SCO: 'Commitment to Competence' Needed in HumCo Finances

Long-awaited report identifies staffing, training, communication as contributors to fiscal dysfunction



Those hoping that a long-awaited investigative report from the State Controller's Office into Humboldt County's fiscal dysfunction would carry either a blanket vindication or condemnation of former Auditor-Controller Karen Paz Dominguez were likely disappointed.

The report, released publicly July 22 after months of investigation followed by months of review, stops well short of blaming Paz Dominguez for the dysfunction or absolving her of having contributed to it. Rather, the report makes clear that Humboldt County's fiscal issues are long-standing and that, while Paz Dominguez instituted tighter fiscal control systems, implementation was unnecessarily rocky, and that fiscal staff in the Auditor-Controller's Office (ACO) and across other departments need additional training.

"One of the principles of an effective internal control system is an organization's commitment to competence," the report states. "Management should ensure that its personnel possess and maintain a level of competence that allows them to accomplish their assigned responsibilities and understand the importance of effective internal control."

The SCO launched its investigation last year because the county had "been unable to complete and/or file required reports" to the state in a timely manner, including financial transactions reports, single audit reports and annual comprehensive financial reports for 2019-2020 and 2020-2021, missing mandatory filing deadlines. The investigation found the county's internal controls lacking in a number of areas, including a backlog of journal entries, a failure to complete cash reconciliations, insufficient staffing in the Auditor-Controller's Office, inadequate training and a failure to update Auditor-Controller's Office policies and procedures in a decade.

The report comes weeks after Paz Dominguez left office, having reached a separation agreement with the county in which she's being paid to relinquish her office early after she was resoundingly defeated on Election Day by challenger Cheryl Dillingham, who took 70 percent of the vote. (Dillingham has been appointed to replace Paz Dominguez in the interim until she assumes office officially in January.)

The investigation found the county amassed a backlog of journal entries, essentially payment requests from county departments that need to be vetted and approved by the Auditor-Controller's Office before checks are issued. The backlog stems directly from Paz Dominguez having instituted tighter fiscal oversight, according to the report.

Before Paz Dominguez took office and made some policy changes, the report states the ACO "placed greater trust" in county departments, requiring them to submit "no more than two pages of documentation" to support each payment request. This, the report found, "likely limited the ACO's ability to identify errors, misclassifications, improper entries and fraud," and resulted in numerous — and sometimes substantial — end-of-year budget adjustments.

The report indicates ACO staff told investigators the tighter policy resulted in finding errors in many funding requests, including incorrect classification codes, as well as insufficient or missing descriptions and documentation.

"The additional time necessary to reject an incorrect journal entry, make the necessary corrections and re-review the entries contributed to the backlog of journal entries," the report states.

But the report also notes that some county staff felt the ACO's policy changes were "abrupt," made with inadequate notice and "confusing" because they were inconsistently applied and not formalized. As an example, the report notes that departments were directed to provide the ACO "all" of the documentation supporting a payment request, which in some cases span hundreds of pages, which would then necessitate a "significant amount of time" being spent to determine exactly what documentation was required.

The backlog grew so severe, according to the report, that in October of 2021 — 15 months after the end of the 2019-2020 fiscal year, ACO staff finalized $106 million in journal entries for the year.

Perhaps more troubling, the SCO investigation found that the county does not reconcile its bank balances with the county treasurer's records, nor does it reconcile cash and investment account records between the treasurer and the ACO as required by law. These reconciliations are the governmental equivalent of checking your deposit receipts against your bank statements.

"Due to a lack of records, it is not clear when the county last performed a bank reconciliation," the report states, adding that a consultant hired to complete reconciliations for 2019-2020 was unable to do so due in part to the lack of documentation. "Cash reconciliations with the banks' records, county treasurer's records and the general ledger allow the county to determine whether all cash transactions have been recorded properly and to detect errors and fraud."

Contributing to the county's fiscal woes are the ongoing staffing issues in the office — issues Paz Dominguez first brought forward in 2017, while still the assistant auditor-controller.

The report notes that funded positions have sat vacant — with the department down an average of three staffers through the 2019-2020 and 2020-2021 fiscal years — and the department lost two of its most senior staff and had trouble backfilling their positions. As of April of 2022, the ACO had three vacant fiscal positions.

The report recommends the county reassess staffing levels in the ACO and implement a plan to prioritize hiring, developing and maintaining qualified staff.

On the training front, the report notes that staff from various departments told investigators they were eager to "accomplish their assigned responsibilities" but that implementation of new policies was "abrupt" and more training would have been helpful. At this point, years after the new policies were implemented, the report notes it is "difficult to determine whether the continued need for additional training was due to staff turnover, loss of institutional knowledge or inadequate training." But whatever the reason, the SCO noted that an organization must have a "commitment to competence."

Adding to the confusion of inadequate training, the report found that the ACO's policies and procedures manual has not been updated since 2012 and no longer reflects current practices and processes. The county has updated certain policies on an "ad hoc basis" but the investigation found staff felt these "ad hoc" policies were confusing, and sometimes "conflicting or not communicated properly."

In response to the SCO's report, neither the ACO nor the County Administrative Office seemed entirely pleased with its findings.

For her part, Paz Dominguez pointed out the report failed to note the degree to which her office's "great progress ... was hampered by the coronavirus pandemic combined with a continuing lack of support" and conflicting priorities from the Board of Supervisors, an "entrenched culture of obstructing process." Paz Dominguez maintained the problems identified in the report are not caused by her office but by not having all county fiscal staff working for the ACO at the direction and guidance of the auditor-controller.

The former auditor-controller "emphatically" agreed with the SCO's findings that the ACO is understaffed and that other county employees need additional training.

In her response, County Administrative Officer Elishia Hayes clearly took issue with the notion that the county has not worked to get the ACO the staffing and resources needed to file timely financial reports. It's been Paz Dominguez's "inability to effectively utilize the resources and staff provided" that has been a significant factor in the county's delinquent reports. The county has spent nearly $1.5 million to "support and/or mitigate the actions and delays of the auditor-controller," while increasing staffing in the office by 31 percent since 2017-2018 and seeing multiple other departments loan fiscal staff to the ACO who were underutilized or not used at all.

Despite the investments, Hayes wrote there has been "consistent turnover" in the office, pointing out it currently has only one employee who predates Paz Dominguez's tenure.

"The turnover, recruitment challenges and loss of institutional knowledge have negatively impacted the ability to effectively manage an office with demanding deadlines and workloads," Hayes wrote, later noting that third-party investigations also found Paz Dominguez engaged in retaliatory behavior and fostered an "atmosphere of hostility, retaliation and bullying."

"I must commend staff in their diligence and commitment in attempting to work with the auditor-controller," Hayes wrote. "It has not been easy, and staff have had to endure a hostile work environment, retaliation, multiple accusations of fraud and corruption, and a lack of leadership and communication."

Into this mess has now stepped Dillingham, who has been working part-time as the county's appointed auditor-controller while she transitions out of her previous position as Rio Dell's finance manager. It remains to be seen whether she can maintain and build upon the tighter standards of internal controls Paz Dominguez began to institute while also making the proverbial trains run on time.

Thadeus Greenson (he/him) is the Journal's news editor. Reach him at 442-1400, extension 321, or [email protected]. Follow him on Twitter @thadeusgreenson.


Comments (4)

Showing 1-4 of 4

Add a comment

Add a comment