The state chancellor's office forwarded the matter to the Riverside County district attorney's office in a letter Thursday.Without naming any individuals, the report says the president at that time, Jerry Patton, unnamed members of the "senior management team" and a consultant knew the college was submitting false reports.
The penalty is significant, representing about 15 percent of the district's $34 million annual budget. But the chancellor's office has ensured district officials they will be able to pay back the money on a schedule that allows the district to remain fiscally sound, a college spokeswoman said.
The fiscal team's review found "sufficient evidence to demonstrate that financial statement fraud and mismanagement may have occurred" from 2003 to 2010, according to the Nov. 28 report.
College of the Desert President Joel Kinnamon took office in July, after the period in question. He said he plans to work with the chancellor's office and any local or state authorities on any further investigations.
"We are real concerned about the audit findings, we take seriously the consequences and we're obligated to be good stewards of taxpayer funds," Kinnamon said. "And we're committed to working with the chancellor's office to settle all the penalties and make sure that we demonstrate that we're accountable."
The discovery also raises questions about the state's oversight of roughly $5.5 billion the state distributes annually to community colleges based on their reported enrollment. The chancellor's office – and the state – relies on external auditors for fiscal oversight, including whether each independent district is accurately reporting attendance.
But for seven years, auditors never caught on to College of the Desert's accounting improprieties. The college also has a longstanding relationship with its auditing firm, California Watch found. It hired Lund & Guttry every year for more than 40 years, since 1960.
Paul Feist, spokesman for the chancellor's office, said the independent financial auditor must test transactions to provide a reasonable assurance that fraud has not occurred, but it cannot detect all instances of fraud.
"We believe the accountability oversight system over the state apportionment process is sound and working," Feist said in an email. "Financial audits cannot catch all instances of fraud. This is especially true if a district misrepresents certified submittals with the intent to deceive."
The community colleges receive 80 percent of their unrestricted funding based on enrollment figures they report to the state. The chancellor's office determines how much of the total pot of money each district will get based on the number of students it serves.
That means the College of the Desert received $5.2 million that should have gone to other districts. The state pays districts roughly $5,000 per full-time student, meaning the state could have funded an estimated 1,052 additional students with that money.
The money that College of the Desert pays back will be redistributed to the other districts, Feist said.
The chancellor's office first found out about the overbilling in spring 2011 through an anonymous tip. Initially officials asked the district to hire a new auditing firm to determine the extent of the problem. This summer, the chancellor's office asked the Fiscal Crisis & Management Assistance Team, a state-funded agency, to investigate.
The community colleges get state money based on the number of students enrolled and the number of instructional hours provided.
Here's how it worked: From 2004 to 2011, college officials used a formula that assumed that every three-unit class provided 54 hours of instruction per semester. But in reality, many three-unit credit classes met for 52 or 53 hours per semester.
For example, the district claimed 54 hours for a plant science course taught in fall 2009 that actually met for 52.48.
While the difference may seem small, it adds up over seven years and tens of thousands of classes.
The audit says the college's senior management team had "significant and extensive knowledge" that it was miscalculating enrollment as early as 2004.
In 2005, Patton, who was vice president of administrative services at the time, hired consultant John Mullen of Strata Information Group to review the college's method of counting enrollment hours.
During his review, Mullen discovered the college was not following state regulations in the way it calculated attendance, and he reported as much to Patton.
"I did point out at that time that I observed that they were calculating (full-time equivalent students) on the basis of catalog hours … which is really a target number of hours for the course, but not the actual number of scheduled hours," Mullen said in an interview last year. "And I pointed out that state regulations call for you to report on actual hours."
According to the audit, Mullen and the college president were aware that the college's formula was overstating enrollment, but the college continued the false reporting. Mullen's company worked with the district to help file the annual enrollment reports submitted to the state Chancellor's Office.
The president of the college signs these reports to certify that "to the best of my knowledge and belief, this report is true and correct."
Maria Sheehan served as president of the college from 2001 until 2007, and Patton served from 2007 to 2012. Sheehan is now president of Truckee Meadows Community College in Nevada, and Patton is retired.
Sheehan said Thursday that she was not aware the district had overstated enrollment, and that she had not been contacted by the audit team about the allegation.
She believed her senior administrators had consulted with the Chancellor's Office on the enrollment calculations.
"I would never do anything like that," Sheehan said. "That's ridiculous for any president to try to skim around numbers that are inaccurate."
Patton could not be reached for comment Thursday. Mullen declined to comment further.
Kinnamon said no one had been disciplined as a result of the report's findings, and that he is now beginning to explore next steps.
"We reserved judgment on findings or any of that until(the audit team) concluded their work, so now I'm in a position of determining what I may need to do organizationally or with checks and balances or any other kind of things," he said.
College of the Desert's close relationship with its auditors raised red flags for Judy Nadler, a government ethics expert at Santa Clara University's Markkula Center for Applied Ethics.
"I am personally shocked to hear that a public agency has used the same auditor for that period of time," Nadler said.
Nadler said it's good practice to rotate auditing firms every few years.
"You want someone with a fresh look … because when an audit occurs, these auditors go into the institution, they work closely on a daily basis with the people in the institution, and they form relationships, and that's all certainly very good. However, it can possibly lead to overlooking certain things inadvertently or sometimes deliberately."
Feist said state education code allows districts to keep the same auditing firm for an unlimited amount of time, as long as a different partner in the firm acts as "lead partner" on the audit every six years.
In addition to the longstanding contractual relationship, one of the auditing firm's partners, Keith Lyrla, serves on the college foundation's planned giving committee. He's also an adjunct faculty member at the college, having taught a class in accounting since 1988. It's not clear whether he was part of the auditing team during that period. Lyrla could not be reached for comment Thursday.
Nadler said Lyrla's entanglement with the college opens the door to abuse.
"He's trying to drum up money for the college, he's being paid by the college to teach, and his firm is being paid for the audit. I think that's like serving three masters, and this not a one-pony town," Nadler said.
In addition to the $5.2 million penalty, College of the Desert will see a reduction of $600,000 in its annual state funding to reflect its accurate enrollment count, starting next year.
View this story on California Watch
Story courtesy of our media partners at California Watch (A Project of the Center for Investigative Reporting)