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San Diego city embezzlement case prompts rethinking about when to alert city auditor

Late last year, when officials at San Diego City Hall uncovered an embezzlement scheme that allegedly netted former parks employee Lisa Ann Petty more than $100,000, they summoned police and a criminal investigation ensued.

Petty, who worked for the city from 2012 to 2018, was charged last month with forgery, grand theft and 10 other felonies. She pleaded not guilty to all counts and faces more than four years in prison if convicted at trial early next year.

Although Petty allegedly stole thousands of dollars before the fraud was discovered, senior city leaders never alerted the Auditor’s Office to the long-running breach in internal controls.

Robert Vacchi, the city’s deputy chief operating officer, informed Mayor Kevin Faulconer and Chief Operating Officer Kris Michell in an Oct. 1 memo that he discovered the “revenue discrepancy.” The memo was distributed to more than a dozen other elected and appointed officials, but not to the Auditor’s office.

The decision to exempt the City Auditor from the Petty investigation — and the Parks and Recreation department’s subsequent changes to cash-handling procedures — is notable because the City Auditor is responsible for monitoring operations and practices across the city.

At least one elected official said he is considering changing the municipal code to require that the Auditor be informed next time.

Councilman Scott Sherman, who also serves as the Audit Committee chairman, said he is grateful that Parks and Recreation Department officials discovered the alleged theft of taxpayer dollars, and he wants to improve the city’s rules for reporting financial misconduct.

“I have met with the City Auditor’s Office to discuss possible reforms to the municipal code that would include the auditor’s office in future investigations of this sort,” he said. “This change could add an expert eye to investigations and improve transparency in the process.”

Petty, 43, is accused stealing at least $100,000 in public funds by diverting payments to the Paradise Hills Recreation Center for her own use. The 12 felony counts include an aggravated white-collar crime enhancement alleging that her take was between $100,000 and $500,000.

The three-page October 1 memo, dated the same day Petty was arrested, laid out details of the suspected crimes along with some changes adopted to address weaknesses identified in the city’s revenue-control practices.

An earlier memo that Vacchi and interim Parks and Recreation Department Director Andrew Field sent to 19 officials and the entire parks department staff said that changes to the cash-handling procedures would be forthcoming by early October.

“These changes will improve efficiencies in the collection and processing of city funds,” said the August announcement, which made no mention of the embezzlement investigation.

Interim City Auditor Kyle Elser, whose office is responsible for recommending and monitoring internal controls across all city departments, was not copied on either of the memos distributed to other city officials.

He said he found out about the case last month, when The San Diego Union-Tribune reported on Petty’s arraignment.

Vacchi issued a statement through the Mayor’s Office last Thursday supporting his decision not to include Elser on the list of people who received the two memos.

“The City Auditor’s Office doesn’t have the authority to prosecute criminal charges,” Vacchi said. “We’re confident the operational changes we’ve made to largely eliminate cash handling at Parks & Recreation facilities have significantly reduced the potential for theft like this to occur going forward.”

The city charter says: “The City Auditor may investigate any material claim of financial fraud, waste or impropriety within any city department.”

But there is no specific language currently in the municipal code or the city charter requiring a department head or other senior leader to immediately inform the City Auditor about cases of embezzlement or other financial crimes.

Under the San Diego Municipal Code, the chief financial officer is required to submit a written report each year to the City Council and its Audit Committee.

Among other things, the report must include “any material weaknesses in internal controls and any fraud, whether or not material, that involves management or other employees who have a significant role in the city’s internal controls.”

The Mayor’s Office did not respond to questions about Sherman’s discussion about changing the code.

For his part, Elser said his investigative staff are experts at gathering evidence and even testifying in fraud cases.

“They are also experts at making recommendations to strengthen internal control weaknesses that allowed fraud to occur,” he said. “It would be a best practice if management was required to report significant suspected fraud to the city auditor, and some cities do have this requirement.”

The decision not to tell the City Auditor’s Office about the suspected fraud discovered by the parks department in October 2018 came amid lingering disagreement over how the recently vacated City Auditor’s post should be filled.

Eduardo Luna, the city’s first and only independent City Auditor, had resigned weeks earlier, after learning that Faulconer would not renew his 10-year appointment.

The independent, decade-long position was created a dozen years ago, as San Diego was emerging from a pension scandal that nearly drove the city into bankruptcy.

The idea was to reduce the possibility of political interference by making the Auditor answer to a council committee, rather than to the elected mayor, a position that in 2006 was converted to a chief executive job rather the ceremonial council leader it had been for decades.

But even though the independent City Auditor reports directly to the Audit Committee — and not to the mayor — the mayor is responsible for nominating the person whose job it is to root out fraud and mismanagement across City Hall.

After Luna departed, Faulconer nominated a longtime Treasurer’s Office employee for the auditor’s job, but the nomination was derailed in July after Sherman and others raised concerns about the appropriateness of the mayor selecting the person in charge of monitoring his administration.

Sherman succeeded in placing a measure on the upcoming March ballot that, if approved by voters, would put the City Council in charge of selecting the City Auditor.

If voters approve, a new search for the City Auditor would be performed in the spring and the Audit Committee would recommend three finalists to the council.

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