An independent financial review presented to the Fullerton City Council on Monday concluded that the city’s $2.9 million accounting error and the disappearance of roughly $10 million in unassigned fund balance were the product of bookkeeping mistakes, weak financial governance, and unclear budget presentation — not fraud. But the firm that conducted the review, Grant Thornton Advisors LLC, was explicit, in both its presentation and its written report, that it was never asked to look for fraud in the first place.

A Review, Not an Investigation

According to Grant Thornton’s engagement materials, the City of Fullerton hired the firm under a Statement of Work dated April 30, 2026, to analyze specific accounting transactions and budget items from the fiscal year ending June 30, 2025. The scope was to determine whether those transactions were conducted at arm’s length, complied with generally accepted accounting principles, followed city policy, and served a legitimate city purpose.

The engagement materials state plainly that Grant Thornton “was not retained to investigate specific allegations of fraud or misconduct,” was “not engaged to perform a forensic review,” and that its procedures “were not designed to identify, nor should they be relied upon to have identified,” all information that could bear on the matter. The firm also notes it was not engaged to perform an audit or provide attest services under AICPA or Government Accountability Office standards.

Despite that limited mandate, both the slide presentation and the written report state that, “based upon the procedures performed, no indicators of fraud or intentional misconduct were identified.” During the June 16 Council meeting, that combination — a firm not tasked with investigating fraud, nonetheless offering a conclusion about its absence — drew direct questions from Council Member Dr. Ahmad Zahra, who asked how the firm could reach that conclusion without having investigated it. Grant Thornton director Ann Lane responded that the conclusion was based on the procedures the firm did perform: review of underlying documentation, review of internal communications, and discussions with city staff and Council members, limited specifically to the two transactions in scope and the FY 2024-25 budget presentations of April 23 and June 4, 2024. She did not extend that conclusion to the broader question of citywide financial governance.

The $2.9 Million Error

The report traces the $2.9 million prior-period adjustment to a property at 501–515 North Pomona Avenue, originally purchased by the Fullerton Redevelopment Agency in 2004. When the state dissolved redevelopment agencies in 2012, the property passed to the city’s Successor Agency. In December 2020, while preparing for an audit, city staff in the Administrative Services department determined the property should instead be recorded in the General Fund and directed that a journal entry transfer it.

That entry, and a follow-up correcting entry made the same month, did not use the “due to/from” interfund accounts required under governmental accounting standards when no actual cash changes hands between funds. Instead, the entries ran through a “claims on cash” account and ultimately posted directly to fund balance — both irregular treatments, according to the report. The result was that the General Fund’s fund balance and its claims-on-cash balance were each overstated by $2.9 million.

In 2022, the city sold the property in a transaction the report describes as “an apparent arm’s length transaction,” unanimously approved by the City Council on November 15, 2022. The report identifies no issue with the sale itself. Separately, in 2022, staff determined the original 2020 transfer had been wrong and attempted to reverse it — but the reversing entry corrected the assets-held-for-resale account without correcting the fund-balance error, leaving the $2.9 million overstatement in the city’s books until it was caught during the FY 2025 external audit and corrected through a prior-period adjustment.

The Vanishing $10 Million

Grant Thornton’s review found that unassigned fund balance — money with no formal restrictions on its use — grew from about $4 million in FY 2022 to roughly $10.1 million by the end of FY 2024, before dropping to zero in FY 2025. The firm attributes that decline to several compounding factors: a $7.4 million operating deficit (expenditures exceeding revenue), $4.5 million in net transfers out of the General Fund, a $2.9 million reduction tied to the correction described above, and a $2.8 million reclassification of fund balance into assigned, committed, or restricted categories. After accounting for these factors and a $1.2 million draw from the contingency reserve, Grant Thornton’s reconciliation came within $290 of fully explaining the depletion.

Critically, the report identifies the operating deficit as “the most significant driver.” The adopted FY 2024-25 budget — approved by the Council on a 4-1 vote on June 4, 2024 — included a planned deficit exceeding $9.4 million. In other words, the depletion of fund balance was substantially foreseeable at the time the budget was adopted, though the report notes the budget materials did not clearly communicate that fact: the presented “beginning fund balance” did not reconcile to audited financial statements (a roughly $468,000 gap even after adjustment), a $5 million reserve tied to a county road-maintenance matching program was never properly reclassified as “assigned” fund balance, and the budget’s “net operating surplus/deficit” line blended transfers together with core operating results in a way Grant Thornton said could obscure the General Fund’s actual performance.

Conclusions and Recommendations

Grant Thornton’s bottom-line conclusion, as stated in both the report and presentation, is that the issues it found “relate to financial governance and oversight, accounting treatment, financial reporting, and budget presentation” — not fraud or intentional misconduct. The firm’s five recommendations are to establish formal financial governance, including hiring a Chief Financial Officer with governmental accounting experience and creating a standing Council finance committee; to standardize interfund accounting procedures; to improve budget presentation so that beginning fund balances reconcile to audited financials and operating results are shown separately from transfers; to implement regular fund-balance “rollforward” reporting; and to revise the city’s financial policy to provide clearer operational guidance rather than aspirational language.

The report also notes that the city has seen turnover in key finance positions since 2024, including departures of both the prior City Manager and the prior Director of Administrative Services, with the Administrative Services role currently filled on an interim basis.

What the Report Does Not Say

Because the engagement was explicitly not a fraud investigation, the report does not address — and does not purport to rule out — motive, intent, or any individual’s state of mind in connection with the budget presentations or the 2020 journal entries. The conclusion that no indicators of fraud were identified is bounded by the procedures actually performed: document review, email review, and interviews related to two specific transactions and two specific budget meetings. Grant Thornton stated during the presentation that it does not, at this time, recommend a further “Task 3” forensic investigation into the city’s broader finances, based on the results of the work completed so far.