Committee report criticizes internal auditor, finds no fraud

lblackford@herald-leader.comSeptember 9, 2010 

  • Members of the investigative committee: Chairman George Myers, Linda Gorton, Julian Beard, Jay McChord, Diane Lawless, Cheryl Feigel, K.C. Crosbie

    Judge Roger Crittenden: Counsel for the investigative committee

    Patrick Johnston: Director of Risk Management who alleged wrongdoing in the city's insurance procurement process in comments in two fraud survey allegations

    Bruce Sahli: Director of the LFUCG Division of Internal Audit

    Logan Askew: Commissioner of Law

    Mountjoy Chilton Medley: City's external auditor

  • The report's recommendations

    ■ Take no further action regarding the fraud allegations and proposed restructuring until the state auditor's report is delivered and reviewed.

    ■ Refer the possible violations of the council's Ethics Act to the Ethics Commission for review.

    ■ Form a committee to determine the restructuring of the Internal Audit Board, its staff and the process for handling fraud allegations. Reconstitute the Internal Audit Board with a new charter and bylaws.

    ■ Establish a process for employees to report suspected wrongdoing that protects their identities.

An investigative committee of the Lexington Fayette Urban County Council criticized the city's internal auditor over the way he handled the fraud allegations of a city employee and recommended that the Internal Audit Board that oversees his work be overhauled, according to the committee's final report.

The committee did not find evidence of fraud when the city switched to the Kentucky League of Cities for insurance in 2007, but recommended that the council refer possible ethics violations in the handling of the allegations to the city's Ethics Commission. Those possible violations involve alleged reprisals against the employees who reported concerns.

The council voted unanimously to form the investigative committee after some council members said they could not get any information from Mayor Jim Newberry's administration regarding fraud allegations made by Patrick Johnston, the city's director of risk management. He questioned the city's procurement of insurance from KLC in 2007 and filled out routine fraud questionnaires in 2008 and 2009 detailing his concerns.

The exact concerns expressed by Johnston remain confidential, but the report said they suggested that during the awarding of insurance contracts: the Model Procurement Code was not followed, KLC was given preferential treatment in the bidding process, KLC did not have the legal authority or ability to manage the contract, and the council was not fully informed of the various professional analyses of competing contracts. In addition, bids were communicated to competitors.

The allegations also indicated that professionals in the Division of Risk Management were aware of conflicts of interest within the League, which were ultimately reported in the press and by the state auditor, according to the report.

Prior to the appointment of the special committee, external and internal audits by the city had found no evidence of financial fraud based on Johnston's concerns at the time.

However, in 2010, Johnston was told his job would be eliminated in a proposed reorganization. Council members deferred that job elimination this spring and decided to investigate further.

The harshest words in the investigative committee's report were directed at Bruce Sahli, the city's internal auditor, who would not speak to the committee and filed a lawsuit to block its subpoena for documents because he said confidentiality was required for his audits.

It found that Sahli "failed to adequately address the allegations" in 2009 because he did not interview affected persons nor did he report the allegations to the Internal Audit Board, which oversees his work.

Specifically, one of Johnston's claims was that another LFUCG employee had tipped off a potential vendor who later won a bid, but Sahli never interviewed the employee, according to committee members and the employee.

In addition, Sahli gave Johnston's boss, Law Commissioner Logan Askew, a copy of the 2009 allegation under the state's Open Records Act but failed to redact Johnston's name, according to the report.

Sahli also failed to notify Johnston that he had done so, even though Johnston specifically requested that he be told if the document was given to anyone, the report said.

"It's unfortunate Mr. Sahli chose not to work with the committee in the interest of transparency and good government, particularly since he already violated the confidentiality he purported to uphold," said committee Chairman George Myers, who is also a member of the Internal Audit Board.

The report recommends reconstituting the Internal Audit Board with a new charter and new bylaws, along with a new procedure for employees to report suspected wrongdoing without revealing their names.

Sahli was not available for comment late Wednesday.

"I am pleased, but not surprised, that the committee found no fraud," Mayor Jim Newberry said in a statement. "Members of my administration have conducted themselves professionally and ethically."

Committee member Jay McChord said he believes the most important point of the report is that it found no fraud.

"The first conclusion is the most important one — that there was no fraud," McChord said, adding that he looked forward to another report by state Auditor Crit Luallen, whose office also looked into the matter. Her report is expected in the next few weeks.

However, the 13-page report concluded that the "tedious, time-consuming, and costly" process was not supposed to "prove someone committed fraud."

What the committee determined, the report said, is that "no agency of LFUCG or contractor examined the allegations or the response to those allegations in any detailed manner other than whether there was any impact upon Urban County financial statements."

The conclusion goes on to say that had the allegations been presented to the Internal Audit Board or if administration officials had responded to some council members' questions, "there is a strong possibility there would have been no need for the committee."

"I think it's unfortunate it took this type of investigation to get some transparency in government," Myers said. "Transparency in government is important to the public trust, and if it took this committee to get that transparency, then it's worth it."

The committee's seven members voted unanimously on Wednesday to approve the final report and give it to the full council for discussion at Thursday's regular meeting.

"There are a number of recommendations that will be taken up by the full council, and out of those discussions, there will be other recommendations and suggested policy changes to make government better," Myers said.

Reach Linda Blackford at (859) 231-1359.

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