Utility pays for fraud investigation, but will handle the matter 'in-house'
Pezzullo said Cady retained his firm to review call-out reports for possible falsification of hours worked by LMUD employees.
Ray Luhring, LMUD’s new general manager, characterized the issue as a “confidential, employee matter.”
He said Pezzullo’s work was based on action taken under the direction of the former general manager to direct an outside investigation.
With the change in the leadership on the board — three newly appointed members — and Cady’s firing, Luhring said the board discussed the issue at its January meeting and decided it should be handled in-house.
Luhring said that decision was in the best interest of the district.
“We don’t want to be jumping over dollars to save nickels,” he said.
Apparently Cady was serious about the investigation. According to Pezzullo’s documentation, included in the LMUD board packet, the accountant began meeting with Cady on Dec. 27, 2007 to discuss “preliminary findings by Mr. Cady, which were sent to various law enforcement agencies and the board of trustees (sic).”
According to Pezzullo’s bill, he met with Cady, Luhring, Steve Gross, an LMUD attorney, various LMUD employees, Jeff Atkinson, Susanville’s chief of police, and had a 30-minute phone conversation with Bob Burns, Lassen County’s district attorney.
According to his bill, Pezzullo worked 40.75 hours on the issue.
Pezzullo expressed his displeasure with this item being included in the board packet.
Director Wayne Langston said he saw no reason for this information to be included in the board packet because the board had already decided this was a bill it had to pay.
When he asked why the information was included, Bill Stewart, LMUD’s controller said, “I was asked to place it in here for the board’s consideration in terms of ratifying the contract and authorizing payment,” because there was billing beyond the point in time when LMUD had ordered the accounting firm to stop working.
Board members wondered why Pezzullo continued working on the matter after he’d received a letter asking him to stop working for the district and why the board had not received a preliminary findings report mentioned in the billing.
Director Jay Dow said the board had an obligation to pay the bill and Pezzullo had an obligation to provide the preliminary report he billed the district for.
“We want to get what we’re paying for,” Dow said.
Pezzullo said he couldn’t write a report until the investigation had been completed because the sensitive nature of the information and it’s possible effect on people’s lives. But he said he had to continue the matter and would now have to assume a number of costs in the matter.
He said his firm no longer wanted to work for LMUD, but he hoped the matter would be referred to another firm so the investigation could be properly completed.
“Once you put me in a position where I have knowledge there’s a possibility of the misuse of public funds, I cannot quit. I cannot quit and walk away and let it go. I have to follow this through …
“You have a problem. You’ve been notified of it. You have to take it. If you don’t, I will take it. I’ll have to do it through some kind of means. I’m not sure how, but I’m addressing that right now, and I’m looking into my options. As to a formal report, you will not get one until it’s complete, and you may not be the entity to get it. ”
Jamiee Jones, LMUD’s attorney, said the board’s direction was to handle the matter in-house. She also said she wasn’t sure what Pezzullo’s ethical obligations as a CPA were, given the circumstances.
Board President Bud Bowden said, “I do know the district attorney referred it back to us as an in-house matter, so I don’t see any problem with us handling this in-house.”
“You can handle it anyway you want,” Pezzullo said. “If we’re not apprised of the way it’s being handled, we’ll have to handle it under our efforts. We’ll have to handle it our way. Unfortunately not at your expense. We’ll have to handle it at my own expense because I’m aware of the problems you have now. I didn’t want to be made aware of these problems, but I have, and you have to do something about it. If you don’t do something about it, it’s called co-conspiracy, and you’d be just as liable. If there’s criminal time, you could do it also, I don’t really care. It has to be resolved.”
Pezzullo gave the board members copies of three letters, correspondence between his firm and LMUD.
Director Wayne Langston said the letters already had been included in the board packets. He said he understood the authorities were not going to pursue the matter and the district was going to “move forward.”
What’s in the correspondence?
Pezzullo said LMUD’s order to stop working and end his investigation thrust him on the horns of an ethical dilemma.
In his first letter Pezzullo acknowledged he had been asked to stop work on the investigation of the district’s Call-Out Reports from Jan. 1, 2005 through Dec. 31, 2007.
“In our preliminary review of supporting documentation,” Pezzullo wrote in the Jan. 29 letter, “we found that five of 10 samples of the Standby Call-Out reports required further investigation. There were discrepancies in overtime reported and corresponding telephone records. We were unable to complete our review of these records due to our not being provided the GPS vehicle records and the answering service logs. We also noted that Acting General Manager Ray Luhring had initialized his approval as the supervisor of overtime on seven of the 10 Standby Call-Out Reports we reviewed.”
Pezzullo wrote after the firm had been asked to stop work, he contacted the California State Board of Accountancy and the firm’s errors and omissions insurance carrier.
“They have advised us that we need to obtain documentation that the examination will be completed and the results thereof,” Pezzullo wrote. “We cannot stress how important it is to have a complete, thorough and independent investigation performed when public funds are involved.”
Jones responded to Pezzullo in a letter on Jan. 30. She asked Pezzullo to advise the board whether the 10 samples had been provided by Cady or had been selected at random.
“While the district can certainly appreciate your requirements and duties as a certified public accountant to place the California State Board of Accountancy and your E & O insurance carrier on notice regarding alleged discrepancies, please be advised that we will be providing no further documentation to your firm for review.”
Jones also asked for “back up documentation for this invoice, including detailed time and work descriptions … ”
On March 11, Pezzullo advised the board, “You have requested that we provide the board with a report of our findings. We feel that we have already notified the board of our concern, preliminary findings and their obligation to complete the project. Due to the potential legal ramifications which could result from the review of the records, we are unwilling to prepare a report without completing our review.”
Pezzullo also told the board the 10 samples had been selected at random.
The accountant also said Luhring advised him in December that he would find “discrepancies in the months I selected for review and that he had other documentation in his possession about falsifying overtime that he wanted me to look at.
“I now have a legal, professional and moral obligation to this matter. Also, as a ratepayer, I have a right to know the outcome, and I will hold the LMUD Board of Directors responsible to uphold the oaths of office they took and its responsibility,” Pezzullo wrote.
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