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iAUDIT! - In a recent Westside Current article, I wrote about the silent contempt local leaders have for their constituents. Voices for reforming homelessness programs are ignored or shouted down. If the contempt is sometimes silent and behind the scenes, a recent court hearing and City Council committee meeting put the dysfunction of local homelessness programs on full display.
Before getting into the details, let me backtrack a bit. In 2014, police arrested a City of Pasadena management analyst for embezzling more than $6 million from a fund meant to pay for undergrounding residential utility lines. As an investigation by accounting firm KPMG reported, over several years, the analyst colluded with an electrical contractor, creating dozens of false invoices for utility work that was never done. He even listed the church where he was a pastor as a contractor for utility work and then cashed the payments himself. The city’s finance department routinely issued payments despite the lack of documentation. Top managers never went into the field to verify the work was done. When I wrote a report to my city’s management assessing the risk of a similar scheme in our organization, I noted the whole process was almost farcical. A staff-level analyst created blatantly false invoices, (sometimes not even bothering to change the invoice number), walked the invoice to the Accounts Payable counter, and received a check right away, which he promptly cashed. Nobody thought to ask why a church would be doing heavy utility-related work, or why the checks had to be issued right away instead of through normal channels. I described the environment enabling the fraud: lax internal controls that were rarely enforced; inadequate staffing in accounts payable and internal audit (the city disbanded its internal audit program in 2008 to save money—a move that cost the city $6.4 million in embezzled dollars and much more in legal and auditing fees); management indifference; and deference to someone with the perceived expertise to manage the program without oversight. Ironically, the embezzlement was discovered accidentally, after the analyst was placed on administrative leave for falsifying his timecard entries.
There was nothing sophisticated about the analyst’s fraud scheme; it was a classic case of “on the books” fraud, where there is no attempt to hide the perpetrator’s actions; this type of fraud is common in environments with few or poorly managed internal controls. The analyst simply found a few accomplices, created some false invoices—many laughably crude—and took advantage of a weak system to enrich himself. Bear the Pasadena case in mind as you read about the October 16 hearing in federal court and the meeting of LA’s Housing and Homelessness Committee that followed.
At the October 16 hearing before federal Judge David O. Carter, the City, County, and LAHSA were supposed to explain the process they use to document millions in payments to service providers. At previous hearings, court-appointed auditors from Alavarez & Marsal described the lack of documentation and verifiable performance measures in contracts and payments. If last Wednesday’s hearing was the City’s and LAHSA’s chance to prove they could document their program performance and finances, they failed miserably. What was made plain was the extreme dysfunction in the current homelessness system. Consider the following:
- LAHSA does not send supporting documents like invoices with its bills to the City, and the City doesn’t require them.
- LAHSA’s CFO Janine Trejo told the court documentation is “not required” in its contracts with the City.
- City Controller Kenneth Mejia said the City has no way to verify services were provided as billed and it takes a long time to match invoices to payments.
- Judge Carter stated, “The City is paying bills with no supporting documentation”.
Things did not improve at a meeting of the City Council’s Housing and Homelessness Committee later that day:
- LAHSA’s management claimed it had insufficient accounting staff to match providers’ invoices to its billings to the City.
- Councilmember Blumenfeld suggested the City only pay for what can be documented.
- The system is co convoluted, Councilmember Padilla requested a flowchart so committee members could understand the payment process. She then left the meeting, depriving the committee of a quorum, so no definitive action was taken.
After I heard about the results of the court hearing and committee meeting, I thought of at least three ways a low-level clerk could easily defraud the system (I won’t provide details lest I be accused of giving someone ideas).
The City and LAHSA are violating several best financial practices. Requiring supporting documents for billing is fundamental to sound contract management; documents are used to verify performance and justify billings. It shouldn’t be difficult for a provider to submit details of time and services with a billing; we required it in my city’s service contracts. In addition, the right to audit a provider’s records is standard contract language, but it appears neither LAHSA nor the City has the staff nor interest in doing so.
With the City and LAHSA, we see the same red flags that were present in Pasadena: lax controls, no management oversight, inadequate staffing, and deference to the providers doing the billing. But there is one key difference; in Pasadena, top management may have been disengaged, and unaware of fraud until it was discovered, but they took aggressive action to reform the city’s processes to assure it wouldn’t happen again—including firing senior managers who ignored the risks. In LA, senior leadership and elected officials have known for years the system is broken but have done nothing to fix it. As early as 2018, the LA County Auditor was calling for reforms in LAHSA’s financial and contract practices, and in 2020, the Board of Supervisors discussed a new structure for the authority’s governance. In late summer 2023, the City Council blasted LAHSA’s leadership for not tracking vacancies in Inside Safe rooms. And yet nothing has changed.
The October 16 comments mirror the independent auditors’ concerns as they look into the City’s homelessness program performance. At an August 29 heating, Alvarez & Marsal’s auditors referred to trying to reconcile records and payments as “untangling spaghetti”. There is a serious lack of supporting documentation for service provider billings, and the numbers of clients served on billings don’t match program reports.
The weaknesses, inconsistencies, and rationalizations for inappropriate billings create an environment ripe for fraud. The conditions are so lax, fraud would be even easier than it was in Pasadena. All a provider needs to do is bill for work it hasn’t done, or for more clients served than it actually helped. There is no system to ensure the number of clients served is accurate, nor to track what those services may have been. Since contract performance requirements are tied to processes instead of outcomes, providers know they need only apply the absolute minimum effort and they’ll be paid. It is a system with so many points of failure and so vulnerable to fraud, successful outcomes are the exception rather than the rule. For all their talk of compassion and the need to house the homeless, local leaders appear to have no stomach for holding providers accountable for achieving that goal. Perhaps the billions of dollars flowing through the system without documentation is the reason—accountability is hard and occasionally unpopular, something that does not come easily to political figures more interested in appearance than results.
(Tim Campbell is a resident of Westchester who spent a career in the public service and managed a municipal performance audit program. He focuses on outcomes instead of process.)
