Port of Seattle Fraud Reveals Need for Performance Audits

Published March 1, 2009

A scathing report documenting fraud in the Port of Seattle’s contracting practices demonstrates the value of state performance audits, according to audit supporters.

It was a state audit a little more than a year ago that paved the way for the independent confirmation of fraud occurring in several Port of Seattle contracts.

“The Port of Seattle performance audit—in fact, all of our performance audits—show the results of a robust performance audit program,” said State Auditor Brian Sonntag. “We plan to continue to do the work citizens have asked of us.”

The original audit conducted by the Washington State Auditor’s Office found the port wasted $97.2 million in taxpayer money during construction projects and contracts active from January 2004 to March 2007. After the state audit, the port hired former U.S. Attorney Mike McKay to look into its contracting practices.

Ten Fraud Cases

McKay’s report, released in December 2008, uncovered 10 instances of outright fraud.

These included a port employee’s decision to provide a potential bidder with internal cost estimates for a project related to Seattle-Tacoma International Airport’s third runway, which opened in November 2008. The runway cost more than $1 billion, nearly five times the original estimate.

Also as a result of the original state audit, the U.S. Justice Department is conducting a criminal investigation into fraud at the port. Information from McKay’s investigation is being shared with federal prosecutors.

Resignations, Reprimands

As a result of McKay’s report, John Rothnie, who managed the third runway expansion at Seattle-Tacoma International Airport, resigned, as did Larry McFadden, Port of Seattle’s construction services general manager.

A chief engineer was suspended for three weeks without pay, and three senior managers were suspended for one week without pay. In addition, three other officials were given letters of reprimand.

Port Chief Executive Officer Tay Yoshitani said he’s implementing recommendations to make sure contracts are awarded through fair and open competition, including a better whistleblower policy that will make it easier for employees to report concerns. Other policy changes include disclosure of financial conflicts of interest between port employees and contractors.

Port watchdogs are not satisfied with the actions taken so far by the port authority, however.

“Any culpable parties identified in the McKay report as having committed fraud need to be prosecuted to the fullest extent of the law. An abused public demands it,” said Amber Gunn, director of the Evergreen Freedom Foundation’s Economic Policy Center. “The longstanding culture of arrogance and corruption that has infiltrated the port’s business practices is unacceptable and inexcusable.”

Attack on Audits

Some parties would like to rid the state of the voter-approved performance audits that exposed the problems at the Port of Seattle. Performance audits were among the items on the state’s Do Not Buy list, released every two years as part of the Priorities of Government (POG) process.

The $26.8 million allotted for performance audits—approved by voters in November 2005 through the passage of Initiative 900—was the biggest single item to turn up on the list. Performance audits were ranked 201st out of 248 state programs in the government efficiency category by the governor’s budget and policy analysts, with input from invited members of the labor and business communities.

Putting performance audits on the budgetary chopping block—at least in theory, as the Do Not Buy list is advisory, not mandatory—makes little sense in the context of the budget problems facing Washington, said Gunn.

With the budget deficit estimated at $6 billion—the difference between growing revenues and even-faster spending growth—hanging over the state like a pall, she asks why the government would recommend eliminating a tool that helps identify waste and inefficiency.

$4.1 Billion Savings

Although performance audits are ostensibly on the Do Not Buy list to save money, 14 performance audits have made 574 recommendations identifying $4.1 billion in potential savings over five years. That compares to the combined 2007-2008 performance audit cost of $15.9 million.

The cost-benefit ratio contradicts the notion of axing performance audits as a money-saving measure, Gunn noted.

Given Washington State’s current budget situation, the governor and legislature need to adopt those dollar-saving recommendations and forget about scrapping or even scaling back the performance audit program, Gunn said.

In the case of the Port of Seattle, she noted, the program proved its value by beginning a process that has led to an internal investigation that found evidence of waste, possible fraud, and ethics violations. That process is continuing in the ongoing federal criminal investigation.

Now is precisely the time when state performance audits—with their ability to help leverage reform and increase confidence in public agencies—are needed the most, Gunn said.

Brett Davis ([email protected]) is an analyst for the Economic Policy Center of the Evergreen Freedom Foundation in Olympia, Washington. He focuses on EFF’s Transparency in Government Project.