Comments
iAUDIT! - Auditing for fraud is a highly specialized profession. Certified Fraud Examiners (CFE’s) take a grueling three-part exam that is every bit as challenging as the standard Certified Internal Auditor test many auditors take. Since I wasn’t a forensic auditor, I never took the CFE exam, but like all certified auditors, my initial test and continuing education covered fraud risk analysis and fraud recognition.
There are basically two kinds of business fraud: “on the books” and “off the books”. On the books fraud is the more common of the two. It covers everything from charging personal expenses to the company account to writing checks to fake companies. Its called on the books because it occurs after a transaction has been recorded in an organization’s financial records. There’s no attempt to hide the activity; perpetrators count on weak controls and inattentiveness to get away with it. Off the books fraud takes place before a transaction is recorded; unlike on the books fraud, off the books fraud tries to hide the activity to evade controls. I recall reading of a programmer for a major bank who added a “1” at the end of the interest rate account holders earned on their savings, (e.g. 4.571% instead of 4.570%), and then steered the extra income to a personal offshore account. The extra earnings were infinitesimal per account but added to hundreds of thousands of dollars spread over millions of customers.
The point is the risk of fraud is present in any environment where money, services, or goods trade hands. Ordinary auditors like me aren’t trained to do the intricate work of major fraud auditing, but we are trained to recognize the signs and risks of fraud, bring them to management’s attention, and recommend follow-up.
Like any other crime, fraud requires three factors: 1) Rationalization (called motive in other crime investigations)--a reason or perceived need to commit fraud; 1) opportunity, where a person or organization is in a position to perpetrate fraud with little chance of being caught; and 3) means, where the person has the authority, skills, or other access to the money they want to steal. An auditor’s job is to assess the risks for all three and determine the likelihood fraud may or has occurred.
When I read the results of the court-ordered assessment of Los Angeles’ homelessness programs, the alarm bells for fraud risk started going off in my head after just a few pages. I was concerned after reading the County Auditor’s November 2024 report on LAHSA’s financial practices. The County audit described financial practices that were already questionable (moving money between restricted funds, failing to track cash advances), but the assessment by Alavarez & Marsal (A&M) brought how serious the risks are into much sharper focus. LAHSA and the City manage billions of dollars in homelessness funds so poorly, they don’t just create a risk of fraud, they invite it.
A&M’s report is rife with descriptions of fraud risk, from the general risks posed by lax or nonexistent contract monitoring to more specific instances of questionable billings. For example, on pages 88-89 of the report, A&M found providers were not accurately reporting staffing levels at some shelters, indicating they were padding the bills by inflating the number of employees assigned to various facilities. On page 108, the auditors found a provider who was supplying only two meals per day instead of the required three. They also found several instances where case management staff were insufficient for the number of clients in a shelter.
Let’s consider the audit in terms of the three factors for fraud. What is the rationalization or motive? Money. The report covered more than $2.3 billion in expenses over its four-year examination period. The City, County, and LAHSA spend a combined $5 million per day on homelessness. By any measure, that is a lot of money. Most of this money is given to service providers (about 82 percent of LAHSA’s budget, or $700 million per year, goes to contracted providers). The rest is spent on direct services, and administrative and support costs.
Opportunity: A&M’s auditors described a system designed to encourage fraud. Contract management is notoriously lax, and verification of services provided is nearly nonexistent. On page 84, auditors wrote, “…A&M was not able to confirm that LAHSA actually validated the accuracy of the expenses, including that the service paid was actually provided. LAHSA noted that the invoice reviews were conducted at a high level, with Grant Specialists not performing a “deep-dive,” or in-depth, examination of expenses submitted for reimbursement”. LAHSA’s grant managers merely ensure the billing details add up to the amount requested and authorize the payment. A provider can simply add a few staff here or some extra expenses there and be assured they will be paid. That is classic on the books fraud, and in LAHSA’s case it is as simple as creating a padded bill. Both the County audit and A&M’s report noted LAHSA routinely pays providers without properly executed contracts in place; without a contract, what constitutes an allowable expense can be whatever the provider says it is. Of the few instances where LAHSA disallowed and expense, it was usually because the amount exceeded the budget or for some other ministerial issues, but not one of performance or questionable billing. On page 90, auditors wrote, “A&M identified three instances where expenses were deemed “disallowed” during the invoice review process. These disallowances were not based on the type of expense or its inherent eligibility; rather, the amounts exceeded budgetary or allowable rate limits or surpassed the total expenses reflected in the supporting documents”. In other words, the only times payments were disallowed were for clerical or procedural errors rather than insufficient service documentation.
Means: The means to defraud LAHSA and the City are basically built into the system. LAHSA has a reputation for selecting a relatively small number of large nonprofits as contractors and, as A&M noted, granting these contractors multiple addendums and extensions. The nonprofits’ executives often have close personal or professional ties to top LAHSA and City management (Dr. Va Lecia Adams Kellum, LAHSA’s CEO, was CEO of St. Joseph’s Center, a huge homelessness services nonprofit that still contracts with the Authority). Both the City and LAHSA say they lack the staff to thoroughly examine each provider’s invoice, so they concentrate on making sure the billing documents match the invoices and pay the bills. The billing system itself is so cumbersome, the staff’s main objective is to process the bills as quickly as possible so providers can get paid.
Accusing a person or business of fraud is a serious charge and takes irrefutable evidence. A&M’s assessment wasn’t a fraud audit and wasn’t meant to gather the evidence needed to confirm fraud has occurred. Rather, it has made the court, senior managers, elected officials, and now the public, aware of the significant risk of fraud.
There are two companion problems that are often found where fraud exists: waste and abuse. Although not criminal per se, they cost taxpayers untold millions of dollars and dedicate resources to ineffective services. A&M mentions several instances of waste, such as where city, county, or LAHSA services overlap (the report uses some form of the word “overlap” 15 times). Service overlap means local government pays for the same service more than once; this not only wastes money, but it is also inefficient because neither of the three entities tells the others who they are working with or what services they are providing. As the report says on page 16, “This intertwined governance structure, with LAHSA at the nexus of the City and the County’s roles, results in a complex environment characterized by overlapping responsibilities, diverse funding streams, communication obstacles, and multiple accountability channels; consequently, it is extremely difficult to clearly define the process flows for both funding and service delivery within the CoC [Continuum of Care] system”.
Overlapping services can also lead to abuse, in the form of over-counting the number of people served. On page 107, the report states, “The design of the various outreach subprograms funded by the City may have contributed to overlapping services, creating a risk of inefficiencies or duplication of efforts. Individuals experiencing homelessness could be served by more than one outreach subprogram, which may have complicated data collection, led to possible duplication of efforts, created confusion among the unsheltered community, and diminished transparency regarding the allocation of resources”. This is important to remember when the city or LAHSA claims they’ve served or sheltered 30,000 people. All it really means is that they’ve completed a process 30,000 times on an unknown number of people, a great many of whom may be repeat clients.
In addition to A&M’s description of inherent inefficiencies and ineffective programs, the report serves as a clear and serious warning to leaders and taxpayers there is a very high likelihood of waste, fraud, and abuse in L.A.’s homelessness system. Wasting taxpayer money always reduces the public’s faith in government. When that wasteful system has been supported by our elected leaders, it is even more egregious. Although some local officials have made statements about eliminating waste, and some have even proposed abolishing LAHSA, we must remember it is the system itself that is the problem and simply moving ineffective programs from one organization to another will not solve this crisis. We need new structures with new leadership. Then perhaps we can improve the horrendous conditions that at least 75,000 of our fellow citizens endure on the streets every night.
(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 in his iAUDIT! column for CityWatchLA.)
