Features & Columns
County Finance Officials Attempt Cover-up in Shirakawa Scandal
the profligate ways of George Shirakawa Jr.
While much attention has been focused on admitted gambling addict George Shirakawa Jr.'s flamboyant excesses, questions remain about who knew of, enabled and failed to stop his criminal activity. Interviews and newly uncovered documents show that decisions made by the county's top finance officials were key to facilitating and covering up Shirakawa's misdeeds.
The results of those bad decisions will cost Santa Clara County taxpayers millions by the time voters elect and seat a new District 2 representative.
What's now clear is that the county's top financial officials—entrusted with protecting the public's money—were either asleep at the wheel or so focused on other issues that basic accounting controls were ignored, allowing Shirakawa to game the system for four years and be re-elected without opposition.
County finance administrators have so far escaped reprimand for their ineptitude. In fact, they've actually been praised by superiors for reforming a system that should have been well-equipped to catch simple expense abuse scams in the first place.
The county's $4 billion annual finance machine is managed by Vinod Sharma, the chief financial officer (CFO) and director of finance, and Controller-Treasurer Irene Lui, the second in command. Together, Sharma and Lui repeatedly concocted excuses to cover their tracks, fooling the county Board of Supervisors and public into believing that budget cuts, ill-equipped auditors and reprisal-fearing underlings allowed the jail-bound former supe to avoid detection for so long.
The record, however, does not support their explanations.
Based on numerous interviews and an extensive review of documents, Metro has learned that Sharma and Lui decided on their own to direct resources away from reviewing charge card expenses to focus on larger-scale audits in hopes of pleasing their superiors. And by blaming their subordinates and making confusing—if not cunningly calculated—statements at public hearings, Sharma and Lui seem to be more politically astute than some of the elected and appointed officials who listen to their explanations.
Vinod Sharma's hands are dirty when he walks into the second-floor county conference room for an interview. He has spilled something on them, he says, and even after wiping them he seems hesitant before agreeing to shake hands. Irene Lui walks briskly into the room a moment later and the interview begins—but not until both individuals state that they won't agree to a recorded conversation. This is unusual, but it fits a pattern.
The next 30 minutes is a voyage into the illogical, where answers change, contradict and eventually, this report will show, implode on themselves.
Sharma and Lui were both sent audits of Shirakawa's P-Card activity in his first two years as a supervisor, starting in 2009. These two audits noted missing itemized receipts and non-approved business meal expense vouchers. The audits were "lousy," according to Assistant District Attorney Karyn Sinunu-Towery, who headed up Shirakawa's prosecution. She's right, of course.
Obvious red flags like casino trips and luxury rental cars went unremarked. But the audits, conducted by employees Sharma now says were not qualified to catch the embezzlement, did in fact note that some of Shirakawa's purchases clearly violated county policy. Reference was made to such unauthorized purchases as an HDTV and a Southwest Airlines plane ticket that should have been bought from contracted county vendors rather than consumer channels.
The audits—unlike reviews of other supervisors' expenditures at the same time—called out problems in Shirakawa's spending activity. But at a Jan.10, 2013 Finance and Government Operations Committee (FGOC) meeting, Sharma and Lui testified that they were never properly informed.
"Most of these things were perhaps looked at clerical level and were not considered serious enough to bring to the attention of higher-ups, and that's where the training comes in," Sharma told supervisors Ken Yeager and Dave Cortese. The three men thanked each other repeatedly for their diligent work in rehabilitating the system. "Some of those things staff looked at, perhaps they were never brought to the attention."
When Sharma was shown paperwork that he did, in fact, receive the reports, he deflected. "It didn't occur as a big deal in my mind," he said in an interview last week.
"If you see the reports they issued, they did not state the magnitude of the issue, what percent of [missing receipts,] things like that," Sharma said. "These were not professional auditors. They were more like semi-professional accountant assistants or junior accountants."
This is true, in the sense that Sharma and Lui assigned people from the less-qualified Claims Unit to conduct audits instead of the controller-treasurer department's Internal Audit Division. But as Larry Stone, the county's assessor and one of the most vocal critics of finance administrators and County Executive Jeff Smith, pointed out: "The policy says, and it said then and it says it today, the controller-treasurer has final authority of the appropriateness of reimbursement requests. That's been there since 2001. That hasn't changed."
When I asked Lui why the P-Card audits of Shirakawa and all other supervisors mysteriously stopped in 2011—when they should have occurred every six months—the county's second-highest ranking finance official appeared unfamiliar with her own handbook.
"I don't recall how often—I don't really know what's the policy," she says in slightly broken English. "When I read the report it seems like every six months. It seems like they normally six months."
Regarding the plane ticket noted in Shirakawa's 2010 P-Card audit, Lui adds that it's "not a big deal if they're doing real business travel"—which again is contrary to county policy.
But while the pair may be short on sure answers, there is no scarcity of excuses. Sharma and Lui advance other reasons for the failed oversight of Shirakawa's illegal expenditures.
"We were extremely busy with redevelopment," Sharma said. "This county has taken a leadership role in the redevelopment issues. We were using all of our resources and borrowing from other sections, just to cover the redevelopment."
The dissolution of California's 400-plus redevelopment agencies, however, didn't occur until late in 2011, by which time the finance department had already stopped auditing elected officials' P-Cards. Jeff Smith, Sharma's boss, disputed the RDA pretext in a telephone interview an hour after Metro's interview with Sharma.
"I can't really comment too much on what [Sharma] said," Smith prefaced, "except to say that I'm aware they were not using all of their resources on redevelopment." Sharma never came to his boss and asked for more resources, Smith added. "Every department head is expected to give the county executive an idea of how many resources they need to get the job done."
Sharma then assigned blame to others in his department. Also copied on the audits of Shirakawa's P-Card in 2009 and 2010 were Brian Mark and Bill Perrone, the latter of whom oversaw the controller-treasurer department's Internal Audit Division.
"There were also emails going to the Internal Audit staff," Sharma noted. "That's my eyes. If you see, Bill Perrone and Brian Mark [are cc'ed on the audit reports]. He was getting these reports. What did they do? Bill Perrone and his team are supposed to look at these things and say if these risks are big enough to do an audit."
The Oversight Stops
Bill Perrone invites me into his home on a muggy, overcast Saturday morning. We sit at his dining room table, which is covered with pink and purple plastic bags filled with Easter candy. No call was made ahead of time, but Perrone—a grandfather whose balding white hair matches his mustache—gives off the impression that he somewhat expected this visit.
A professional accountant and auditor for nearly 30 years, up until his retirement from the county last April, Perrone, 69, is thoughtful and thorough—and fiercely proud of his career. He joined the county as a senior accountant in 1999, a year after Sharma came on board. The two each climbed the finance agency's rungs, with Sharma a step ahead, going from controller-treasurer to CFO in November 2010. A few months later, Sharma promoted Lui to his previous job.
"Vinod's very politically sharp, and he's very conscientious of the upper review," Perrone said. "And Irene is a talented, very hard worker. But she's just focused on the fire drill now."
The county faces a $90 million deficit this coming fiscal year, after a one-year reprieve following 11 straight years of balancing shortfalls. The pressure to increase investment yields and manage costs, one could argue, has never been greater. And yet, with scarcer resources, the need to ethically manage expenses demands attention.
According to Perrone, Sharma and Lui don't fit the profile. "They're 'yes' people," he said. "Yes. Yes. Yes. Yes."
This hunger to please, Perrone says, led to a sharp change in the county finance department's direction in the last few years. Rather than maintain comprehensive reviews with checks and balances, at a time the county was cutting staff, Sharma pushed for bolder audits that would show how well the county could keep its house in order with cost savings.
"When Vinod became controller, he wanted more macro-audits," Perrone said. "He wanted the Harvey Rose-type audits done." Harvey Rose is the acclaimed auditor for the San Francisco Board of Supervisors. His firm also reviews the performance of Santa Clara County's Valley Medical Center and the health and hospital systems, which comprise almost half the county's $4.1 billion budget.
According to Perrone, Sharma made a unilateral decision near the end of 2009 to take Internal Audit Division staff off of P-Card reviews and focus on large-scale, "Harvey Rose-type" audits that Sharma could show his bosses: Jeff Smith and the Board of Supervisors. A review of Perrone's workplan for the 2010-11 fiscal year, which went in front of the FGOC committee on June 10, 2010, states in plain language that any staff shortages would be covered "by reducing Internal Audit time where it is felt that there will not be a significant increase in risk to the County."
"Data analytics [for P-Cards] took one work day per month," Perrone said. "[Sharma] said, 'You haven't produced anything. Don't do that one'."
Perrone asked that his name be taken off the distribution list of P-Card audit reports, he says, but his superiors ignored his request. Instead, with Sharma now head of the Finance Agency, the CFO's name was removed from the audits, leaving his subordinates to twist in the wind if anything went wrong.
"I was a positive cash flow," Perrone said, his voice rising with emotion. "I produced over $120 million in cost savings during my 12 years there, and my budget was never over $1 million. And those are facts.
"He told me to drop it. That was a management decision of priorities."
At the Jan. 10 Finance and Government Operations Committee, it's instructive to look at Sharma's first answer to a direct question from Supervisor Yeager. "Had someone in your office seen those expenditures and waited before anything was said?" Yeager asked. "I think everyone is a little confused why it wasn't caught earlier and why something wasn't said to Supervisor Shirakawa."
"The important thing is going forward," Sharma replied.
He then proceeded to throw his staff under the bus, saying things were kept at a "clerical level."