KPMG Choice for Contracting Panel Raises Conflict Questions

By AMANDA BRONSTAD

Staff Reporter

Los Angeles City Controller Laura Chick has questioned whether a pending contract with KPMG LLP for advisory services to Mayor James Hahn’s Blue Ribbon Commission opens the firm to charges of conflicts of interest.

Hahn formed the commission in February to review city contracts and devise a “best practices” program for the water and power, airport and harbor departments. The Big Four accounting firm audits the Port of L.A. under a one-year, $150,000 contract that ends June 30.

In an April 22 letter to the firm, Chick questioned KPMG’s independence in recommending new contracting procedures to the commission while auditing the port.

Addressed to Tom Snow, a partner in the Los Angeles office, the letter said, “it is also my understanding that you were, at one time, the audit partner with lead responsibility for the port. I am concerned that your firm may lack the independence required to recommend contracting policies and procedures that will affect the leasing operations at the port.”

Snow did not return calls. Tim Connolly, a firm spokesman, would not comment other than to say, “We received the letter and are responding to it.”

Deputy Mayor Carmel Sella said that KPMG was selected for the Blue Ribbon contract by a review panel made up of Hahn, Chief Administrative Officer William Fujioka and Chief Legislative Analyst Ronald F. Deaton. The contract has not yet been executed, she said.

Sella said the administration was concerned about any appearance of conflict of interest.

“Clearly, the issues raised by the controller are serious, we take them seriously and we’re committed to taking every step to ensure the consultant we do select has the confidence of the city and elected officials,” she said.

She said KPMG was selected for its depth of resources and ability to simultaneously and quickly review all departments. She added that, “because of the small number of firms, there may be these types of issues. So, for that reason, we take care to assure that it’s a contract in which there’s not the appearance of any conflict.”

Sella confirmed that Snow and Margaret Jean McBride were the KPMG partners overseeing the firm’s work for the commission.

McBride led KPMG’s audit of Orange County in 1994 and was about to sign off on its books for that year when, in 1995, the county filed for bankruptcy protection. The firm was sanctioned in 2002 by the state Board of Accountancy for signing off on the county’s books for 1992 and 1993, placed on one year’s probation and ordered to pay $1.8 million in fines.

McBride was also sentenced by the board to three years’ probation and ordered to serve 100 hours of community service. In its ruling, the board said McBride and the firm cut corners and ignored signs of the county’s impending financial collapse.

Certified public accountants must be licensed by the state, and the board has the authority to discipline licensees for violations of the state Accountancy Act for, among other things, negligence or incompetence; fraud, deceit and misrepresentation in the professional practice.

Higher standards

Hahn appointed the commission as county and federal prosecutors were widening their probes into contracts at the city’s harbor, airport and water and power departments. In recent months, investigators have subpoenaed documents and city officials from the three departments, including the port’s executive director, Larry Keller.

Keller was copied on Chick’s recent letter; when asked for Keller’s comment, port spokeswoman Sheila Gonzales replied in an e-mail: “The letter was addressed to Mr. Snow, not Mr. Keller, therefore a reply is not requested.”

KPMG was selected after it responded to a request for proposals issued by the Chief Administrative Office. The description of services included a “review and report on the contracting practices, procedures and written policies of the departments of airports, harbor and water and power” and development of “comprehensive recommendations for ‘best practices.'”

The RFP also said “prior experience in conducting non-financial audits of departments of the city of Los Angeles is highly desirable.”

Last month, Fujioka’s staff recommended engaging KPMG’s financial advisory services division for the contract. The division consults on the financing of mergers and acquisitions, restructurings, bid services, vendor assistance and contract assistance, according to KPMG’s Web site.

Fujioka did not return calls.

KPMG still has two ongoing contracts at the port.

In August 2003, the Board of Harbor Commissioners approved KPMG for $200,000 in specialized financial services to be provided on an as-needed basis for a one-year period. Those services include, for instance, valuations on properties being acquired during that time period, Gonzales said.

The contract referenced in Chick’s letter provides for annual audits used in the issuance of bonds and incorporated in the city’s overall financial statements.

The contract, awarded to KPMG in September 2003, covers the fiscal year ending June 30, Gonzales said. It may be renewed through a request for proposal to be released soon, she said.

Chick said she wrote the letter after seeing Snow at the Blue Ribbon Commission’s second meeting last month, where she learned about the contract award.

“I think highly of KPMG,” she said. “But I was surprised in realizing that KPMG is the auditor for the Port of Los Angeles that now they’ll be the consultant recommending policies the port should adopt.”

Still, she added, “I don’t have pre-conclusions. I’m really writing the letter asking them to comment back to me and give me reassurances. In the past couple of years, with all the scrutiny, KPMG has taken major steps to have separate entities have a firewall between them, and I want to hear about it. Improving how we do contracting is too important to risk anything sullying the results of this work.”

In her letter, Chick said, “In raising this issue, I am not only concerned about the audit work that you have preformed for the port, but also about the services that you may provide in the future.”

Chick has asked Snow to respond by letter to the chairman of the blue ribbon commission, Erwin Chemerinsky. Chemerinsky could not be reached for comment.

Brainard Simpson, a partner at Simpson & Simpson, the city’s outside auditing firm, also received a copy of the Chick letter. He did not return calls.