DWP IGNORED SIGNS OF ABUSE AUDITS CAUGHT P.R. FIRMS' OVERBILLING IN 2002, BUT CONTRACTS WERE RENEWED.

Byline: James Nash Staff Writer

Los Angeles Department of Water and Power auditors reported finding more than $350,000 in overbillings by two public-relations firms as early as 2002, but their warnings were ignored by utility managers who renewed their contracts worth more than $5 million a year, the Daily News has learned.

According to interviews and documents released under the California Public Records Act, DWP officials missed a critical chance to root out abuses discovered by their own auditors before they became swept up in the ``pay-to-play'' scandal that has engulfed Mayor James Hahn's administration. The contracts were only terminated earlier this year after City Controller Laura Chick began assailing them as part of her audit that accused the public-relations firm Fleishman-Hillard Inc. of $4.2 million in DWP overbillings.

Back in November 2002, DWP internal audits questioned the legitimacy of $300,000 in billings by Fleishman-Hillard and $52,000 in charges by the Lee Andrews Group. The two politically connected firms were consulting the DWP under contracts that gave Fleishman-Hillard $3 million a year and Lee Andrews $2.4 million a year - contracts that were renewed after their billings were questioned.

``It appears that (the internal audit) was ignored,'' said Michael deCastro, a private auditor whose firm, Thompson, Cobb, Bazilio & Associates, was hired by Chick to scrutinize Fleishman-Hillard bills.

``There was no corrective action as far as we could tell, and they continued to pay Fleishman-Hillard. I can't speak to why the DWP management appeared not to pursue collection from Fleishman-Hillard on (the disputed charges).''

The blame game

Chick said blame lies with Hahn, who appoints DWP commissioners and had a close relationship with Fleishman-Hillard executives and was benefiting from their advice even as they were billing the DWP for events that promoted the mayor.

``I would not characterize this as a simple breakdown in processes at the DWP,'' Chick said. ``The auditors were doing their jobs properly. The question is, who was directing the DWP to continue these contracts and who was directing the (DWP) commission and the general manager and the assistant general manager to set aside (auditors') concerns?''

Deputy Mayor Doane Liu said Hahn recognized problems with DWP contracting early in his tenure and moved to correct them. Liu denied that Hahn pressured DWP management to ignore concerns about the public-relations contracts.

``I think it's unfair to say we didn't do anything when in fact we brought in a new general manager, David Wiggs, a new assistant general manager, Lillian Kawasaki, and really brought credibility to the green power program,'' Liu said, referring to the energy-conservation effort promoted by Fleishman-Hillard and the Lee Andrews Group.

The city is suing Fleishman-Hillard to recoup the money and the matter of fraudulent bills is now part of the ongoing investigations by the Los Angeles County District Attorney's Office and U.S. Attorney's Office into contracting practices in the Hahn administration.

Inflated bills

According to internal DWP documents, utility auditors concluded in November 2002 that the firms submitted inflated bills for attending DWP commission meetings, processing invoices and employing student interns for as much as $55 an hour. The auditors faulted the DWP for ``insufficient controls over expenditures and tracking of events.''

But then-chief administrative officer Frank Salas wrote in February 2003 that the DWP should not ask Fleishman-Hillard to reimburse more than $273,000 in payments that utility auditors found to be illegitimate. Salas said the DWP should seek only $26,138 in phone bills that Fleishman-Hillard had passed along to the utility even though its contract stated that Fleishman-Hillard would absorb those costs.

Salas did not respond to interview requests for this story.

DWP and Fleishman-Hillard officials were unable to produce evidence that the public-relations firm ever reimbursed the utility for the phone bills.

Salas stepped down as the DWP's chief administrative officer in November. His former boss, Wiggs, also recently retired from the DWP after a long illness.

Salas, Wiggs and other top DWP managers received copies of the 2002 internal audit, according to its cover sheet. But there is no proof that its warnings ever reached City Hall.

Officials in Hahn's office could not recall whether they had seen the audit. Liu said the Mayor's Office generally does not receive internal audits of semi-independent city departments such as the DWP.

Chick's office also did not recall reviewing the audit at the time, although the controller had issued a series of warnings about DWP public-relations costs in 2002. The Mayor's Office received copies of several of Chick's letters raising concerns.

Former City Councilwoman Ruth Galanter, who in 2002 chaired the council committee that oversees the DWP, also could not remember reviewing the audit.

``Remember that the council would not ordinarily see any DWP internal audits,'' Galanter wrote in an e-mail message. ``Pretty much the only way we would have gotten hold of such a thing would have been a hearing about it at a DWP commission meeting if they had discussed it there or if some employee snuck the word out, and even then we would likely have referred the issue to the controller.''

The DWP commission - a five-member panel appointed by the mayor - was not on the recipient list of the audit.

Commission President Dominick Rubalcava said the audit likely never reached the full commission or its audit committee, which met infrequently.

``It is not the role of the audit committee to be forensic auditors,'' Rubalcava said. ``Forensic auditors are the ones who look for fraud or evidence of criminality. That's not our job. That's the job of Laura Chick and her forensic auditors.''

Rubalcava said Chick continued approving payments to Fleishman-Hillard and the Lee Andrews Group even after the critical audits. Chick responded that she blocked payment of several invoices beginning in March 2002, when she rejected $27,750 on charges for a ``Voices for Green L.A.'' concert.

DWP reaction

Even before DWP's internal audit, Chick had issued a series of critical memos in early 2002 questioning the DWP's public-relations costs but did not formally audit the Fleishman-Hillard contract this year. Chick examined the Lee Andrews Group contract as part of an August 2002 audit that found bloated spending on marketing and public relations in the green power program.

In one March 2002 memo to Wiggs, Chick wrote that her attempts to force the DWP to account for its public-relations costs ``have fallen on deaf ears.''

The DWP's top internal auditor, Manolo Robles, declined to comment for this article.

Wiggs' successor as general manager, Ron Deaton, also declined to comment.

Rubalcava said DWP officials were limited in their ability to comment by the city lawsuit seeking repayment of the disputed Fleishman-Hillard bills. Officials in the city attorney's office did not return calls.

Although Salas decided not to ask Fleishman-Hillard to reimburse the DWP for most of the disputed charges, his February 2003 memo said the public-relations firm had agreed not to continue billing the DWP for administrative overhead costs, which accounted for $224,000 of the $300,000 in expenses the auditors rebuffed.

Invoices indicate that Fleishman-Hillard stopped billing for overhead, although hourly rates for some Fleishman-Hillard executives subsequently increased.

Fleishman-Hillard's top Los Angeles executive, Doug Dowie, was paid $425 an hour for his work on the DWP contract while serving as a confidant, strategist and campaign supporter of the mayor. He was placed on administrative leave from Fleishman-Hillard in July amid allegations that the firm had routinely submitted inflated bills to the DWP.

Richard Kline, the Fleishman-Hillard regional president who replaced Dowie as head of the Los Angeles office, said in an interview that the firm complied with the new rules outlined in Salas' February 2003 memo.

``Our accounting and account team continued to do everything - as I understand it - to operate under the terms and details of the contract and the audit requirements,'' Kline said.

In response to Chick's audit last month of the $24 million that Fleishman-Hillard was paid over the last six years, Kline acknowledged that the firm was unable to document about $650,000 in DWP bills.

Salas' memo was silent on the DWP's contract with the Lee Andrews Group, which originally was a subcontractor to Fleishman-Hillard but received its own $2.4 million contract to promote the green power program.

DWP auditors wrote that the Lee Andrews Group overcharged the utility by about $52,000, most of it on bills for Lee Andrews Group employees to attend DWP meetings where their presence had not been required.

The auditors also noted that the Lee Andrews Group increased the hourly rate for student interns from $25 to $55 in July 2001, which the auditors concluded was ``unreasonably high.'' Some of the student interns worked as much as 226 hours a month on the DWP contract, according to the audit.

The audit also noted that a Lee Andrews Group subcontractor billed the DWP for creating three ``Green L.A.'' Web sites when it had only created one. The audit said the Lee Andrews Group employed 11 subcontractors on its DWP contract without proper documentation.

A separate 2002 audit of the DWP's green power program concluded that the Lee Andrews Group contract was ``vulnerable to errors and irregularities'' and that administrative and marketing costs were excessive.

Lee Andrews Group President Donna Andrews said DWP officials retroactively approved costs for the firm's employees to attend DWP commission meetings. The firm charged more for interns after they graduated from college and became eligible for benefits, Andrews said.

Andrews defended her company's work on behalf of the DWP's green power program, saying it helped persuade 100,000 power customers - including many with low incomes - to sign up for cleaner energy while accepting higher power bills.

``We're a small company,'' Andrews said. ``We wouldn't be in business if we weren't operating above board. We always do what our clients tell us to do.''

Before either audit was released, some city officials had questioned the contracts with the Lee Andrews Group. In June 2002, several City Council members unsuccessfully moved to block a one-year extension of the Lee Andrews contract.

Months later, audits by the DWP's internal auditors and by a firm contracted by Chick ripped the DWP's handling of the Lee Andrews contract. But by then, DWP commissioners had already approved an extension of the contract, and it remained in effect through June 2004.

James Nash, [phone]

james.nash(at)dailynews.com