Refusal to express an opinion, known as a disclaimer, is generally regarded as the worst possible outcome of a company or public agency's annual audit, experts said.

"A disclaimer of opinion is not a good thing under any circumstances," said Ken Scurlock, a partner at Beverly Hills-based accounting and audit firm NSBN LLP. "It's not going to be looked on in a positive light by … governing agencies, lenders in for-profit organizations, prospective investors or nonprofit donors."

Perrodin said at a council meeting that he did not want to talk to the auditors because he had spoken with the state controller's office and did not want to discuss the issues with other parties until the controller's investigation was complete.

"I don't believe in telling somebody, 'I'm doing an investigation on you, so now you can go get rid of the evidence,' " he said.

Three City Council members sent letters of their own to the controller, calling the mayor's allegations "specious" and "baseless" and asking that the office not launch a forensic audit, which they argued would upset the city's plans for financial recovery.

It was not immediately clear how the audit report would affect the city.

Harold Duffey, the newly hired city manager who will start work later this month, said he was concerned about the report and thought the auditors should have found the fraud claims unsubstantiated since they were not able to obtain more information from the mayor to back up the allegations.

"It's almost as if the city was found guilty, when it should be the other way around," he said.

In March, rating agency Standard & Poor's downgraded some of Compton's bonds to BB — considered "junk" status — citing the negative general fund balance and uncertain future finances. Analyst Lisa Schroeer said she had not seen the independent auditor's report and could not say how it would affect the city's rating, but that a disclaimer opinion would generally require follow-up.

A spokeswoman for the U.S. Department of Housing and Urban Development also could not say immediately what the effect would be.

Heywood Sanders, a professor of public administration at the University of Texas, San Antonio, who previously worked for HUD, said the auditors' findings did not suggest that funds were necessarily misspent and might not lead to any drastic consequences.

"I would not expect to see federal funds cut off, and I would not expect to see this necessarily change the city's bond rating," he said. "It's more of a indication of dysfunctional local politics than anything else."

abby.sewell@latimes.com

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