San Diego Officials Struggle with Throwing More Money at Accounting Problems

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San Diego's City Attorney, Michael Aguirre, on Friday asked the City Council to reject additional funding for the independent risk firm, Kroll, Inc. and law firm Wilkie, Farr & Gallagher, who are investigating the City's finances, including disclosure practices relating to the $1.4 billion shortfall in the City's pension fund. The two firms have said they will be unable to conclude their work by December as scheduled, because the City's data search has not produced all of the records they need, the San Diego Union-Tribune reports.

Investigators have concluded that an entirely new search for documents and emails should be conducted in the case, and a new data retrieval company hired for the search, because the companies currently performing email and document retrieval have not been able to do the job, the Union-Tribune reports.

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According to the City Manager's Office, San Diego originally agreed to pay $250,000 to Kroll. With the increase Kroll has requested, the total payment to Kroll would be $5.275 million and the total to Wilkie, Farr & Gallagher, $3.9 million, the North County Times says.

San Diego's accounting firm, KPMG, has refused to sign off on the 2003 financial statements without an independent investigation of the City's disclosure practices.

The Securities and Exchange Commission (SEC), the U.S. Attorney's office and the FBI are also looking into possible securities violations and corruption in the pension system, the Union-Tribune reports, and will not conclude their investigations until the independent review is completed.

The City has been unable to borrow money for needed projects because of the ongoing investigations and the refusal of KPMG to release the 2003 financial statements.

In 2004, the City hired Houston law firm Vinson, Elkins LLP to conduct a review of the pension plan and the City's finances. Vinson issued a report and was paid $6 million for their work, but they were unable to produce documents requested by KPMG, the-Union Tribune reports.

Early this year, the City hired the independent Audit Committee, chaired by Arthur Levitt, former chairman of the SEC, to supervise another review and address the Vinson reports, which were critical of San Diego's handling of its finances. The Audit Committee then hired Kroll and Wilkie, Farr & Gallagher, to investigate and the City's finances, and the problems with the Vinson review.

Aguirre said the Council should get rid of KPMG and the Audit Committee and hire another firm to bring the case to a close, the San Diego Voice reports.

Deputy Mayor Toni Atkins did not see any alternative to continuing the current investigation.

“I've yet to hear anyone give a viable alternative that will satisfy the SEC and make sure our audits get done, and something that will make the credit agencies and Wall Street happy,” Atkins told the Voice.

Kroll will meet with the City Council on Tuesday, but will not ask for more money until later, City Manager Lamont Ewell told the Union-Tribune.

One of the two companies currently assigned responsibility for retrieving emails, the San Diego Data Processing Corp., is a city-owned non-profit corporation. Tom Fleming, chief executive officer of the company, says that the requests may be beyond the company's ability.

“We're not specialists in doing forensic research and sort methodology,” Fleming told the Union-Tribune.

Kroll has indicated that they have focused on 35 “individuals of interest,” in the probe. The new records search should produce 185,000 emails, the Union-Tribune says. KPMG says that after the emails have been read and analyzed, they will need one month to issue the financial statements.

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