Insiders Allege Fraudulent Accounting at SamTrans

Insiders say they were asked to make changes to the San Mateo County Transit District’s financial records that they believe were illegal; they say SamTrans made up expenses to create the appearance it needed more taxpayer money.

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    NEWSLETTERS

    Insiders say they were asked to make changes to the San Mateo County Transit District’s financial records that they believe were illegal; they say SamTrans made up expenses to create the appearance it needed more taxpayer money. Vicky Nguyen reports. (Published Friday, Sep 20, 2013)

    Was it a mistake or was it intentional? That’s the question facing the San Mateo County Transit District after the NBC Bay Area Investigative Unit uncovered a series of accounting errors that district insiders say were made to deliberately hide how the district is handling public money.

    SamTrans vehemently denies these allegations, categorizing the “classification errors” as honest mistakes.

    The district operates the budgets for Caltrain, SamTrans buses, and the San Mateo County Transportation Authority. In recent years the district has announced that Caltrain is in a fiscal crisis, freezing worker wages, hiking fares and warning riders of reduced service.

    Now, several employees in the finance department are speaking out, revealing that behind the scenes of this fiscal crisis, they were asked to make changes to financial records that they believed were fraudulent.

    “It’s only the workers bees, the grunts, who know what’s going on,” said David Ramires, one of several whistleblowers who came to NBC Bay Area with their concerns. “I provided the financial [statements], I know what’s going on.”

    Ramires worked in the finance department from 2001 to 2012. His duties included preparing Caltrain’s monthly financial statements for the board of directors. But Ramires told NBC Bay Area, before those numbers were presented, he was routinely instructed to artificially inflate Caltrain’s expenses, so management could ask for more taxpayer money.

    “We had to increase expenses where there were no true expenses,” Ramires said. “It’s hard to believe, but it’s done, it happens. The thing was either get it done or you’re going to get fired.”

    Ramires said he was ordered to find leftover money in departments that came in under budget and create fake expenses to show to the public. “They would look at what was already posted and look at the budget and change it to either match budget or go over budget,” Ramires explained. This allowed managers to build up a reserve they could later dip into and use at their discretion, without transparency to the public or the board of directors.

    According to Ramires, one of the primary ways management was able to create these fake expenses and avoid scrutiny was through accounting process known as an accrual.

    In simplest terms--a legitimate accrual occurs when a product or service is received by the district as of year-end, but has not yet been paid as of year-end. Examples of those expenses include utility bills or employee salaries owed for June but paid in July. Accountants will recognize those expenses as accruals to keep track of costs incurred in one period that are paid in the next period. Usually accruals are paid within a few months.  Under Generally Accepted Accounting Principles (GAAP), expenses should be recognized in the period the goods or services were provided rather than when they are paid.

    But Ramires said managers instructed him to classify leftover money in the budget as an accrued expense, when it wasn’t. “It was journal entries no backup, no nothing, just numbers to inflate the account,” he said. “We move it to an unreserved fund, to an unreserved account.”

    He pointed NBC Bay Area to a trail of documents showing examples of some of the questionable accounting he was asked to perform. He said the errors coded in these documents were designed to hide how the district was truly managing public money. In these examples, bills for management coaches and consultants were first paid out of the proper account. But Ramires said managers told him to later reverse the payments so that they came out of an insurance accrual account instead.

    If it sounds complicated, that’s because it’s supposed to be, according to Ramires. He said the miscoding in these documents was designed to hide how the district was truly managing public money.

    “I was one of the people who was like 'Why? Why are we doing this? It doesn’t make sense,’” Ramires recalled. He admitted that he believed these transactions were fraudulent, but said he went along with the orders to help the district save money.

    “It was like, OK, we’re saving for a rainy day, but it’s not raining,” Ramires said.

    And he’s not the only one speaking out. 

    Others, including a certified public accountant who worked for the district for two years, raised similar concerns, but asked not to be identified for fear of retribution. The CPA provided this email sent by a manager requesting that the bill for a management coach be paid with money set aside for a $5,000 “printing services accrual.” Upon further inspection, the employee discovered that the accrual was two years old and had no invoices, paperwork, or any other kind of backup to prove that this service was ever received by district.

    The employee responded by informing the manager, “This is against the accounting principles… I will make journal entry as you wish but you are wrong and you need to consult with the auditor for what you are trying to make me do.”

    Through a California Public Records Act (CPRA) request, NBC Bay Area asked SamTrans about a sample of the questionable transactions identified by Ramires and others inside the finance department.

    The district’s auditors, Maze and Associates, confirmed that these transactions were made in error.  According to the SamTrans response to NBC’s records request, the auditors concluded that expenses were coded incorrectly in 2010, 2011, 2012 and 2013.
     
    Click here to see the district’s response to NBC Bay Area’s records request

    The auditors also found additional errors including:

    --$292,119 of payments over 3 years to consulting firm Parson’s that came from the “incorrect general ledger account”

    --$60,286 of payments over 3 years to coaching firm S3 that were initially coded correctly, but later “reclassified…to an incorrect general ledger account”

    --A $16,500 payment to S3 that came from “an incorrect general ledger account”

    Click here to see the memo from auditors Maze and Associates.

    As for the printing accrual, SamTrans admitted “There is no backup to the $5,000 accrual for printing expenses” stating it was “an accrual to encumber these funds for the 2011 Progress Report for the Transportation Authority.”

    It’s an explanation that has no basis in accounting, according to experts we spoke with at MGO, a Bay Area firm that has performed audits for government agencies throughout the Bay Area, including SamTrans from 1997 to 2001.

    “Under governmental accounting standards, you don't accrue an expense for an encumbrance. Rather, an encumbrance  is used in budgetary accounting for commitments the entity has entered into but for which goods or services have not yet been provided,” MGO partner and independent auditor David Bullock said. “In addition, it appears that in subsequent years, this accrual was used to offset consulting costs rather than printing, a seemingly unrelated cost classification.”

    Bullock added: “I think it's important to note that when errors are found, the auditor has a professional responsibility to look at the facts and circumstances surrounding the error especially in combination with any allegations made. [They] should take it seriously and expand their testing and look a little more deeply into these errors.”

    For its part, SamTrans insists any mistakes were accidental.

    “Honest mistakes happen every year,” SamTrans CEO Mike Scanlon said. He strongly argued that these miscoding was not done on purpose, as sources told NBC Bay Area.

    “It is not bad accounting. It is errors that occur,” Scanlon said.

    When pressed to answer why this happened repeatedly from 2010 to 2013, and why some of the people who made these entries described them as fraud, Scanlon maintained his position. “I don’t know why somebody can just make allegations and all of a sudden they carry more weight in your world than these fine professionals.”

    Scanlon touted the quality of his award-winning finance department and insisted the errors were done so with honest intentions. “What’s happened over many years is that we’ve gotten awards every year for our accounting practices,” he said.

    In an exchange over why SamTrans would pay consultants and management coaches out of an account designated for paying for insurance costs, Scanlon admitted if it happened, it “was a mistake that something was paid erroneously out of an account. That’s not where you would pay them from.” He went on to promise, “We do not pay for coaches out of an insurance fund if there was a time I would be happy to have my CFO (Gigi Harrington) come on air, come on camera, and explain to you if there was a mistake paid because of a miscoding. That is not what we do.”

    Is paying management coaches out of an insurance account a transparent way to spend public money?

    “I believe on one time it was done as an error,” Scanlon said. “That’s all I know of and it was corrected.”

    But when reminded that the district’s auditors found this happened multiple times in just one small snapshot of transactions provided by NBC Bay Area, Scanlon continued to deny it was done purposefully. He contends that the errors uncovered by NBC Bay Area’s sources made no impact on Caltrain’s overall financial statements.

    But Ramires urges auditors to dig deeper, saying these transactions represent just a fraction of the money he was asked to hide for years.

    Later this month, the district’s independent auditing firm, Maze and Associates, will review the accounts brought to SamTrans’ attention by NBC Bay Area. SamTrans said Maze will also review the district’s internal processes and recommend changes if necessary. The auditors declined to speak with NBC Bay Area directly, citing company policy not to comment on clients unless directed by the client.   

    The morning after the interview with Scanlon, SamTrans sent out this memo to the board of directors and staff warning of the NBC Bay Area investigation.

    To view the full  interview with Scanlon, click on the links below:

    NBC Interview with SamTrans CEO Scanlon Part 1

    NBC Interview with SamTrans CEO Scanlon Part 2

    NBC Interview with SamTrans CEO Scanlon Part 3

    Have a tip for the Investigative Unit?

    Email Vicky@NBCBayArea.com. You can also follow her on Twitter or connect on Facebook.

    Or Call 888-996-TIPS (8477) or email the Unit at TheUnit@nbcbayarea.com.