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Wednesday, October 11, 2006 - Page updated at 12:00 AM

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Port commissioner says audit report glosses over deficiencies

Seattle Times business reporter

Disputed accounts


Reports by auditor Deloitte & Touche and a Port of Seattle audit committee gave sharply different views of the Port's 2005 accounting problems.

What the auditor said: "We noted certain matters involving the Port's internal control and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the Port's internal control that, in our judgment, could adversely affect the Port's ability to record, process, summarize and report financial data consistent with the assertions of the management in the financial statements."

What the commission heard: "There were no findings by the audit firm. A finding is reported by the audit firm if there are significant issues to be addressed by the client. A clean, unqualified opinion was reported by Deloitte Touche."

What the auditor said: "The Port should improve the operation and design of certain controls that are in place with regard to the issues noted above."

What the commission heard: "There were no material weaknesses in the Port's internal controls. ... Deloitte Touche's audit ... noted no major systemic deficiencies. ... The commission audit committee is pleased with the excellent results of the 2005 financial audit by Deloitte Touche."

Source: Deloitte report, Port audit committee report

A Port of Seattle commissioner says the Port's new audit committee glossed over "significant deficiencies" in its 2005 financial accounting, keeping negative findings out of the public eye.

Lloyd Hara said a summary by the committee, which has just two members and doesn't meet in public, failed to disclose negative details of findings by outside auditor Deloitte & Touche — including $15 million in bookkeeping errors and $9.7 million in bills that weren't properly recorded.

Deloitte raised those and other concerns in two letters and a PowerPoint presentation attached to its annual financial audit, which were all initially given only to the audit committee.

When the audit committee summarized those findings for the rest of the board, however, it highlighted the Deloitte audit's "excellent results" and had few details on the auditors' concerns.

"The audit for 2005 is a testament to the diligent and thorough work of the Port's accounting and financial management team," it said.

Hara — an award-wining former King County auditor — said the two reports paint starkly different pictures.

"From this you get the impression that we have very good staff," he said, pointing to the audit committee summary. But judging from the Deloitte report, he said, "we need some help."

"When I saw the [Deloitte] report, I said, 'Geez, there's a hell of a lot of stuff in here,' " Hara said.

The Port staff said it gave the more critical report to the full five-member commission on Aug. 1, a day after the audit committee was briefed on it.

But Hara said he got a copy after he asked for it.

Commissioner John Creighton said he doesn't recall receiving it and had not seen it until shown a copy by a reporter.

Comparing the two, he said, the summary "could have been more detailed. For a full picture, it would probably be worthwhile including the entire Deloitte report."

The auditors didn't find big issues such as stolen funds, fraud or embezzlement.

But Hara, Creighton and commissioner Alec Fisken said even minor accounting problems are important because the Port relies on public funding. Of the $62 million in taxpayer money the Port received last year, nearly $11 million was misclassified in the Port's accounting, Deloitte said.

That figure was not included in the audit committee summary.

Previous audits of the Port also uncovered shortcomings. In 2004, the Port took a $9.9 million charge and restated its accounting because of errors found by its auditors. The state auditor last year found that the Port misclassified contributions to local organizations, including $300,000 to the Pacific Rim Games.

Missing members

The audit committee was created after Hara and Creighton, both new commissioners this year, pushed to bring more transparency to the Port's finances.

Within the Port commission, they have the most professional experience with audit committees — Hara as a former auditor, and Creighton as a securities lawyer who advises boards on setting up audit committees.

But neither is serving on the committee, which consists of commission President Patricia Davis and longtime Commissioner Bob Edwards, an investment analyst.

To be sure, the audit committee summarized many of Deloitte's concerns, including the failure to account for money from sales of surplus land and equipment, poor bookkeeping and problems with internal controls. But it downplayed them as not "material."

In accounting parlance, issues are "material" if "there is a substantial likelihood that a reasonable person would consider it important," according to the Securities and Exchange Commission.

Since the Port has more than $5 billion in assets and an annual operating budget of $420 million, errors of $10 million to $15 million are not "material," Davis said.

"It wasn't something that rose to the level of a major, major finding," Davis said. "It's not missing money, it's not mishandled accounts, it's just misreported."

Hara said the audit committee may be technically correct when it says there were no "material" problems and that therefore the audit was "clean."

But that doesn't mean a reasonable person would not consider the mistakes important.

"In a public agency, $1 million here and $1 million there, pretty soon you're talking about 10 million bucks and the public thinks that's a lot of money," he said.

Hara said if he had been on the audit committee, "I would have said these are matters that we as the commission should be concerned about."

The audit committee also didn't mention that the manager the Port hired to improve its accounting, Lisa Lam, previously worked at Deloitte and was involved in responding to questions about her former employer's audit, Hara said.

"It's totally a conflict for the auditor because they lose their independence," Hara said. "How far under the woodpile are you going to dig if they're all former employees of the auditor?"

The Port has since switched auditors from Deloitte to Moss Adams. However, the new Moss Adams team is managed by the person who managed Port audits at Deloitte in 2002, 2003 and 2004 — Laurie Tish. Tish moved to Moss Adams in July 2005, the firm said.

Committee needed?

Hara and Creighton said Port politics kept them from serving on the committee they proposed.

Hara said he thought he was on the committee after he volunteered. But he was not invited to the committee's first meeting. Instead, Davis met with Creighton, and Hara learned about it later.

Creighton said he stepped down from the committee when he realized that Hara had not been told that he wasn't going to be allowed to serve.

Creighton said Davis, Edwards and the Port staff were skeptical of the committee at first. They saw more busywork and perhaps a "gotcha" attack by the two new commissioners.

"I got a lot of pushback," Creighton said. There was concern that "the two new commissioners were coming in and wanting to muck things up."

"But we're responsible to the taxpayers," he said. "It's good to have multiple eyes on the cookie jar."

With commissioner Fisken, they had enough votes to push the committee forward. Still, the process stalled, Creighton said. To jump-start it, Creighton drafted a committee charter, based on ones he drafted for private companies. He gave it to other commissioners in May and was frustrated by the delay in setting up the committee.

"It took much longer than it should have," he said.

Creighton said that while he has seen worse audits that are technically "clean" — meaning no material findings — this one is not as clean as it should be.

"As a public institution and high-profile institution, we need to strive for a much cleaner audit," he said.

Alwyn Scott: 206-464-3329 or ascott@seattletimes.com

Copyright © 2006 The Seattle Times Company

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