the auditor's report

7/29/2019 The auditor's report

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Jorge Oseguera

City Auditor

Scott Herbstman

Auditor

City AuditorsWhistleblower HotlineActivity Report(January October

2012)

Office of the City AuditorDecember, 2012

Report #

2012-07

Jorge Oseguera

City Auditor

Scott Herbstman

Senior Auditor


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ContentsWhistleblowerProgramBackground.......................................................................................................... 1

CityCouncildirectedtheCityAuditortoestablishaWhistleblowerProgram......................................... 1

Auditorsrole

and

responsibilities

............................................................................................................

2

WhistleblowerProgramimplementation................................................................................................. 2

Whistleblowerprocedurestargethighriskcomplaints........................................................................... 3

Statusofinvestigations................................................................................................................................ 5

Morethanhalfofcomplaintsreceivedhavebeeninvestigatedandclosed............................................ 5

FutureWhistleblowerProgramreports.................................................................................................... 7


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WhistleblowerProgramBackground

CityCouncil

directed

the

City

Auditor

to

establish

aWhistleblower

Program

InFebruary2012,theCityAuditorpublishedtheAssessmentforEstablishingaWhistleblowerHotline.Thisreportpresentedwhistleblowerhotlinebestpractices,othercitieswhistleblowerprogram

information,estimatedcoststoestablishaprogramfortheCityofSacramento,andCityemployee

surveyresultsaboutpotentialfraud,waste,andabuseinSacramento.

InMarch,CityCouncildirectedtheCityAuditortoestablishaWhistleblowerHotlineProgramtoallow

Cityemployeesandmembersofthepublictoreportpotentialfraud,waste,andabusewithoutthefear

ofretaliation.InOctober2012,theCityManagerpostedtheCityPolicyrelatedtotheprogramPolicy:

WhistleblowerProtectionAP1002andtheCityAuditorpostedtheWhistleblowerHotline

Procedures.

AccordingtotheAssociationofCertifiedFraudExaminers(ACFE)2012ReporttotheNationson

OccupationalFraudandAbuse,atypicalorganizationisestimatedtolose5percentofitsannual

revenuestofraud.TheACFEdefinesoccupationalfraudastheuseofonesoccupationforpersonal

enrichmentthroughthedeliberatemisuseormisapplicationoftheemployingorganizationsresources

orassets.

IftheCityofSacramentoslossduetofraudwereinlinewithACFEestimatesforatypicalorganization,

thelosstotheGeneralandenterprisefundswouldequalabout$30.3millionperyear.TheCitysactual

lossfromfraudisunknown.However,theACFEstudyfoundthatreceivingtipsisthemostfrequentway

fraudisdetected,andthatthecostanddurationoffraudactivitywaslessinorganizationswith

whistleblowerhotlines.

TheACFErecommendsthatemployerssetupwhistleblowerhotlinestoallowemployeesto

anonymouslyreportpossiblefraud.OtherlargecitiesinCaliforniahavehotlinesthatallowfor

anonymousreportingoffraud,waste,andabuse.SomeCaliforniacitieswithwhistleblowerhotlinesare

LongBeach,LosAngeles,Oakland,SanDiego,andSanFrancisco.In2009,statelawwentintoeffectthat

enabledlocalgovernmentauditorstoestablishwhistleblowerhotlineswithwhistleblowerprotections.

WesurveyedCityemployeesanonymouslyaspartoftheAssessmentforEstablishingaWhistleblowerHotline

to

seek

employees

views

on

establishing

ahotline.

More

than

580

employees

responded

to

the

survey.Giventheresponses,thereappearedtobestronginterestandsupportforestablishinga

whistleblowerhotline.Manyemployees(326)indicatedthat,duringtheircareerattheCity,theyhave

hadatleastoneconcernaboutfraud,waste,orabuse.Forthosewhohadconcerns,manysaidtheyhad

notreportedtheconcernsbecausetheyfearedretaliationordidnotknowwhotoreporttheconcern

to.


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Auditorsroleandresponsibilities

TheCityAuditoristheCitysindependentauditorwhoreportsdirectlytotheMayorandCityCouncil.

CouncilapprovestheAuditorsannualauditplanandhashistoricallyaddedauditstotheplanwhen

needed.

Statelaw

sets

requirements

for

establishing

and

running

awhistleblower

hotline,

but

local

auditors

have

discretioninhowtooperatetheirprograms.CaliforniaGovernmentCodeSection53087.6allowslocal

governmentstocreatewhistleblowerhotlines.

ThefollowingincludeskeypointsofthisGovernmentCodesectionandhowitpertainstotheCityof

Sacramento:

TheCityAuditorshallobtainapprovalfromCityCouncilbeforeestablishingawhistleblowerhotline.ThisapprovalwasobtainedbyCouncilinMarch2012.

Thehotlineisusedtoreceivecallsfrompeoplewhohaveinformationregardingfraud,waste,orabuse.

TheCityAuditormayrefercallsreceivedonthehotlinetotheappropriategovernmentauthorityforreviewandinvestigation.

Duringtheinitialreviewofcallsreceived,theCityAuditor(ortheappropriategovernmentauthoritytowhomthecallisreferred)shallholdinconfidenceinformationdisclosedthrough

thehotline.Thisincludestheidentitiesofthecallersdisclosinginformationandthepeople

identifiedbythecallers.

Uponreceivingspecificinformationthatanemployeehasengagedinanimpropergovernmentactivity,theCityAuditormayconductaninvestigativeaudit.

Theidentityofthepeopleprovidinginformationthatinitiatedtheinvestigativeauditshallnotbedisclosedwithouttheirwrittenpermission,unlessthedisclosuresaretolawenforcement

agencies

that

are

conducting

criminal

investigations.

Theinvestigativeauditshallbekeptconfidentialexcepttoissueareportofaninvestigationthathadbeensubstantiatedortoreleasefindingsfromcompletedinvestigationsthataredeemed

necessarytoservetheinterestsofthepublic.

Theidentitiesofindividualsreportingtheimpropergovernmentactivitiesandthesubjectemployeesinvestigatedshallbekeptconfidential.

However,theCityAuditormayprovideasubstantiatedauditreportandotherinformation(includingsubjectemployeeidentities)toappointingauthoritiesfordisciplinarypurposes.

WhistleblowerProgramimplementation

WhileCouncilhasdirectedtheCityAuditortoimplementtheWhistleblowerProgram,andthe

GovernmentCodespecifiestheparametersinwhichtheprogramcanoperate,werealizedthatthe

programcouldbenefitfromaclarification.Specifically,statelawallowsforinvestigativeauditstobegin

afterwhistleblowercomplaintsarereceived.However,neitherstatelawnortheSacramentoCityCode

explicitlyprovidetheCityAuditorwiththeauthoritytoinvestigatepotentialfraud,waste,andabuse

thatmembersoftheOfficeoftheCityAuditormightdiscoverthroughauditworkorinwaysotherthan

throughwhistleblowertips.


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Someinformationlearnedmayrequireimmediatereviewsandberelatedtosensitivetopics.However,

thecurrentstructuredoesnotspecifytheAuditorsauthoritytoengageininvestigativeorperformance

auditsthatarenotdirectlyrelatedtowhistleblowertipsorpartoftheannualauditplans.

InlinewithCouncilsdirectiontoestablishawhistleblowerhotlinetoreducetheCitysoverallriskand

theCity

Auditors

function

to

investigate

fraud,

waste,

and

abuse,

we

recommend

that

City

Council

authorizetheCityAuditortocommenceinvestigativeorperformanceauditswhenhighriskincidentsor

issuesarediscovered.

RECCOMENDATION

WerecommendtheCityCouncil:

1. AuthorizetheCityAuditortocommenceperformanceorinvestigativeauditswhentheAuditordeterminesthatahighrisktotheCityoraCityprogramexists.

Whistleblower

procedures

target

high

risk

complaints

DuetothelimitednumberofstaffmembersintheOfficeoftheCityAuditorandtheOfficeschief

responsibilitytoconductperformanceauditsinaccordancewiththeCouncilapprovedAuditPlan,

conductingfullinvestigationsofallcomplaintsisnotfeasible.Instead,theCityAuditorhasadopteda

riskbasedapproachtoinvestigatewhistleblowercomplaints.

Aspartoftheprogramsintakeprocess,werankcomplaintsbyriskandfocusinvestigativeeffortson

thosethatrepresentthegreatestrisktotheCity.Thefollowingshowshowwegenerallyclassifytypesof

complaintsbasedonrisk:

HighPrioritySome

reasons

why

allegations

may

be

considered

high

priority

are

that

they

could

include

asafety

concern,loss1totheCityofmorethan$75,000,criminalactivityresultinginalossofatleast$400,high

levelinvolvement,collusionofmultiplewrongdoers,majordepartmentwideissue,orneedfor

immediateactiontostopapotentialmajorissue.Addressingtheseitemscouldtakepriorityoverother

investigationsandauditsattheCityAuditorsdiscretion.

MediumPriority

AllegationsinthiscategorycouldincludealosstotheCityofmorethan$25,000,abuseofauthority,

mediumtolowlevelemployeeinvolvement,minordepartmentwideissues,orpatternsofsmall

problemsthatcouldbecomeseriouswhensummed.Somemediumpriorityitemscouldbereferredto

departmentsfortheirreviews.

LowPriority

AllegationsinthiscategorycouldincludealosstotheCityoflessthan$25,000,isolatedinstancesof

timeabuse,wastefulpracticesthatwouldleadtolimitedgainsinefficienciesifcorrected,orallegations

thatlackcredibilityandevidence.Theofficewouldaimtoinvestigateitemsinthislist,butmaynotdoso

becauseoflimitedresources.However,ifthesameorsimilarissueswerereportedmultipletimeslow

1Losscouldentailactualorpotentiallossofmoney,waste,orinefficiencies.


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priorityitemsmaybecomemoreofapriority.Additionally,somelowprioritycomplaintscouldbe

referredtodepartmentsfortheirreviews.


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Statusofinvestigations

Morethanhalfofcomplaintsreceivedhavebeeninvestigatedandclosed

Asnotedabove,CityCouncildirectedtheCityAuditorinMarchtoestablishaWhistleblowerHotline

Program.However,theOfficeoftheCityAuditorbegantoreceivewhistleblowercomplaintsearlierin

theyear.

Many

complaints

were

received

towards

the

beginning

of

2012

around

the

time

that

we

workedonandissuedtheAssessmentforEstablishingaWhistleblowerHotline.Atotalof19complaints,covering12typesofallegations,havebeenreceived.Thefollowingshowsall

WhistleblowerProgramcomplaintsthatwerereceivedbytheOfficeoftheCityAuditorasofOctober

31,2012.

Exhibit1:NineteenComplaintsHaveBeenReported

TypesofAllegations Number Percent

AbuseofPositionorAuthority 3 16%

ContractIssue

2 11%

Theft 2 11%

TimeAbuse 2 11%

ViolateState/FedRules 2 11%

WastefulPractice 2 11%

Bribes/Kickbacks 1 5%

HiringIrregularities 1 5%

ImproperControls 1 5%

InformationRequest 1 5%

MiscategorizedExpenses 1 5%

ReimbursementAbuse

1 5%

Asexplainedinthebackgroundsection,weclassifycomplaintsashigh,medium,orlowpriority.More

thanthreequartersofcomplaintswereclassifiedashighormedium,asshownbelow:

Exhibit2:MostComplaintsRepresentedHighOrMediumPriorities

High 5 26%

Medium 10 53%

Low 4 21%

Thefollowingexhibitprovidesinformationaboutclosedcases.Wehaveclosed10ofthe19complaints

(53percent).Thereasonfortheclosureisnoted.Forcomplaintsthatweresubstantiated,asummaryof

thedispositionisincluded.


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Exhibit3:TwoComplaintsHaveBeenSubstantiatedAndThreeWereReferredToDepartments

Log# PrimaryTypeof

Allegation

Priority Status Reasonforclosureanddisposition(ifapplicable)

2 WastefulPractice High Closed Unsubstantiated: perinvestigation

8 ContractIssue High Closed Substantiated:Wereceivedacomplaintthatthe

InformationTechnology

Department

was

considering

enteringintoasolesourcecontractwithanentitythat

couldhavecreatedapotentialconflictofinterest.We

confirmedthatapotentialconflictofinterestexisted.To

resolvethepotentialconflict,thedepartmentdidnot

executeasolesourcecontract.Instead,Information

Technologypursuedtwopossiblesolutionssimultaneously

1)attemptingtofilltheneedthroughacompetitivebid

processand2)recruitingstafftomeetthedepartment's

need.Ultimatelythedepartmentwassuccessfulinits

recruitment.

13 ViolateState/Fed

Rules

High Closed Substantiated:Wereceivedacomplaintthatmany

supervisorshad

not

completed

state

mandated

sexual

harassmentpreventiontraining.Asthisrepresenteda

highriskarea,weperformedalimitedscopeauditabout

thetraining.Wefoundthatabout16percentofmanagers

whowererequiredtocompletethetraininghadnotdone

soduringthereportingperiod.Apublicauditreportwas

publishedJune7,2012.Thereportincludedeight

recommendationsandtheDepartmentofHuman

Resources,whichrunsthetrainingprogram,generally

agreedwiththerecommendationsandistakingcorrective

actions.

6

Abuseof

Position

or

AuthorityMedium

Closed Other

investigation:

According

to

the

complainant,

this

issuewasalreadyunderinvestigationbyanotherCity

department.Thecomplainantwasnotseekingareviewby

theOfficeoftheCityAuditor,butmayinthefutureifthe

issueisnotresolved.

10 Reimbursement

Abuse

Medium Closed Unsubstantiated:perinvestigation

12 ViolateState/Fed

Rules

Medium Closed Referred:todepartment

19 HiringIrregularities Medium Closed Unsubstantiated:perinvestigation

7 WastefulPractice Low Closed Referred:todepartment

11 Theft Low Closed Referred:todepartment

18 Information

Request2

Low Closed InformationProvided:Notfraud,waste,orabuse

complaint

2NotallinformationrequestsareloggedasWhistleblowerProgramcomplaints.Thisitemwasincludedbecause

thecomplainantspecificallymentionedtheWhistleblowerHotlineduringthecall.


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AsshowninExhibit4,ninecomplaintsarepending.Thetypesofallegationandthepriority

classificationsareshownbelow.

Exhibit4:TwoHighPriorityAllegationsRemain

Log# PrimaryTypeofAllegation Priority Status

1 Bribes/Kickbacks High Pending

4 Theft High Pending

3 MiscategorizedExpenses Medium Pending

5 TimeAbuse Medium Pending

9 ContractIssue Medium Pending

14 TimeAbuse Medium Pending

16 ImproperControls Medium Pending

17 AbuseofPositionorAuthority Medium Pending

15 AbuseofPositionorAuthority Low Pending

FutureWhistleblowerProgramreports

ThisisthefirstreportshowingthestatusoftheWhistleblowerPrograminvestigations.TheCityAuditor

planstoreportonthestatusofinvestigationseverysixmonths.

TheOfficeoftheCityAuditoriscurrentlysolicitingbidstoestablishathirdpartytollfreehotlinethat

canacceptwhistleblowercallsanytime.Evenafterthehotlineisactive,membersoftheAuditorsOffice

willcontinuetoacceptandinvestigatewhistleblowercomplaints.Thosewhowouldliketomake

whistleblowercomplaintscancontactanymemberoftheOfficeoftheCityAuditorbymail,phone,e

mail,or

in

person:

SacramentoOfficeoftheCityAuditorNew City Hall915 "I" Street, 3rd Floor, Room 3221,

Sacramento, CA 95814

Website: http://www.cityofsacramento.org/auditor/

AuditStaffJorge Oseguera (City Auditor)

Office: (916) 808-7270

[email protected]

Scott Herbstman (Senior Auditor)Office: (916) 808-7278

[email protected]

Felicity Wood (Auditor)

Office: (916) [email protected]

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