​​Taking the City for a Ride

Addressing governance and control weaknesses can prevent executives from misusing the organization’s funds for personal gain.​

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The former head of the Phoenix area's transit service has pleaded guilty to fraud charges of misusing public funds for personal purposes, The Arizona Republic reports. The plea comes three years after The Republic's 2015 investigation alleged that then-Valley Metro CEO Stephen Banta's spent public funds for first-class air travel and dinners. The state auditor general and attorney general allege that the amount of funds was ​more than $32,000. Moreover, a 2015 city of Phoenix audit found $315,000 in "questionable expenses" by Banta and the Valley Metro staff. The plea deal calls for Banta to serve one year of probation, but he could be sentenced to up to one year in prison and ordered to pay a $150,000 fine.

Lessons Learned

An effective combination of investigative journalism and internal auditing by the Phoenix city auditor has uncovered flagrant abuse and fraud involving several hundreds of thousands of dollars in travel, business and relocation expenses, and other benefits received by former CEO Stephen Banta. The auditors' report (PDF) contains several appropriate recommendations concerning major control weaknesses in Valley Metro's management of travel and business expenses that should help address and prevent future such occurrences. Here are the most important ones, along with some additional suggestions.

Governance review. There should be a thorough review and adjustment, where necessary, of  Valley Metro's board governance and accountability regime along with its control framework and policies. This is particularly necessary as it relates to ethics, the performance of board directors and executives, executive compensation, and controls over executive travel and benefits activities. Note that the internal auditors found that Banta and several other employees were in violation of several policies. This would be an opportunity to remedy several gaps found by internal auditors, including:

  • Specific language and compliance monitoring to ensure coverage of all executives by ethics and travel/business expense policies. For example, the agency had an ethics policy, but no one ensured that the CEO signed it.
  • Increasing rigor in segregation of duties over approvals of travel and business expenses to prevent cronyism. Two senior staff members working directly for Banta authorized $115,000 in additional pay so he could avoid paying taxes on relocation travel expenses.
  • Enforcement of requirements to provide documentation before and after approvals. The organization also should ensure that compliance with allowable persons and maximums of travel, relocation, and business expenses are enforced. One particular example of the former is that Banta and staff did not comply with policy requirements to submit itemized receipts for meals, including those they had together. This resulted in questionable dining expenses, which were wasteful and represented preferential treatment or a conflict of interest. An example of the latter is that Banta flew first class and paid higher hotel room rates than allowed. He also misused travel expenses by registering his wife and unidentified guests at conferences, traveling for no business purpose, or having no documentation. Furthermore, Banta and his wife took more than 50 relocation-related trips between Phoenix and Portland, Ore., where they had another home.
  • Written policies and procedures regarding the process of awarding bonus pay. This gap resulted in overpayments to Banta.

Vacation and leave policy. Vacation and other types of leave policies must be consistently enforced for all employees, including executives. Banta took at least 50 days off and did not count it as vacation time, but no one challenged this. Similarly, all employees should account for all absences from the office. Banta went golfing many times during the workday, and most of the outings were found to not have a business purpose. 

Board performance reviews. Regular and transparent reviews of board and executive performance are also essential. In this story, it appears that the performance of the chief financial officer, who approved many of Banta's questionable expenses, went unnoticed for too long.

Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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