by Martha Rose Woodward
Last Tuesday Knox County’s internal auditor (Richard Walls) presented his report on his audit of the Hardin Valley Academy construction as it pertained to the PBA’s management of the school. What is typically a dry boring meeting full of CPA-isms turned into a three man heavyweight fight.
Dr. Joe Carcello, head of the audit committee served as the referee and appeared surprised to have more fighters to manage than the normal two.
The PBA was represented by several members including Jeff Galyon and Dale Smith, the Construction Manager on the project, Merit Construction’s contingency included Steve Heatherly and Buddy Heins, and the Architect Jerry Lewis stood quietly in the corner.
The general audience included several media types, Commissioner Jeff Ownby and local builder Sandy Loy. Ownby is the Knox County Commission who initiated the audit, several months ago by bringing the issue before the full commission. His impetus was provided by numerous complaints by Loy in the form of letters, emails, PowerPoint presentations and articles in the Knoxville Focus and Knoxville Journal over the last few years.
After Walls led an intro into the report’s first couple of pages, Steve Heatherly, Executive VP of Merit Construction took his robe off and entered the ring. In response to the first indication that Walls might say something short of declaring Merit as the greatest construction managers known to man, Heatherly, who apparently had already broken a sweat while shadow boxing in the dressing room, came out swinging.
After several of Heatherly’s punches missed, through lengthy “defense through offense” type rants, Loy finally had enough and started counterpunching. Loy’s first body shot was over the Benefit Costs charged by Merit. Merit had charged a 9% rate for worker’s comp; which Walls had jabbed as seemingly high. Walls and Heatherly clinched, defending the rate as based upon carpenters workers comp rates. A heckler from ringside let it slip that Merit didn’t employ carpenters on the project. As Carcello moved in to break the fighters apart, Loy landed a solid gut shot by way of an inconvenient truth. He asked Walls, “So the 9% rate was based upon carpenters, but they then didn’t have any carpenters on their payroll but Knox County still paid them the same rate which was based upon carpenters being on their payroll?”
As Walls staggered to find an answer, Loy followed with another body shot, “Richard did you reconcile the rates we paid for workers’ comp against Merit’s worker comps insurance audit?” Walls was reeling, looking to Carcello for a standing 8 count, babbling some nonsense when Loy landed an uppercut, “You’re not giving me a straight answer, did you reconcile it to the WC audit or not?” Carcello finally got Walls’ mouthpiece out and Walls finally muttered….”No”.
Despite several of these inconvenient facts, in the “Results” section of the audit report Walls answered this question, “Were project costs verifiable and validateable?” with “Yes, however, we identified issues with benefit costs, travel expenses and markups.” What? Is that a yes, a no or both? At this point Walls appeared to need an additional standing eight count.
The audit report states that there were travel expenses paid outside the contract’s conditions, labor costs which were not verifiable through payroll records and worker comp costs were not reconciled to the insurance audit for worker comp costs…do those findings sound like costs were verified to you?
The second round began with the participants dancing around the guaranteed maximum price. The report states, “The GMP was agreed to 431 days after the final contract documents were submitted.” Heatherly jabbed, “This was not abnormal, you can’t determine the GMP until the scope is defined.”
Loy tapped gloves with Heatherly as Carcello broke the fighters, again agreeing with Heatherly’s statement. Then Loy backhanded Heatherly by adding, “My heartburn is that the drawings were complete in September of 2006 yet the GMP wasn’t settled until December of 2007. That’s 15 month. I am confused as to how that reconciles with what you just said.”
Loy followed with a sharp overhand right, interjecting that the contracts issued with “TBD” in the amount lines were also a concern.
After several minutes of Heatherly punching air about the selection process, he finally landed a glancing blow with, “These selected subcontractors were of great value to Knox County as experts; which helped us define the scope of work and value engineer the design to save the county money.”
Loy bobbed and weaved, ”Again I agree with what Mr. Heatherly says subjectively, as those benefits are often possible by involving subcontractors early in the process.”
Loy then counterpunched, landing a haymaker, “My problem is the objective facts don’t support that this is what happened here. For example the original budget for the Mechanical/Electrical scope was $7.75mm, then when the HVAC/Electrical subcontractor submitted his proposal the cost was projected to be $8.44mm, then at the end of the day, Knox County paid the same sub who was hired under a “TBD” contract to assist in cutting costs, $9.62mm; so where is the value engineering?”
Loy emulated the Ali shuffle, prefacing his statements with something to the effect of, “I am not criticizing Merit, I am criticizing the process used here and the way it was presented as being an at risk arrangement when the risk was almost non-existent due to the manner in which the contract was administered.”
Heatherly’s continued efforts to land a solid punch on Loy, were no more successful than the previous attempts. At one point Heatherly got a standing eight count when he slipped, stating, “We knew we had this money over here, motioning with his hands to his side, which we hoped to use for some of these things such as the field house, etc.”
Loy caught Heatherly coming out of the eight count with a solid kidney punch, “Mr. Carcello I hope you heard what he just said because this is primary to my concerns. Just as you acknowledged earlier about the lack of a log being kept on the back charge, when Richard said, “You don’t know what you don’t know.”
Loy said that the same is true about these change orders. “Who knew or approved the reallocation of funds saved to pay for a $545,000 concession stand? We have kids without text books, and other schools who would love to have a $545,000 concession stand?” he asked.
Carcello looked to be reaching for Loy’s right hand to raise it when he asked who could say why Loy was wrong.
Dale Smith finally thought he should pipe in from the cheap seats, “I can tell you why he’s wrong, because every one of those changes were approved by the County Mayor.”
Loy said that Smith acted like a soldier oblivious to the realm of right and wrong, only focused on following orders, he made that statement with a completely straight face. He said, “We think you missed the point there Dale.”
Loy continued to dance around the ring with solid jabs, “Mr. Carcello this is exactly what I mean, instead of coming back to the Commission or School Board and asking what should be done with over a million and a half dollars the Mayor apparently authorized spending this money for items which were never discussed in a public forum or subject to public, Commission or BOE input.”
Amy Broyles asked for a break and as the bell for round three rang, Commissioner Broyles stated that she was informed during the break that County Code required any county agency funded by county dollars wishing to reallocate part of those funds to a new line item must bring such a request back before the funding body if the amount is over $1,000 and must be bid if over $10,000.
Loy said, “The lady has game. If that rule applies to HVA, Mayor Ragsdale broke county policy.” He says that isn’t shocking and interjected, “The fact is state statute allows PBAs to operate with disregard to any local laws or procurement requirements.”
Loy continued to stick and jab stating, “This is central to the concerns I have presented for over 5 years.”
Carcello broke the fighters for a minute with some instructions, stating that there seems to be some policy concerns at play not germane to the audit committee’s scope of authority.
Loy agreed, and made his most important statement, stating, “I hope the Commission will do what I have asked for years for them to do, and that is to pass a resolution requiring the PBA to follow County procurement codes like everyone else.”
As the fighters pulled on their trunks from fatigue the judges went to the scorecards to try and determine the winner.
One judge asked how Walls could opine a report with no harsh admonitions of the audited target (PBA), and at the same time include the following statements, in the same report:
1. The change management team handled over 240 changes to the project. (ALL MONTHS AFTER THE PROJECT WAS COMPLETE)
2. The construction manager and owner’s representative were unable to locate the original documentation evidencing their negotiations.
3. The unallowable mileage reimbursements resulted in an approximate overcharge of $41,385.
4. The GMP risk to the construction manager appears to have been minimized.
5. Even though the charges were verified by the construction manager, we were unable to verify these costs.
6. We determined that some of the labor cost charges were based upon agreed upon amounts rather than actual costs as defined in the agreements.
7. Fifty-seven reimbursable expense items of the architectural firm were marked up 10%, resulting in an overpayment of $608. The practice was stopped. However the overpayment was not recovered.
8. We discovered the construction manager did not track or log back-charges. Without tracking or logging, there is no way to determine if back-charges were handled appropriately or charged to the owner.
Another judge considered deducting a point from Walls, stating the above statements aren’t consistent with Walls’ summary statement, “No material weakness, significant issues or control observations were noted.”
What does it take to be significant? What does it take to qualify as a material weakness?
As the judges (the committee) voted to forward the report to the commission “as is” one has to wonder what they were forwarding. Is this slugfest going to be called another “Cleared” story or an indictment of the PBA?
During the scorecard review, Carcello revealed that the report being reviewed was a reissued report, as Walls had issued an original audit report which PBA was allowed to review and then meet with Walls to “negotiate” revisions.
During the following discussions Walls said, “There was a lot of give and take between us and the PBA, sometimes we thought things weren’t as verifiable as they did and vice versa so we tried to come to an agreement as to what we could agree upon.”
Loy asked, “Since when does an auditor meet with the audit target and negotiate the content of an audit report? This should definitely have led to Walls being counted out as a TKO.”
Carcello stated he didn’t even read the original report because he knew there was a revised report coming.
Loy called this into question, asking, “What?”
His stock as a referee had dropped sharply.
Heatherly and Loy were obviously the more aggressive fighters and one has to admire Heatherly’s passion and drive, but he simply walked straight into too many punches by Loy to have won on points.
Carcello certainly established himself as a big time referee and performed admirably until the revised report surfaced. Dale Smith probably needs to work on his jeering skills, especially his lone “booing” of Loy was just too faint to make the box score.
As John Ward would say, “Smith played, but did not score.”
Loy said, “You know the setting for this fight has to be in Knox County…you can’t make this stuff up.”
