avoiding legal and political pitfalls for directors – a ... · revised to mirror acwa guidelines...

Water Education Foundation Water 101 – The Basics and Beyond

February 24, 2012

Avoiding Legal and Political Pitfalls for Directors – A Case Study

Paul M. Bartkiewicz, Attorney

Bartkiewicz Kronick & Shanahan Law Firm

Robert S. Roscoe, General Manager, Sacramento Suburban Water District

Outline of Presentation

• Overview of common legal and political pitfalls for Directors (Paul Bartkiewicz)

• A case study – Sacramento Suburban

Water District (Rob Roscoe)

Some Basic Rules for Board Members

• Know your role: – accountable to the voters – establish policy – ensure implementation, but let

management manage – follow the money!!!

Some Basic Rules

• Maintain the public trust: – A special district is a business, but it’s the

public’s business. – You will never be adequately

compensated as a Director. (That’s why it’s called public service.)

– Avoid conflicts. (You should know them when you see them.)

Some Basic Rules

• You don’t win every argument. (We didn’t opt for a benign monarchy.)

• Part of your job is to explain what the district is doing and why.

• You are the Board: focus on the big stuff, but create an institutional culture of rectitude.

What Can Happen When These Rules Aren’t Followed

• A case study – Sacramento Suburban

Water District

Case Study Outline

• Brief District background • Past problems with transparency • Lessons learned • Suggestions for improvement

Sacramento Suburban Water District Location Map

District Overview • Five-member board elected by division • 50 staff • 45,000 Service Connections • 168,000 Population Served • Conjunctive-Use water supply

• 100% Groundwater in dry and very dry years • Surface water available in average and wet years

Abbreviated Chronology • February 1, 2002: SSWD formed through the merger of Arcade

Water District and Northridge Water District

• September 2002: Improper use of overtime reported to the Board (early sign of fiscal accountability deficiencies)

• October 2002: Director of Finance discharged (extensive press coverage)

• November 2002: General Manager announces retirement effective December 2002

• December 2002: New Acting General Manager retained. New accounting firm retained for special audit (agreed-upon procedures report). Scope of audit work expanded twice

Abbreviated Chronology (cont.)

• January 2003: Assistant General Manager retires. New Board ethics policy adopted

• February 2003: Special audits on payroll, travel and expenses completed and presented to Finance Committee

• March 2003: New General Manager hired. Board receives audit report and Finance Committee recommendations

Board directs collection of all monies owed to the District, and directs all findings by staff and new auditors sent to the Sacramento County District Attorney and the County Grand Jury

Abbreviated Chronology (cont.)

• By April, 2003: investigations underway included: County District Attorney County Grand Jury IRS FBI Federal Grand Jury U.S. Attorney

Revised W2 forms sent to employees and directors for previous 3 tax years.

• July 2003: Board directs civil complaint filed against

former General Manager and Assistant General Manager to recover monies owed. New Finance Director begins.

Abbreviated Chronology (cont.) • September 2003: Board files State Board of

Accountancy complaint to revoke CPA license of long-time former District auditor. New Assistant General Manager begins.

• October 2003: Federal grand jury indicts former General Manager and former Assistant General Manager.

• November 2003: California State Controllers Office initiates investigation at the request of Senator Ortiz. SSWD is one of five districts identified for “surveys.”

Abbreviated Chronology (cont.) • January 2004: Controller’s Office issues final report. The report concludes that the District’s special audit “properly

identified the fiscal irregularities and mismanagement” and noted that “SSWD either has completed corrective action … or is in the process of taking corrective action …”

• February 2004: Board ethics policy reviewed and

revised to mirror ACWA guidelines

• February 2004: Former General Manager pleads guilty to one count of conspiracy to defraud the United States.

• October 2004: Former Assistant General Manager pleads guilty as trial begins.

What Went Wrong? 1. Fiscal and accounting irregularities 2. Wholly-inadequate preparation for a merger Different business support systems

• Finance/accounting/general ledger • Work order/maintenance management/inventory • Human resources • Customer information and billing

3. Lack of new entity policies and procedures, and little adherence to existing policies and procedures

4. Lack of accountability

Internal Deficiencies Identified

1. Senior management performed all accounting and finance functions. Selected staff performed data input functions only. No checks and balances. No oversight. No accountability.

Internal Deficiencies (cont.)

2. Basic documentation and record retention policies either did not exist, were not implemented or followed, or were easily circumvented.


3. Expense receipts were not required. Travel advances were based on senior management’s (sometimes inflated) cost estimates for transportation, lodging, meals and incidentals without post-trip reconciliation.


4. Critical financial and operations duties were not segregated or separated. A single individual could approve a purchase, order the goods, receive the goods, approve the invoice, process the check, sign the check and input and process the accounting.


5. Employee timesheets were directly entered into payroll without employee signature or review by supervisors. Employees could unilaterally control the size of their next paycheck. Overtime usage was:

• liberally allowed • seldom, if ever, reviewed • frequently booked as comp time, which was blended with vacation

time, which could be bought back, and paid outside of payroll … without tax withholding

Vacation records kept in $$ not in hours.


6. Little control over inventory. Annual balancing of inventory was done periodically (by counting) what was present at the end of the year, and adjusting unit cost until the total asset value was close to the target dollar amount.

Fixed assets not accounted for individually and

estimates of economic life were not realistic (e.g., water meters with 150 year lives).


7. The same audit partner was used for the annual external audit for at least 15 years in a row (older records are lost). In that time, only two annual audits offered minor suggested changes. No record of a management letter.


8. No functional organization chart and no post-merger employee manual existed. Employees were told that no one would lose any

benefits, but the two merging districts had different benefits offered.

The organization chart approved by LAFCO was not followed, nor shared with staff.

No approved job descriptions. No training programs.


9. There was a strong sense of entitlement with employees, particularly with long-time employees who had “served their time.” Rampant personal use of District facilities and equipment.


10. Basic operations policies, procedures and processes were missing or not followed. There was no analysis of how to merge the best practices of each district.

Recommendations to Increase Accountability • Report Director meetings attended, and

expenses reimbursed at each monthly Board meeting (Government Code section 53065.5 requires annual reporting for special districts).

• Define a compensatory meeting. Regular and special Board meetings Board Committee meetings In-field conferences and training approved at, and

reported back to a public Board meeting Other meetings advancing the mission of the district

approved at, and reported back to a public Board meeting

Recommendations to Increase Accountability (continued)

• Require compliance with oversight body findings and recommendations, such as LAFCO municipal reviews.

• Establish a whistleblower mechanism. Create policies to promote reporting of misdeeds.

• Establish expense procedures that comply with IRS requirements for an accountable plan.


• Adopt clear travel reimbursement guidelines for Directors and staff.

Reimbursable expenses must be “reasonable and necessary” Consider an annual or fiscal year cap on travel Report on travel to the public at monthly Board meetings

• Report on Director meetings attended and expense

reimbursements at monthly Board meetings.

• Regularly review district policies and procedures (at least biennially) to ensure they remain current (and in mind).


• Prohibit automatic increases in Director compensation. No automatic inflation adjustment.

• Take ethics training for senior managers and Board members seriously. Adopt ethics guidelines similar to ACWA’s.

• Establish an internal audit function. Auditor reports directly to the Board. If cost is prohibitive, then use external auditors. Regardless…

• Increase the scope of the annual audit !!

Increasing the Scope of the Annual Audit • Only the Board (or an Audit Committee of the Board)

should engage outside auditors. The audit report should be presented at a public meeting. Findings and recommendations should be discussed orally with the Board and public in layman’s terms.

• Require that auditors increase their audit scope to include a sampling of: payroll, reimbursements, cash, capital and operating expenses, etc. Sample ALL transactions regardless of materiality level.

• Require a written management letter, whether or not deficiencies are noted.

Increasing the Scope of the Annual Audit (cont.)

• Do not allow a materiality level that misses most transactions.

• Require compliance reviews to check adherence to Board-adopted policies, established procedures, and contractual obligations. Report on any missing or deficient policies or procedures.

• Routinely change auditors. • Sarbanes-Oxley Act guidelines require a new audit

partner at least every 5 years.

Problem Areas For Smaller Districts • Segregation of Duties

– Same person has custody of, performs accounting for and approves purchasing of assets.

• Bank Account Signature Authority – A single senior manager often has both invoice

approval authority and check signature authority. • Depth of Expertise

– Managers must wear many hats, and frequently are asked to make executive level decisions in areas outside core areas of competence.

• Cost of expanded annual audit and/or hiring an internal auditor can be expensive

Some Lessons Learned

• Too much trust in regular annual audits. Same auditor year after year. “Materiality” level far too high. Board members need to know what an audit is designed to do and, importantly, what it is not designed to do.

• Insufficient segregation of duties.

• Existing laws and regulations were not followed.

• Existing board policies were not followed and needed strengthening.

Lessons Learned (cont.)

• Too little information reported to the Board and public. More transparency needed.

• Correcting problems is much harder than avoiding them. (The ounce of prevention was missing.)

• Public trust is easily lost and hard to gain back.

• The criminal justice system works.

Maintaining Public Trust • Report monthly all financial transactions,

particularly payments or reimbursements to Board members and senior management.

• Be straightforward and open in all communications. • Admit mistakes, correct them and correct the

process that allowed them. • Regularly review and update policies and

procedures. • Work in a fishbowl, under a spotlight (let the sun

shine on everything).

In General, Water District Directors: • Are part-time, and are not involved in day-to-day district

activities.

• Do not have accounting or finance backgrounds and are not trained in audit procedures.

• Rely heavily on the expertise of senior management and the professionalism of external auditors.

• Have no reason to dig deeper (or spend further) when an external auditor reports that “all is well” and provides no recommendations for changes.

Suggestions for Board Members

• Insist on solid financial and operational oversight policies

• Require periodic reporting related to such policies

• Establish an internal audit function that reviews financial and operational policies and procedures

• ASK QUESTIONS!

Suggestions for Senior Management

• Establish operating procedures for all Board adopted policies

• Require all financial staff to have backups for their functions and periodically have the backup assume the duties (require one annual vacation in a 40 hour increment for all financial staff)

• Review all financial data and reports • Review and understand internal and external

audit reports and their functions. • ASK QUESTIONS!

Suggestions for Staff

• Understand and follow all procedures. • When deviations occur, receive authority

from next higher-level manager • Document transactions and retain

documentation • Write procedures for your function and

have a backup person • ASK QUESTIONS!

SSWD Mission Statement • To deliver the best quality of water that can be attained

at a reasonable price. • To assure that District operations are conducted in

accordance with all statutory and regulatory requirements, with an emphasis on safety of staff and the public.

• To operate in a manner that results in a high degree of customer satisfaction.

• To operate in an atmosphere that provides staff with security and career satisfaction, including competitive compensation and training opportunities.

For More Information, Visit Us at

SSWD.ORG

Water Education Foundation Water 101 – The Basics and Beyond

February 24, 2012

Avoiding Legal and Political Pitfalls for Directors – A Case Study

Paul M. Bartkiewicz, Attorney

Bartkiewicz Kronick & Shanahan Law Firm

Robert S. Roscoe, General Manager, Sacramento Suburban Water District

avoiding legal and political pitfalls for directors – a ... · revised to mirror acwa guidelines...

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