I commented on the controversy concerning the City of Bell audits earlier this week.
I also looked at the audit reports issued by Simpson and Simpson for the City of Los Angeles, the latest available report covering the fiscal year ended June 30,2009.
The report stated that the financial statements were presented in accordance with GAAP and fairly represented the financial condition of the city. There was a qualification concerning the internal controls as they related to the process used to prepare the statements; I commented on that as well.
There was nothing in the reports pertaining to the future prospects for Los Angeles.
Given the state of the city’s pension plans, the escalating costs of health care, and the erosion of the general fund, I was surprised there was no mention of whether the city could continue as a going concern in the absence of major cost reductions.
Let’s go back a few years in time to when the City of Vallejo was in a fiscal death spiral.
Vallejo voted to declare bankruptcy in May 2008, but the external auditors gave the taxpayers a heads-up as early as the issuance of the June 2007 financial statements. In Maze and Associates’ independent auditor’s report accompanying the statements, a qualified opinion was given concerning whether Vallejo would continue as a going concern. http://phinvv.files.wordpress.com/2010/11/vallejo-auditors-report.pdf – read the third paragraph from the bottom of the first page. It told the story in no uncertain terms.
Los Angeles is facing similar problems to the ones that drove Vallejo into bankruptcy, but there was no hint of them in Simpson and Simpson’s report covering the 2009 fiscal year.
I believe the City Council’s Finance and Budget Committee should question Simpson and Simpson about the assumptions they used to determine whether the city will continue as a going concern.
I am not suggesting the city should or should not receive a qualified opinion. However, in light of what many experts consider to be a weakening trend for the city, the auditors and the Council owe the stakeholders an independent assessment of where we are headed.
By the way, the June 2006 Vallejo financial reporting package included a Certificate of Achievement for Excellence in Financial Reporting – the same type of certificate that has been displayed in the Los Angeles reports for years (these certificates are awarded to the city department responsible for preparing the information, not the CPA firm).
These certificates amount to ninth-place ribbons and have no place in a report. To a layman, they could give a misleading impression that the information presented indicates a state of financial health.
Please read this excellent synopsis about “going concern.”