AUDITOR MAY HAVE LAUSD CONFLICT; LATE DISCOVERY PUTS SCREENING IN QUESTION.

Byline: Terri Hardy Daily News Staff Writer

An auditor that the Los Angeles Unified School District board may hire to review its contracting process also is chief auditor for the parent company of the firm overseeing Proposition BB bond repair and improvement work.

Beyond the potential conflict of interest, critics said the way the auditing firm of KPMG Peat Marwick LL has been handled could reflect flaws in how the LAUSD screens companies.

``If we ask KPMG to evaluate Proposition BB contracts handled by the very company they have had a longtime, multimillion-dollar relationship with, then that is inappropriate,'' said David Tokofsky, a board member who sits on the audit committee.

Tokofsky questioned why it took him, a social science teacher, to discover the connection during an audit committee meeting.

The Board of Education is scheduled to consider hiring KPMG at its May 4 meeting.

Board members are expected to examine these relationships:

Heading up the $2.4 billion Proposition BB repair and improvement project is O'Brien Kreitzberg Inc.

That Los Angeles-based construction management company is owned by the Dames & Moore Group.

In turn, Dames & Moore employs KPMG as its chief auditor.

In a letter to the school district, KPMG asserts that its ties to Kreitzberg do not constitute a conflict of interest, a contention that the LAUSD's chief financial officer accepts.

``They concluded they are independent and have no conflict of interest,'' said Henry Jones, the chief financial officer. ``I think that I can accept that.''

Just last year, the district was embarrassed when it learned that O'Brien Kreitzberg had not revealed that its predecessor company was being investigated by a state commission over allegations of laundering campaign contributions.

The school district did no screening and only asked O'Brien Kreitzberg to fill out a disclosure statement after it was hired. The company failed to mention the state probe in the disclosure form, and the district's outside investigators did not discover the problem.

Angry school district officials considered firing O'Brien Kreitzberg and vowed they would begin to screen contractors.

Despite that debacle, KPMG was not initially asked for any conflict-of-interest information in writing. Its relationship with Dames & Moore was revealed only at Tokofsky's prodding, according to a tape of the committee meeting. KPMG was then asked for a letter certifying that its relationship with Kreitzberg doesn't pose a conflict of interest.

Tim Lynch, deputy controller for Los Angeles and a member of a panel of citizens monitoring Proposition BB work, said the relationship should have been caught sooner.

``These types of oversights can't be excused, especially when the district went through this with O'Brien Kreitzberg,'' Lynch said.

One area the LAUSD will ask KPMG to examine is contracting in Proposition BB projects, with the expectation that the auditor will recommend changes in policies and procedure revisions.

Tom Snow, partner for KPMG Peat Marwick, told the audit committee that he was asked in an oral interview if there was any potential conflict of interest when the district hired his firm in January to do its annual audit. He said no.

``There are no situations that we are aware of,'' Snow told the committee. ``Certainly if there were, professional standards would require us to report them to you and so forth.''

In a later interview, Snow said it is not unusual that his firm, a Big Six auditing company, would have dealings with Dames & Moore, a global engineering and consulting firm.

And because KPMG would be doing an overall review of the district's contracting process, not a performance evaluation of O'Brien Kreitzberg, Snow said there is no conflict.

``We've concluded that we've maintained independence, and there is no conflict because it's a more general project,'' Snow said.

Tokofsky and board member Jeff Horton, also a member of the audit committee, told Snow to put it in writing - a letter explaining his relationship with Dames & Moore and why he believes there is no conflict of interest.

In an interview, the LAUSD's chief financial officer said he asked KPMG for such a letter months ago. Snow denied that, saying the only request came at the audit committee meeting.

Jones received a draft of KPMG's explanatory letter last week. The document will be reviewed by the district's legal counsel and a recommendation made, Jones said.

``We take conflict-of-interest matters very seriously,'' Jones said. ``If this is not an appropriate situation, then we need to go look for someone else.''

The district estimates the cost of the initial contracting audit at $110,000 to $120,000. Superintendent Ruben Zacarias and board members have also called for ongoing audits on its contracting procedures.

It is expected that the board will vote on the Peat Marwick contract at its May 4 meeting.

Steve Soboroff, chairman of the Proposition BB Oversight Committee, said perception is the most important factor to consider in such cases.

``If all things are equal, the district might consider hiring another firm on their list,'' Soboroff said.