Central Basin’s auditor quits over missing records, ongoing ‘mismanagement’
Harshwal & Co., the second accounting firm to quit in two years, said it had "significant concerns" about the the accuracy of the financial data it was provided.
An accounting firm hired to audit Central Basin Municipal Water District’s fiscal records threw in the towel last week, claiming it could not finish the job because missing records and “ongoing mismanagement” had undermined the review’s integrity.
Central Basin hired the firm, Harshwal & Co., in November 2022 to complete a routine end-of-the-year audit of the district’s finances for fiscal year 2021-22. Yet, a year-and-a-half later, the review is still incomplete and now may need to be started over, records showed.
In a June 3 resignation letter, Managing Partner Sanwar Harshwal stated auditors “encountered significant internal control deficiencies that demand immediate attention.”
“We have dedicated our efforts to rectify these deficiencies, but their persistence raises significant concerns regarding the reliability and accuracy of the financial information provided to us,” Harshwal wrote. “Additionally, the challenges associated with incomplete and insufficient information have obstructed our ability to conduct a thorough and comprehensive audit.”
Central Basin is a water wholesaler that serves 1.6 million people from 24 cities and unincorporated areas in Southeast Los Angeles County, including La Habra Heights, East Los Angeles, Signal Hill and parts of Compton and Carson. It is years behind on the annual audits supposed to be completed within six months of a fiscal year’s end.
Lack of ‘internal controls’
Harshwal’s audit for 2021-22 found “significant variances” between the agency’s internal closing balances and supporting documents, according to a draft provided to Central Basin in late May.
“There was a lack of established internal controls and processes over the financial reporting process to ensure timely and accurate financial reporting,” auditors wrote. Such a weakness generally increases the chance that “fraud or material errors will occur,” according to the draft.
The auditors initially issued a “qualified opinion,” which indicates that problems exist but are not pervasive, in their May 16 draft. However, days later, an employee at Harshwal told Kenneth Pun, the contractor serving as Central Basin’s finance director, the firm intended to lower its opinion or quit.
Central Basin previously fired most of its staff, including its internal finance director, in 2020 and contracted out for those services in subsequent years.
Harshwal’s downgrade would have dropped the agency to the second worst audit opinion possible and put its financial credibility at risk. The lower rating — called a “disclaimer of opinion” — essentially states that an auditor was unable to form an opinion because of the amount of missing information. Harshwal reportedly attempted to resign several times from February to May, but was repeatedly persuaded by staff to stay on.
The deficiencies outlined by Harshwal are not new discoveries. A previous accounting firm hired to complete a fiscal 2020-21 audit noted the exact same problems during its review and Central Basin pledged to make reforms in response, records showed. That firm, Maze & Associates, turned in its audit in September 2022 and then terminated its contract with Central Basin a month later.
Both Maze & Associates and Harshwall & Co. — hired as Maze’s replacement — originally were given three-year contracts, but opted to resign early. Maze’s finished audit notes it had to make “$2.1 million in adjustments” to the district’s balance sheets. That covers roughly 10% of the district’s overall budget.
Resignation ‘concerning’
Central Basin’s newly hired interim general manager — Elaine Jeng, who took the helm in late May — stated Harshwal’s resignation is “concerning as it signifies a lack of confidence in the district’s financial records.”
Though her knowledge of the district’s operations is presently limited, resolving the issues highlighted by Harshwal is a “priority,” she said.
“Moving forward, with the Board’s support, the District’s plan is to solicit the services of another financial auditing firm to complete the audit for FY 22, FY 23, and FY 24,” Jeng said in an email. “The District will seek to improve the preparation of the back-up data to support the financial records. This may necessitate temporary staff augmentation and dedicating internal resources to this focus.”
Jeng will present a list of potential replacement firms to the agency’s board of directors in the near future, she said.
“My priority as IGM is to ensure that the District produces a report from a reputable firm that accurately reflects the financial status of the organization,” she wrote.
Pushback from finance team
The Pun Group, the contractor acting as its finance department, internally pushed back against Harshwal’s conclusions, according to an email obtained by the Southern California News Group. Pun told then-Acting General Manager Victor Ponto that his team strongly disagrees with Harshwal’s statements about “inadequacies in the accounting records.”
“We have invested considerable time and effort in correcting any misstatements and addressing all concerns raised by the audit team,” Pun wrote in his email. “This development is both unprofessional and unacceptable, especially given the extensive efforts we have made to ensure the accuracy and integrity of our financial statements.”
Pun recommended scheduling an urgent meeting with the Board of Directors to discuss the next steps, including potentially “seeking legal action” against Harshwal. However, at this time, the board is not set to meet again until its regularly scheduled meeting at the end of June.
“It is crucial that we address this matter promptly to maintain the integrity of our financial reporting and uphold the District’s reputation,” Pun wrote.
Board ‘totally negligent’
Board Director Leticia Vasquez condemned the idea of suing Harshwal for “simply doing their job.” The issues identified in the audit and the resignation letter are consistent with the concerns she has expressed about the district’s finances over the past three years, she said.
“For the past three years, this is how this agency has been functioning,” she said. “The board has been totally negligent in its responsibility to the agency and the public we serve.”
The reasons behind the resignation of Maze & Associates nearly two years ago were never discussed by the board, she said.
Past troubles
Vasquez supported motions to place General Manager Alex Rojas on paid administrative leave and to launch investigations into his management as a result of her concerns about the district’s finances. Rojas was charged by the Los Angeles County District Attorney’s Office in August 2022 for allegedly accepting $400,000 in bribes while serving as the superintendent of the Bassett Unified School District. Despite the arrest, he continued to run the water district for nearly two years until the board placed him on leave following a shift in political power in early 2024.
The board majority initially allowed Rojas, who is often credited with stabilizing the district following a particularly tumultuous period, to stay on because the criminal case was — and is — still pending and was considered unrelated to his new role.
The turning point came after Vasquez, while suing the agency she represents over her alleged treatment by Rojas, uncovered a connection between Rojas’ co-defendant in the bribery case and a contractor hired by Central Basin.
Testimony revealed that Capstone Partners Group, a construction management firm hired by Central Basin, was owned by a longtime employee of Del Terra, a company involved in Rojas’ case.
Rojas has denied having any involvement in the selection of Capstone and maintains he did not know about any ties between Capstone and Luis Rojas, his co-defendant, until after Capstone ended its contract in August 2022.
Much of Capstone’s work with the district occurred during the fiscal year that was under review by Harshwal, according to board director Juan Garza.
“The critical nature of this specific audit is that it reflects a time period in our agency when Capstone was performing services,” Garza said. “Moving forward, we need to figure out what exactly happened and we’re committed to this under the new management team.”
A separate forensic audit and investigation into the district’s hiring of Capstone is still pending.
Garza said it is troubling that the district still does not have the full accounting for “activities and transactions that took place almost two years ago.” He questioned why the district never implemented the reforms proposed in response to the 2020-21 findings of Maze & Associate.
“We have two auditors of prestige quitting as soon as they finish their first year with us,” Garza said. “It is highly disturbing and it is an independent message that the finances and controls in our agency are not accurate and that we have to find out the truth to restore our agency’s credibility and, more importantly, our agency’s control measures and operations.”