Pauly Rogers and Co., the auditing firm that gave the city of West Linn clean audits as an employee embezzled $1.4 million over a five-year period, is being investigated by its state oversight agency on complaints of professional misconduct.
The Tigard-based firm, which has dozens of contracts with public agencies and nonprofit organizations throughout the Portland metro area, is under scrutiny by the state Board of Accountancy for both its work in West Linn and for a recent audit the firm completed for the Portland Public School District. In that case, the district filed a complaint detailing concerns about the methods of a Pauly Rogers auditor, noting missing paperwork and violations of generally accepted accounting principles.
'I would expect a lot of concern and nervousness on the part of that firm at this time,' said John Atkins, spokesman for the city of West Linn.
The city of Lake Oswego terminated its contract with Pauly Rogers in May, shortly after the theft in West Linn was discovered.
Pauly Rogers' president, Washing-ton County Commissioner Roy Rogers, said the complaints involve audits supervised by his former partner, L. Parry Ankersen, and that he was not informed about the complaints until recently.
'I was not involved with the preparation, supervision or the review of anything regarding the city of West Linn, and I have no knowledge of any of the activities,' Rogers said.
He said he also did not participate in the Portland Public Schools audit.
'That complaint, if you read it, is focused on Mr. Ankersen,' Rogers said.
Ankersen denied any wrongdoing. He said he recently left the Pauly Rogers firm and moved to a new office in Lake Oswego. Ankersen declined to discuss the topic further, saying it was a private matter.
'These matters will be investigated,' he said in a written statement.
'I intend to cooperate fully with the board. I expect that there will be no adverse findings with respect to my work on these audits.'
The West Linn complaint
In a letter the state Board of Accountancy sent to Rogers dated June 16, the board said it planned to look into whether or not the firm violated the board's code of professional conduct.
Enclosed with the letter was an Oregonian article about the arrest of Elma Sandoval Magkamit, West Linn's former finance director. Magkamit was later found guilty and sentenced to eight years in prison for stealing more than $1.4 million from the city between September 2000 and March 2005.
Also enclosed with the letter were copies of the independent auditors' reports Pauly Rogers' submitted to West Linn for the fiscal years ending June 30, 2001 and June 30, 2002 - both of which contained boilerplate information declaring a clean audit, meaning that the auditor had found no false or missing information important enough to cause the city concern.
Magkamit, during the time of the June 30, 2001 audit, stole nearly $200,000. During the period of the June 30, 2002 audit, Magkamit stole more than $300,00, according to a later forensic audit.
The amounts equal about 2 and 3 percent, respectively, of the city's annual operating budget.
In a July 6 response to the board's complaint, Ankersen took responsibility for the audit work, but said he could not be held responsible for the fraud.
'Ms. Magkamit's alleged fraudulent activity was well disguised,' he wrote. 'She successfully designed her conduct to avoid detection.'
City officials and the forensic auditing firm hired by the city after a new city employee discovered the theft characterize Magkamit's fraud differently, saying Magkamit's theft was crude and simple and that she left trails throughout her bookkeeping.
'It is difficult to distinguish between error and intent to conceal due to the poor state of accounting oversight,' wrote Financial Forensics, a forensic auditing firm in Lake Oswego.
The forensic auditors' report, released in October, said Magkamit had unchecked access to the accounts payable system and exploited her position by generating extra checks and writing them out to a bogus consulting company, 'Magkamit Consulting.' The amounts of the checks ranged from about $5,000 each in 2000 to more than $34,000 each by the spring of 2005.
Magkamit then deposited the checks in a personal account, and altered the city's bank statements using scissors, Wite Out and a photocopying machine to disguise documentation of her withdrawals.
The bookkeeping, the forensic auditors said, was wildly disorganized, as Magkamit attempted to remain undetected and to keep the city's accounts from being overdrawn.
'It's clear there were certainly accounting practices that were fairly standard that weren't happening, as well as basic controls,' said City Manager Chris Jordan.
Bank reconciliations (the comparison of the bank statements with the city ledgers, a fundamental control tool) did not agree, nor were they done in a timely matter. In one case, bank reconciliations were prepared 10 months to a year after the respective months ended, the forensic auditors said.
Many journal entries in the city's general ledger also did not have supporting documentation, the forensic auditors said. Cash receipts were found to be under-reported or deleted. Checks were not accounted for within the check register.
'Given the myriad of uncorrected errors and journal entries made within the general ledger, it would be inordinately cost-prohibitive to ascertain to what extent individual funds or departments may have been affected by the alleged embezzlement,' the forensic auditors said.
In a November 2006 sentencing memorandum sealed by the Clackamas County Circuit Court, Magkamit's attorneys also cast the theft as crudely done.
'That Ms. Magkamit's methods to steal funds from the city were relatively unsophisticated is also reflected by the fact that the city is commencing a lawsuit against the auditors claiming that the thefts should have been easily detected had auditors followed a few basic protocols in examining what should have been obvious deficiencies within the internal controls then existing in the finance department,' wrote attorney Keith A. Pitt.
Atkins, the spokesman for the city, would not confirm that the city is intending to file the lawsuit.
'We're moving aggressively to recover as many of the funds stolen as we can,' Atkins said. 'The city is considering all of its options.'
Recently, the city hired new auditors, Talbot, Korvola and Warwick, to complete 2004 and 2005 audits for the city, to help improve the city's bond ratings. But the auditors will be unable to issue clean audits, Jordan said, because Pauly Rogers is refusing to release work papers from their previous audits of the city.
Pauly Rogers had been the auditing firm for the city for 10 years; Ankersen did the auditing work for the past five years before West Linn terminated the contract in May.
'We are not getting the past records,' Jordan said. 'It is standard practice that those records are provided to the new auditor from the previous auditors. But we are not receiving those.'
Rogers said he knew the city was interested in getting the work papers, but that he was unaware that they were having problems.
'Mr. Ankersen is now in a firm of his own and he has the files for the clients he worked with,' Rogers said. 'I don't have them.'
The Portland schools'
The Portland Public School District complaint with the state Board of Accountancy was filed against Ankersen and Pauly Rogers Oct. 27. At the time, the firm had been the district's auditor for seven years. Recently, the district terminated its contract.
In the complaint, Heidi Franklin, the district's chief financial officer, said an audit done by Ankersen and approved by the school board was sent to the U.S. Department of Health and Human Services in December 2005. In September, HHS told the district that it was rejecting the audit because it did not meet federal auditing requirements. Agency officials told Franklin that months of back-and-forth discussion between HHS and Ankersen had not solved concerns.
She said she also learned that HHS had had problems with Ankersen's audits before, but had eventually worked them out.
'Certain peculiarities that occurred during the fieldwork take on new meaning in light of these developments,' Franklin wrote in her complaint. 'Neither the comptroller nor I (was) asked the usual checklist of questions regarding internal control (checks and balances within the system). There was unusually minimal interaction between the auditors and district finance department staff.'
She said Ankersen told the district that certain work papers he should have kept on file were missing. She also noted that a member of Ankersen's auditing staff was still doing detail work in the finance department after a final draft of the audit was presented to the school's Finance, Audit and Operations Committee.
'When asked the likelihood of him finding something that would alter the report, he said he expected not, that all he was doing was finishing some documentation,' Franklin wrote.
Of the work papers Franklin's staff did review after learning that HHS did not accept the audit, Franklin said she found that the papers did not 'contain sufficient information to enable an experienced auditor having no previous connection with the audit to ascertain from them the evidence that supports the auditors' significant conclusions and judgments.'
In the end, HHS allowed the school district to resubmit its audit - but only if Ankersen and his staff had nothing to do with it, Franklin said.
Rogers said he fixed the audit for the district.
A new auditing firm, Talbot, Korvola and Warwick - the same firm now doing the West Linn audits - was recently awarded the contract to do the district's independent auditing.
The complaints' status
The two investigations by the Board of Accountancy are still in the beginning stages, said the board's administrator, Carol Reeves.
She said that although both complaints are high priorities - the board itself initiated the West Linn complaint - lack of staff and resources often delay investigations for a year or more. In the case of the Pauly Rogers complaints, she estimated that they would not go before the board for a decision until next fall.
'Both of these (complaints) are very complex. They require expertise, and the board has not yet determined how we will conduct the investigation,' Reeves said.
The board, a group of seven accountants appointed by the governor, is charged with regulating the performance of all services provided by the more than 8,500 accountants registered to practice in Oregon.
Once an investigation is complete, complaints typically go to a complaints committee that reviews the research and then makes a recommendation to the board on how to respond.
If wrongdoing occurred, the board has significant discretion to discipline, Reeves said. Fines could be levied, licenses can be revoked - or the board may require an auditor to get additional training.
But wrongdoing, she said, is not easy to determine.
'I wouldn't be able to recognize if an audit was good or bad,' Reeves said.
Although the industry has standards and principles guiding auditors through its work, much of what an auditor does and how he does it is guided by a number of variables, making each audit unique and difficult for someone outside the accounting industry to second-guess.
Fraud, such as was discovered in West Linn, does not alone mean an auditor did poor work, the experts say. Indeed, they argue that one of the biggest misperceptions of their industry is that they are supposed to discover fraud if it is occurring in the agency they are reviewing.
Phil Hopkins, audit manager for the state Audits Division which is managed under the Secretary of State, said that most auditors are hired to review financial statements prepared by the staff of the agency they are reviewing and determine, using tests, whether it is likely that the statements fairly represent an agency's financial position. Fraud, if done well, can be hard to find because auditors are not looking at every transaction.
'They're not responsible for detecting it,' Hopkins said, 'But they are supposed to go through scenarios to come up with a risk assessment of whether there may or not be fraud.'
During that assessment, auditors are supposed to evaluate how well the checks and balances work within the finance department. Following interviews with the staff, auditors then make judgments about the kind of testing they will do: They can either test internal controls (the checks and balances) - a test often performed in large organizations who have multiple layers of supervision - or in the case of small agencies like West Linn where there are only one or two people managing the finances, auditors can test the numbers.
'Hopefully they will do the best job possible,' said Phil Hopkins, 'To be honest with you, we're a very ethical group. Our reputation is everything.'
Other Pauly Rogers audits
Pauly Rogers has been in existence since 1947, according to its Web site. It had about 20 employees and three partners when Ankersen was still with the firm.
Ankersen, the auditor whose work is being questioned in both Board of Accountancy complaints, is a certified public accountant who has been in the industry for more than 30 years.
He has held leadership positions in the Oregon Society of CPAs, and has taught classes required by the state for public accountants to receive their license.
Neither the firm nor Ankersen has a history of any other complaints being filed against them through the Board of Accountancy.
The firm had about 100 clients when Ankersen was still in the office, Rogers said.
When Ankersen left, he took about 30 clients with him, Rogers said.
A peer review of the firm's work, conducted from May 1, 2001 to April 30, 2002 by a Baker City firm, is not public. Rogers declined to make the documents available, although he said the firm received an 'unqualified opinion,' which he characterized as being positive.
Of the Pauly Rogers audits found, several clients defended the firm.
'They've been our auditors since 1997 and they've done a good job,' said Paul Downey, the city of Forest Grove's finance director.
'We had no concerns with the job they were doing while they were here,' said Cathy Brucker, the finance manager for the Tualatin Parks and Recreation District in Washington County.
The park district employed Pauly Rogers from 2000 through 2004 before recently selecting a new auditor.
Brucker said the move was not related to job performance.
And the city of Gresham, which is in the end of its third year of a three-year contract with the auditing firm, is putting the contract up for new bids this year.
The city has no complaints with the work that has been done, said Terry McCall, Gresham's finance and management services director.
'It's a reputable firm that has been in business for years,' McCall said. But, 'I don't think we can ignore the West Linn situation.'
Jim Hart, John Schrag and Mara Stine all contributed to this story.