Auditors find $2.9M accounting error, depleted reserves in Fullerton

Independent auditors found a $2.9 million accounting error and $10.1 million depletion of unassigned reserves in Fullerton's city finances, raising questions about financial oversight at City Hall, Voice of OC reported.

The findings reveal a governance gap in one of Orange County's mid-sized cities, where a revolving door of financial leadership may have allowed budget problems to compound undetected for years.

Grant Thornton, the firm commissioned to review Fullerton's finances, told city council members Tuesday that the city's reserve situation was more precarious than officials had understood. The firm's director of risk advisory, Anne Layne, said poor accounting presentation obscured the true fiscal picture. "The decline in unassigned fund balance was driven by operating results, including a planned budget deficit, and the numbers and the factors adding to the decline in fund balance were not clearly reconciled or presented, which limited the ability of the city council to understand the city's financial position," Layne said, according to Voice of OC.

City leaders had cited a $26 million reserve, but auditors said much of that sum was already committed to specific projects, leaving roughly $16 million in usable reserves. The city faces a $13.7 million deficit this year that could consume nearly all of it. Interim Director of Administrative Services Steven Avalos told council members in March that "if no adjustments were made, reserve levels would decline to approximately 2% by the end of fiscal year 26-27 which is well below the city's reserve policy."

Auditors pointed to a staffing gap as a root cause. Avalos holds a bachelor's degree in psychology and a master's in public administration — not finance. Fullerton has had three heads of administrative services in three years and four city managers since 2020. Grant Thornton Partner Shawn Stewart said the expertise gap was urgent. "You currently have an interim CFO, that's not that individual's background. This is a complicated area so you need more expertise," Stewart said, according to Voice of OC.

Despite the severity of the problems, auditors said they found no evidence of wrongdoing. "Based on the work that we did, we did not find any indicators of fraud or intentional misconduct, and all of the issues that we identified relate to financial policy, accounting presentation, accounting errors, and governance over the finance process," Layne said at the council meeting.

Councilman Ahmad Zahra pressed auditors on whether the budget had been politically inflated. "Could it be possible that this is a case where the budget was presented as a feel-good budget, sort of politically motivated to make it seem like it's better than it is?" Zahra asked. The council voted 4-1 to maintain current spending levels until the budget is formally adopted July 21, with Councilman Nick Dunlap casting the lone dissenting vote.

Grant Thornton recommended the city hire a chief financial officer with CPA certification and government accounting experience, form a financial oversight committee and implement standardized accounting practices.