Doud Investigation – A Velvet Covered Hammer

Consultants find it is not possible to determine the reasonableness, appropriateness, applicability of the work, or the fairness of the cost to the city for the services of Kindel Gagan or the Davis Group – Total Cost: $1,563,273.00

The Whistleblower Report

Highlights of a Sept. 7, 10-page whistleblower report obtained by the Beachcomber alleged serial contract fraud and misappropriation of public funds in excess of $1 million over the past 15 years by means of a payment scheme between City Auditor Laura Doud and a regional lobbying firm – Kindel Gagan, Inc. was published on Feb. 17. It can be read here: https://beachcomber.news/content/fraud-misappropriation-public-funds-city-auditor-alleged

A second article reporting that a financial consulting firm – RSM – had been contracted by the city to investigate the allegations was published on Feb. 24 along with information that the district attorney had opened a criminal investigation.

The article also included reporting on the Davis Group, a lobbying firm involved in managing Doud’s first campaign for the city auditor’s office. 
That article can be read here: https://beachcomber.news/content/former-mayoral-candidate-rationalizes-alleged-payment-scheme

The full 10-page whistleblower report (name redacted) obtained by the Beachcomber and used as the basis upon which the prior reporting was accomplished – can be read here: https://beachcomber.news/content/redacted-whistleblower-report

On March 2 the Long Beach Records Center responded to a Public Records Act (PRA) request made Jan. 24 by the Beachcomber to obtain financial documents that would support the whistleblower’s allegations.

Instead, on March 2, the city provided the Beachcomber with RSM’s Investigation Report, also dated March 2.

The Records Center message stated: “On Sept. 7, 2021, a complaint was submitted to the city by a whistleblower. On Oct. 1, 2021, the city attorney’s office engaged the RSM US LLP (RSM) to investigate and report findings of the whistleblower complaint. Attached please find a copy of the Investigation of allegations raised in a whistleblower complaint alleging misconduct by the city auditor and the findings and conclusions of RSM.”

The 304-page report includes 44 pages that outline the investigation and findings, 22 pages of data and 66 pages of supporting documents. The full report can be read here: https://beachcomber.news/content/lb-auditor-investigation-report

Cost to the Taxpayer

RSM reported that the allegations by the whistleblower cover the period between late 2006 “shortly after Ms. Doud’s election as the city auditor” and Sept. 7, 2021, the date of the complaint.

The dollars distributed to Kindel Gagan at Doud’s direction over the period covered by the investigation was $1,036,200 while $527,073 was paid out to The Davis Group. The total: $1,563,273.

RSM Conclusions

In the summary portion of the report RSM stated that the firm “was able to substantiate in part” allegations related to misappropriation of city funds through contract fraud but that “RSM did not find clear evidence of misappropriations; “however, the manner in which the Kindel Gagan contracts and invoices were documented was lacking in detail and city procurement policies that establish best practices were disregarded.”

RSM confirmed that Kindel Gagan invoices were paid without a contractual agreement for services during certain periods and “based upon a review of Mr. Gagan’s professional background, he appears to have the requisite expertise to advise the city auditor on financial and CalPERS matters as proposed in the 2016 through 2017 contract” and that “RSM confirmed that invoices for Kindel Gagan contain generic descriptions such as ‘professional services’ without detail of deliverable or hours worked.”

The report did not address whether or not Doud’s duties required advice related to “financial and CalPERS matters” nor did it examine the available expertise of other firms that could engage in competitive bidding for Gagin-like services.

In its summary related to the Davis Group in which the whistleblower alleged that the political campaign consulting firm received monthly payments of $3,000 or $3,600 “for services that are not fully clear” and that the scope of services is “highly vague” and “greatly overlaps with the work performed by the in-house communications director” the investigation report said that “RSM was able to substantiate in part the allegations, “however there were periods of time that RSM could not identify a written work product.”

RSM reported that invoices for the Davis Group contain “generic descriptions such as professional services’ without detail of deliverables or hours worked” and that the “scope of services outlined in the Davis Group statement of work from 2019 through 2021 appear to overlap with the duties of the city auditor communications officer.”

The primary conclusion offered by RSM in the investigative report related to payments made in addition to “not being able to find clear evidence of misappropriation” is that invoices for both organizations “contain generic descriptions such as professional services without detail of deliverables or hours worked” and “Therefore, it is not possible to determine the reasonableness, appropriateness, applicability of the work, or the fairness of the cost to the city for the services of Davis Group…” and “Kendel Gagan.”

Highlights

The following are 20 highlights taken from the RSM Report:

Doud disregards multiple City regulations including her own City Auditor’s Guide to Payments

 “As an elected official, Doud is not required to comply with city regulations; however, she disregards multiple regulations as well as The City Auditor's Guide to Payments. Although compliance with city regulations is requested and not required for the city auditor, best practices would require the city auditor to follow policies and ensure regulations are up to date and being followed.”

Doud did not follow her own recommendations in her audit reports on contracts/procurement

“Doud published audit reports in which she makes recommendations to various city entities regarding procurement, contracting and invoicing that she herself does not follow.”

No competitive bidding was performed

“We did not identify any documentation showing that Doud sought or obtained competitive bids when engaging Kindel Gagan and the Davis Group.”

“We did not identify documentation that suggests the project scopes were supplied to vendors other than Kindel Gagan and the Davis Group. No documentation of bidding or consultation of additional proposals was appended to the identified Vendor Request Forms.”

Statements of Work (SOW) were vague and did not contain deliverables, milestones and reporting requirements

“SOWs provided by both Kindel Gagan and the Davis Group used general terms such as "advise," "assist," "monitor" and "review." Expectations of specific deliverables and the frequency of such deliverables is not defined within the SOWs.”

Invoices were vague and did not contain back up support

“Invoice descriptions were ambiguous, stating "consulting services." Additionally, no back-up support was provided to substantiate the services that were billed on each invoice.”

“We noted that the invoice description stated "consulting services" with no detail of time worked or specific documentation provided to support the contracted work.”

Gagan submitted invoices at the first of each month in which services were to be provided (in other words, invoices were submitted before work was actually performed)

“Kindel Gagan submitted invoices dated at the first of each month for the month in which services were provided (e.g., an invoice dated 9/1/2016 has City of Long Beach and the description: "Professional services for the month of September 2016")”

50% of invoices from Davis Group were submitted prior to the end of the month

40% of payments to Davis Group were made in advance

“Per review of invoices provided by Financial Management, we noted that approximately 50% of invoices from Davis Group were submitted prior to the end of the month in which services were provided. We noted approximately 40% of Davis Group invoices were paid in advance (for example invoice #210907 with description 'Consulting – September 1-30, 2021' was approved by Doud on September 7, 2021 and paid on September 8, 2021).”

Total payments were more than the total amount agreed upon in the Statement of Work

“The Kindel Gagan SOW, dated Dec. 17, 2015, identified a monthly retainer of $5,600 for 24 months equaling a total of $134,400. Kindel Gagan billed and was paid $5,700 each month for a total of $136,800 during this period.”

A Blanket Purchase Order (BPO) was backdated and an invoice was submitted 25 days before the period ended

“RSM noted Davis Group invoice# 200102 in the amount of $18,000 for the period January 1 through June 30, 2020 was submitted on June 5, 2020. Through the review of emails, we noted the following: 1) the invoice was originally submitted against an expired 2019 Munis Contract; and 2) the payables department returned the invoice, at which time a new SOW dated January 2020 and Munis Contract with an effective date of January 2020 were created.”

Minimal documentation supporting services billed under the purchase order

“We identified minimal supporting documentation that showed services billed by Kindel Gagan and Davis Group aligned with the BPO/Munis contracts.”

Payments were made even though blanket purchase orders were never created or were expired

“We identified periods for Kindel Gagan and Davis Group in which both consulting groups continued to invoice and receive payment for services through periods in which the BPO/Munis contracts were never created or were expired.”

“We did not identify any documentation supporting the lack of BPO/Munis contracts for either Kindel Gagan or the Davis Group. Additionally, one to two sentences were provided as explanation for not obtaining bids or following city procedures for procuring consultants.”

“Additionally, Kindel Gagan has been paid by direct payments without a BPO/Munis contract or a PO since March 2019.”

No verification of consultant time spent and tasks performed

“We did not identify any support that suggested consultant time spent and tasks performed were monitored or verified against the contracts provided.”

“We did not identify any email exchanges that revealed the approving person verified specific work was performed in alignment with the contract. Invoice descriptions were ambiguous by stating only that "consulting services" were provided. No work product or report of hours spent and tasks performed were appended to the invoices billed to the city.”

No work product found in the network search

“We were unable to identify substantive work product from Kindel Gagan in the network search.”

“We were unable to identify substantive work product from Davis Group in the network search.”

While Gagan was supposed to provide CalPERS financial analysis, emails between Doud and Gagan show limited discussion of CalPERS and pensions

“We noted a total of 32 emails from Doud to Gagan and 53 emails from Gagan to Doud that mention CalPERS from September 2006 through February 2011.35 Although CalPERS was referenced in the electronic record of POs in 2012, 2013, 2016, and 2017, no emails were identified in the eDiscovery Search between Gagan and Doud that mention CalPERS between March 2011 and February 2017 or after August 2017.”

There were extensive periods where there was no email communication between Doud and Davis Group, even though they were paid during those periods

“We noted periods of no email activity from members of Davis Group to Doud during periods of payments to the Davis Group, including no email exchange in November 2019 and February through April 2020. RSM notes this period of time corresponds with invoice # 200102 submitted on June 5, 2020 in the amount of $18,000 for the period January 1 through June 30, 2020. RSM also notes the Munis Contract covering January 1 through December 31, 2020 was submitted on June 9, 2020.”

Doud claimed that the Davis Group consulted to her starting in Jan. 2019 on Queen Mary issues, although the first mention of the Queen Mary in their emails did not appear until Sept. 2019

“Doud and the Davises stated that Doud requested services from Davis Group again starting in January 2019 regarding Queen Mary issues. Per review of emails, RSM noted the first mention of the Queen Mary between Doud and the Davises during this time was Sept. 27, 2019. RSM also notes Gagan was consulting with Doud regarding the Queen Mary during this time.”

Davis Group claimed Doud used her Yahoo email account to communicate with them because she had problems with her city email, but neither Doud nor Gagan mentioned any issues with Doud’s city email account.

“The Davis’ stated that during the beginning of the pandemic, Doud had issues with her city email account and primarily used her Yahoo account. Upon review of emails in the eDiscovery search, we noted the use of Doud's Yahoo email account prior to the pandemic. Neither Doud nor Gagan recounted issues with Doud's city email account at any time. Doud stated the Davis Group is the only city vendor that she intentionally communicated with using her personal Yahoo account. Doud stated that although it wasn't intentional, she did also communicate with Gagan using her personal Yahoo account.”

Doud claimed services that were not part of the Statement of Work

“Additionally, the Davis Group's SOW for October 2020 through September 2021 makes no mention of working on the Queen Mary audit report. However, Doud states that the Davis Group's services, in addition to Kindel Gagan's, were used to advise her on Queen Mary matters.”

Expert Analysis of RSM Report

Upon receipt of the RSM Report on the afternoon of March 2 the Beachcomber asked lifetime Long Beach resident Daniel Miles, 66, to review and comment upon the RSM report.

Miles, a finance and audit expert has worked as an active CPA and public company CFO since 1983. He also provided emergency financial services to the Port of Long Beach for a 9-month period in 2014.

After reading the two Beachcomber articles on the Doud scandal and consulting with friends and family, Miles filed papers with the city clerk last week and became a candidate for the position of LB City Auditor in the upcoming election.

Miles offered his opinion that “the whistleblower’s complaint was documented thoroughly enough that it could not be ignored.“

He added that that the city should have considered a firm other than RSM to conduct the investigation. “They could have hired a firm like Ernst and Young and that firm could have been even more independent by sending in their Miami office to do the Investigation.”

Miles on the RSM Conclusions

“They left her wiggle room,” he said.

“They could have said things more directly, primarily because they documented the bad behavior. But instead they said, it’s possible but we don't have a full story.”

Miles continued: “RSM was only able to substantiate part of the allegations. What they should have said – in my opinion – is they found that she overrode her own controls and they should have made that their overall conclusion.

“My point is RSM was able to substantiate the allegations in the whistleblowers report and should have said so. Because that is a fact. But when they add to it that they did not find clear evidence of misappropriation, that's just an opinion.

“The allegation that no work was performed is confirmed when they say that no detail was being required by Laura at any time when the documents came to her. I can tell you that in my CFO roles no one ever paid for professional services without detail. That’s a red flag right there and you don’t have to go any further.

“It was also clear there was a duplication of effort between what the Davis Group said they are doing and what the communications officer in her office is already doing. That’s a duplication of effort. Another red flag.

“Laura (Doud) overrode internal controls which means she overrode her own recommendations. She’s in charge of monitoring and setting policy for internal controls, especially since they instituted a new accounting system.

“She would have had tremendous input and responsibility for ensuring that the internal controls were solid. She in fact wrote the controls for the old system and she wrote them for the new system – and broke both according to the RSM report.

“There is a way to opt out of controls. Elected officials have the ability to bypass internal controls for whatever they believe is in the best interest of the city, but what the RSM report did not say is who should the request to opt out be made to? And in what form?

“Since Laura is the one who wrote the controls, wouldn’t it make sense that when you’re looking for an exception you should make that request to her?”

“A well written control would say ‘I can’t make the request for myself, so when I want to opt out, I have to go to the city attorney, mayor, city council, whoever. You need to respond to somebody.

“The bottom line to me is that RSM found that Doud was the chief person in the city to watch how disbursements are made and she watched all these disbursements go out to someone she had a direct business relationship with and in so doing she overrode her own controls to the tune of $1.6 million.”

Will Doud’s Own Words Sustain Criminal Charges?

In a Press-Telegram guest commentary written by Laura Doud on May 22, 2015, the city auditor contradicted practices she had engaged in up to that time – and since – relative to her relationship and business practices with Kindel Gagan and the Davis Group.

Doud wrote in part:

“The only way to reduce the risk of fraud is to ensure adequate processes are in place that limit the opportunity for inappropriate behavior to occur.”

“When faced with limited time and resources, having good anti¬-fraud controls in place is not always seen as convenient or important. However, lack of proper controls is an automatic red flag as it creates an environment which is highly susceptible to fraud.”

“Long Beach is not immune to the occurrence of fraud. Not too long ago, an employee in Animal Care was convicted of embezzling $600,000 in license fees. My office confirmed controls safeguarding revenue were basically non-existent and directly contributed to the employee’s ability to embezzle the money.”

“My job is to keep evaluating processes and alert management and the public of instances where the city’s assets are in jeopardy.”

The full commentary written by Doud can be read here: https://www.presstelegram.com/2015/05/22/why-internal-audits-matter-gues....

Stephen Downing is a Long Beach resident and retired LAPD deputy chief of police.

stephen.beachcomber@gmail.com