News
Central Basin auditor resigns due to lack of records and ongoing ‘mismanagement’ – Whittier Daily News
Central Basin Municipal Water District office, as shown on Dec. 10, 2020. (Staff photo by Mike Sprague)
An accounting firm hired to audit the tax records of the Central Basin Municipal Water District threw in the towel last week, claiming it could not finish the work because a lack of records and “ongoing mismanagement” had undermined the integrity of the review.
Central Basin hired Harshwal & Co. in November 2022 to complete a routine year-end audit of the district’s finances for the 2021-22 fiscal year. However, a year and a half later, the review is still incomplete and may now have to be restarted, records showed.
In a June 3 resignation letter, managing partner Sanwar Harshwal said auditors “found significant internal control deficiencies that require immediate attention.”
“We have dedicated our efforts to correct these deficiencies, but their persistence raises significant concerns regarding the reliability and accuracy of the financial information provided to us,” Harshwal wrote. “Additionally, challenges associated with incomplete and insufficient information obstructed our ability to conduct a complete and comprehensive audit.”
Central Basin is a water wholesaler serving 1.6 million people from 24 cities and unincorporated areas in southeast Los Angeles County, including La Habra Heights, East Los Angeles, Signal Hill and parts of Compton and Carson. It is years behind annual audits that are supposed to be completed six months after the end of the fiscal year.
Lack of ‘internal controls’
Harshwal’s audit for 2021-22 found “significant variations” between the agency’s internal ending balances and supporting documents, according to a draft supplied to the Central Basin at the end of May.
“There was a lack of established internal controls and processes over the financial reporting process to ensure timely and accurate financial reporting,” the auditors wrote. Such a weakness generally increases the chance that “fraud or material errors will occur,” according to the draft.
Auditors initially issued a “qualified opinion,” which indicates that problems exist, but are not widespread, in their May 16 project. However, days later, a Harshwal employee told Kenneth Pun, the contractor who served as Central Basin’s chief financial officer, that the company intended to downgrade his opinion or resign.
Previously fired Central Basin most of its staff, including its internal CFO, in 2020 and contracted for these services in subsequent years.
Harshwal’s demotion would have landed the agency the second-worst possible audit opinion and put its financial credibility at risk. The lowest classification — called “disclaimer of opinion” — essentially states that an auditor was unable to form an opinion due to the amount of missing information. Harshwal reportedly tried to resign several times from February to May, but was repeatedly persuaded by staff to stay on.
The deficiencies described by Harshwal are not new discoveries. A previous accounting firm hired to complete a 2020-21 tax audit noted exactly the same problems during its review and Central Basin committed to reforms in response, records showed. That company, Maze & Associates, delivered its audit in September 2022 and terminated its contract with Central Basin a month later.
Both Maze & Associates and Harshwall & Co. – hired as Maze’s replacements – originally received three year contracts, but chose to resign early. Maze’s completed audit indicates it had to make “$2.1 million in adjustments” to the district’s balance sheets. This covers about 10% of the district’s overall budget.
‘Worrying’ dismissal
Central Basin’s newly hired interim general manager — Elaine Jeng, who took the helm at the end of May — said Harshwal’s resignation is “concerning as it signifies a lack of confidence in the district’s financial records.”
Although her knowledge of the district’s operations is currently limited, resolving the issues highlighted by Harshwal is a “priority,” she said.
“In the future, with the support of the Board, the District’s plan is to request the services of another financial audit firm to complete the audit for FY22, FY23 and FY24,” Jeng said via email. -mail. “The District will seek to improve the preparation of supporting data to support financial records. This may require temporary staff increases and dedication of internal resources to this focus.”
Jeng will present a list of possible replacement companies to the agency’s board of directors in the near future, she said.
“My priority as IGM is to ensure that the District produces a report from a reputable company that accurately reflects the organization’s financial situation,” she wrote.
Financial team resistance
Pun Group, the contractor that serves as its finance department, internally rejected Harshwal’s findings, according to an email obtained by Southern California News Group. Pun told then-acting general manager Victor Ponto that his team strongly disagrees with Harshwal’s statements about “inadequacies in accounting records.”
“We have invested considerable time and effort in correcting any misstatements and addressing all concerns raised by the audit team,” Pun wrote in his email. “This development is unprofessional and unacceptable, especially given the extensive efforts we have made to ensure the accuracy and integrity of our financial statements.”
Pun recommended scheduling an urgent meeting with the Board of Directors to discuss next steps, including the possibility of “pursuing legal action” against Harshwal. However, at this time, the board is not expected to meet again until its regularly scheduled meeting at the end of June.
“It is crucial that we address this issue promptly to maintain the integrity of our financial reporting and defend the District’s reputation,” Pun wrote.
‘Totally negligent’ management
Board director Leticia Vasquez condemned the idea of prosecuting Harshwal for “simply doing his job.” The issues identified in the audit and resignation letter are consistent with concerns she has expressed about the district’s finances over the past three years, she said.
“For the last three years, this is how this agency has operated,” she said. “The board has been grossly negligent in its responsibility to the agency and the public we serve.”
The reasons behind Maze & Associates’ resignation nearly two years ago were never discussed by the board, she said.
Past problems
Vasquez supported proposals to put general manager Alex Rojas in the role paid administrative leave and for meaunch investigations in his administration as a result of his concerns about the district’s finances. Rojas was charged by the Los Angeles County District Attorney’s Office in August 2022 for allegedly accepting $400,000 in bribes while serving as superintendent of the Bassett Unified School District. Despite the arrest, he continued to run the water district for nearly two years until the board placed him on leave following a change in political power in early 2024.
The board majority initially allowed Rojas, who is often credited with stabilizing the district after a particularly tumultuous period, to stay because the criminal case was – and is – still pending and was considered unrelated to his new role.
The turning point came after Vasquez, while suing the agency he represents over Rojas’ alleged treatment, discovered a link between Rojas’ co-defendant in the bribery case and a contractor hired by Central Basin.
The testimony revealed that Capstone Partner Groupa construction management company contracted by Central Basin, was owned by a longtime employee of Central Basin. Del Terracompany involved in the Rojas case.
Rojas has denied any involvement in Capstone’s selection and claims he was unaware of any ties between Capstone and Luis Rojas, his co-defendant, until after Capstone terminated his contract in August 2022.
Much of Capstone’s work with the district occurred during the fiscal year that was under review by Harshwal, according to board director Juan Garza.
“The critical nature of this particular audit is that it reflects a period in our agency when Capstone was providing services,” Garza said. “Going forward, we need to find out what exactly happened and we are committed to doing so under the new management team.”
A separation audit and forensic investigation regarding the district’s hiring of Capstone is still pending.
Garza said it is concerning that the district still does not have a complete accounting of “activities and transactions that occurred nearly two years ago.” He questioned why the district never implemented proposed reforms in response to Maze & Associate’s 2020-21 findings.
“We have two prestigious auditors who leave as soon as they finish their first year with us,” Garza said. “It is highly disturbing and is an independent message that our agency’s finances and controls are not accurate and that we must uncover the truth to restore our agency’s credibility and, more importantly, our agency’s control measures and operations. .”