February 6, 2016

The Honorable District Board

South San Luis Obispo County Sanitation District
P.O. Box 339
Oceano, CA 93475
Mr. John Clemons III, CPO and Acting District Administrator
South San Luis Obispo County Sanitation District (DISTRICT)
1600 Aloha Place
Oceano, CA 93475
ADDENDUM TO PAST MANAGEMENT PRACTICES REVIEW
Dear Honorable Board Members and Mr. John Clemons III, Acting District
Administrator;
I wish to clear up a situation that seems to have been misinterpreted by Mr.
Wallace and his attorney regarding my failure to confront him with the
Malfeasance allegations as detailed in my recent report to the Board (including
all of the cited exhibits), which were subsequently released by the Board to the
public.
During my presentation to the Board, I was asked if I had spoken with Mr. Wallace
about the Malfeasance issues and I answered (in substance) that I had not. My
answer was vague as to the why I had not confronted Mr. Wallace with these
allegations.
In my executive summary to the Board, I stated:
Finally, there was potential Malfeasance in office in the solicitation of payments
by Wallace for the Wallace Group while acting in the capacity as the District
Administrator for the DISTRICT. Malfeasance is a public officials performance
of an act that is contrary to law. Because potential violations of law are
investigated and processed by law enforcement officials, we suggest that this
report be provided to law enforcement officials for their determination.

February 6, 2016
ADDENDUM TO PAST MANAGEMENT PRACTICES REVIEW
I should have added that it is well-established in the auditing world that if during
the audit/examination of a vendor doing business with the government, if the
examiner finds or detects apparent indications of fraud or in this case suspected
violations of law, the auditor/examiner is instructed not to confront the person
suspected of the violation of law.
Below is a quote from U.S. General Services Administration, Office of Inspector
General, Office of Audits, Procurement Fraud Handbook:
"If the auditor believes the contractor is involved in fraudulent activity, under no circumstances
should the auditor confront the contractor with the suspected fraud before providing notice to,
and obtaining legal advice from, the Office of Counsel (JC) and discussing the situation with the
Office of Investigations (JI).

This is also the well-established protocol in IRS audits as well, and also in the
private sector. This is why I did not confront Mr. Wallace regarding the potential
violation of law. I reported the issue to the Board of Directors, and to the District
Administrator, who then followed the proper procedure by turning the report over
to the proper authorities who are qualified to assess potential violations of law.
If I had confronted Mr. Wallace with the allegations, and he said what he said in
the open forum last week, it could have then been used against him by the law
enforcement authorities, and any admission or confession could have then been
devastating to Mr. Wallace. Similarly, the same would be applicable to any of the
Wallace employees who were involved in the discharge permit applications and
covered in the Malfeasance section of my report. This is not to say that the
Wallace Group employees had done anything wrong, and I did not suggest that
they had done so.
Further, there is a misconception that I did not spend enough time with Mr.
Wallace covering the issues identified in my report. I spent more time with Mr.
Wallace than with any other witness in my review. I spent 3 hours with him and
his attorney, and countless hours on the telephone in response to Mr. Wallaces
concerns and questions. As I stated in my report, Mr. Wallace was very
cooperative and provided all of the information I requested.
I traded several emails with Mr. Wallace regarding the interview of his employees,
but since he insisted on being present during the interviews, I did not believe that it
would be a prudent use of my time, but that only applied to Ms. Billing and Mr.
Zehnder, both who were mentioned in the discharge permitting.
2

February 6, 2016
ADDENDUM TO PAST MANAGEMENT PRACTICES REVIEW

As noted in my report, I did interview Mr. Wallaces former administrator, through

Mr. Wallace, and in fact cleared up an allegation that the Wallace Group had
destroyed or purged District documents.
Respectfully submitted,

Carl R. Knudson, PI CFE

Knudson & Associates