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Consulting Firm Faces Possible Fraud Charges

The New York Times reported on June 22nd that Navigant Consulting may face criminal charges for “highly questionable” billing practices and “exorbitant” expenses on services provided to the Long Island Power Authority. A panel appointed by Governor Andrew M. Cuomo (known as the Moreland Commission) plans to issue its findings to federal prosecutors in Brooklyn to determine if criminal charges are warranted against officials of LIPA or Navigant. A link to the New York Times articles appears below:

Among the abuses found by the Moreland Commission:

  • The chief executive of the LIPA, who approved Navigant’s contracts and billings, now works for Navigant
  • A “disturbing revolving door” between LIPA and Navigant existed, with employees leaving one firm to work at the other
  • More than 50 Navigant employees charged time to the LIPA at rates between $300 and $500 per hour
  • One Navigant employee billed more than 3,500 hours in one year, or roughly 70 hours per week
  • Another Navigant employee was reimbursed by LIPA for a seaplane ride from San Juan to a resort island

Cozy relationships between consulting firms and clients is certainly nothing new. I was aware of this practice by some firms in the early 1990s. But it is rather hard to believe that a public agency would allow this to happen. The chief executive of the LIPA surely could not act unilaterally without some oversight by the Board of Trustees. Many individuals who were spending the taxpayers’ money turned a blind eye to questionable practices.

A few days later, the Port Authority of New York and New Jersey announced that it would audit Navigant’s billings for possible fraud. Navigant has been paid $5M in fees for several consulting assignments, including an audit of the Port Authority, which seems rather ironic. In addition, New York City’s Comptroller announced that it would investigate Navigant’s practices during the time it was investigating fraud in the city’s CityTime payroll project. These investigations were also reported by the New York Times:

Frankly, a consulting firm that can charge $300 to $500 an hour to a public agency has a fool for a client. Here in California the High Speed Rail Authority has been criticized for relying heavily on consultants rather than hiring more staff. The argument that specialized knowledge is difficult to obtain for “temporary” positions is rather ludicrous on a rail system expected to take 10 years or more to build. NFL coaches enjoy far less job security. Consultants are the perfect solution for targeted short-time assignments that demand a certain expertise; using them as essentially fulltime employees becomes very expensive.

In too many instances privatizing public services becomes an excuse to gouge the taxpayers. Having been in the consulting industry for 30 years I can say without hesitation that high hourly rates have little correlation to skills and qualifications. Rather, it comes down to marketing. High hourly rates stoke the egos of the people who hire them. The irony of the LIPA debacle is that 90% of its customers lost power when Hurricane Sandy hit. LIPA spends millions of dollars on consulting fees and never asks for an emergency preparedness plan?

My wife and I belong to a wine club that holds “blind” tastings several times a year. Everyone brings the same varietal and we taste the wines without any knowledge of price or the winery’s reputation. And very rarely does the most expensive wine manage to land among the top three selections. Imagine if owners selected their consultants based solely on qualifications?