State auditors knew by 2005 that former Chelsea Housing Authority chief Michael E. McLaughlin was concealing his true salary from state officials and urged him to seek official approval for more than $40,000 in hidden income, according to interviews and records.
McLaughlin resisted, joking to auditors that “all my neighbors are rich and I have to keep up with them,’’ according to a person who heard the remark. But after McLaughlin said he would think about reporting his full income, records show the team from former auditor A. Joseph DeNucci’s office dropped the issue.
During the next five years, however, auditors discovered in the course of two additional examinations that McLaughlin was still concealing his true salary - and by ever-increasing amounts. Both times they did nothing.
By the time the Globe revealed on Oct. 30 that McLaughlin had become perhaps the highest paid public housing official in the United States, his $360,000 salary was a stunning $200,000 more than the amount he declared on state reports. McLaughlin resigned four days later, but not before one of the 2010 auditors invited him to lunch to cheer him up, according to a housing authority employee.
Now, Attorney General Martha Coakley has convened a grand jury looking into whether McLaughlin and others defrauded the state, calling at least two former state auditors to testify, according to two people with direct knowledge. Meanwhile, state Auditor Suzanne Bump, DeNucci’s successor, last week forced the supervisor of the Chelsea audits to resign because of what her office called his mishandling of the agency reviews.
“Mike’s salary was right there in the payroll records for anyone to see,’’ said one housing authority employee who asked not to be identified for fear of retaliation. “The auditors and accountants came and went, year after year . . . but nothing ever came out. Mike had a way of managing things so his salary just didn’t come out.’’
On Friday, Bump’s office declined to comment, but a spokesman confirmed that “after reviewing all audits of the Chelsea Housing Authority since 2005, she provided all audit materials to the attorney general.’’
The state auditors’ repeated failure to blow the whistle on McLaughlin’s admitted efforts to hide his extraordinary pay is part of a comprehensive failure of the financial overseers who were supposed to safeguard the $15 million in subsidies to Chelsea public housing from the state and federal governments.
At least two accountants - one working for the authority, the other filing independent reports to the US Department of Housing and Urban Development - were paid thousands of dollars a year to compile data and ensure that the Chelsea Housing Authority’s financial statements were accurate. They would have had access to payroll records that revealed McLaughlin’s income, but they never noted a problem.
Martin Scafidi, a certified public accountant who has audited the Chelsea Housing Authority for HUD since 2003, said he did not know McLaughlin’s true salary until it came out in the Globe. Scafidi said he did all the analyses he was supposed to, though he did not say whether he saw the payroll records.
McLaughlin “betrayed everyone,’’ said Scafidi, who was paid $10,500 for his 35-page audit and report on Chelsea last year. “He’s just a bad guy.’’
Former state auditor DeNucci said he, too, was unaware of the controversy about McLaughlin’s salary until the Globe story.
“We had good people doing’’ the audits, said DeNucci, who retired in 2011 after 24 years as auditor. DeNucci said the salary issue “never got back to me,’’ and he trusted his subordinates to handle the Chelsea audits.
Housing authority employees say the gregarious, politically savvy McLaughlin actively cultivated relationships with the auditors, so much so that one auditor, part of the 2010 team, asked McLaughlin to lunch after the scandal over McLaughlin’s salary became public.
In addition, McLaughlin was a friend of one of DeNucci’s most trusted aides, Robert Powilatis. The two had served on the board of a housing advocacy group together and Powilatis had donated to a political fund-raiser for Lieutenant Governor Timothy P. Murray organized by McLaughlin in 2009.
When state auditors were at the Chelsea Housing Authority’s office in October 2010, phone records show that McLaughlin and Powilatis called each other four times, though Powilatis said they never discussed the audit.
Powilatis, now retired, said he learned of McLaughlin’s pay from media coverage and played no role in the Chelsea audits. But he said any auditor or accountant reviewing the authority’s books should have recognized the paycheck discrepancy almost immediately and reported it.
“It was an outlier or a red-flag and it would be brought to light,’’ he said of McLaughlin’s outsized salary. “You go in and pick that up in five minutes.’’
But one former auditor’s office employee said some auditors may have felt they had no right to question McLaughlin’s salary, which had been approved by the authority’s board, unless it was so high that it represented a misuse of state funds.
McLaughlin, now facing multiple investigations, declined comment. In the past McLaughlin has defended his decision to dramatically understate his true salary to the state Department of Community and Housing Development, lightheartedly calling it “the rebel in me.’’
McLaughlin, now 66, also set himself up to collect the biggest state pension in Massachusetts history, based on his income, although the Chelsea retirement board has frozen his retirement application pending an investigation into whether he deserves an annual pension of $278,000.
One employee said it served McLaughlin’s interest to conceal his income until he could secure his pension, noting that McLaughlin became visibly upset several years ago when the state auditors asked for a copy of his employment contract. But he later reassured the employee, “I took care of it’’ and nothing more was said.
State audits are supposed to be in-depth, independent reviews of government agency finances, seeking out both mistakes and evidence of misuse of public funds. The Chelsea auditors spent weeks reviewing the books at the housing authority’s Locke Street headquarters where they could easily find McLaughlin’s $183,624 annual pay for 2005 by looking at the agency’s payroll and McLaughlin’s income tax filings.
They could also see that McLaughlin was reporting to the state an income of only $139,050. One DeNucci employee recalled that McLaughlin’s high salary was “the talk of the [auditor’s] office.’’
During the 2005 audit, the team told McLaughlin that the discrepancy was one of their main findings, according to people with direct knowledge of the discussion. McLaughlin tried to make light of the issue, these people say, but also asserted that he was not legally obliged to report his full salary to the state since the state provided only a portion of the authority’s funds.
Nonetheless, the auditors urged McLaughlin to report his full salary as state rules require and McLaughlin said he would consider it, these people say. The auditors made no reference to McLaughlin’s excessive income in their final report.
When the auditors returned in 2008, they found that McLaughlin was hiding even more income - $135,818 by the Globe’s calculation - and they again let the issue slide. By 2010, the gap had grown to $199,966. Again, they did nothing.
Accountants say that it is a major breach of professional standards to allow a financial misstatement to get worse without taking action after the problem has been identified.
Investigators for the attorney general quickly focused on potential lapses by the state auditors as they looked into how McLaughlin got away with his salary deception for so many years. Last week, state Auditor Bump’s office told an audit supervisor that he had to resign or be fired for his oversight of the Chelsea audits, according a person with direct knowledge of the situation. The supervisor resigned.
But the state auditors were not the only analysts who had access to the authority’s records. John D. Marotto, a Woburn certified public accountant who began preparing annual financial reports for the housing authority before McLaughlin arrived in 2000, declined to say whether he knew McLaughlin’s real salary.
During the two days after the Globe revealed that McLaughlin was making $360,000, McLaughlin called Marotto five times, including one conversation that lasted 35 minutes, McLaughlin’s phone records show.
Marotto declined to answer questions, issuing a terse statement that said: “I compile the information that is provided to me by the Housing Authority in the proper format for reporting purposes.’’
Likewise, accountant Scafidi, who was hired on a no-bid contract to provide an independent review of housing authority books for HUD, failed to identify the salary discrepancy for eight years.
Scafidi’s firm, who was paid by the authority, said his team typically spent two to three weeks a year inside the authority’s offices reviewing the books.
The report Scafidi filed last year certified that authority financial records were accurate even though McLaughlin had understated his salary by nearly $200,000.
“We did the work we were supposed do,’’ said Scafidi without going into details. “We report what we see. It will all come out after the investigation.’’
Officials at HUD repeatedly used Scafidi’s favorable reviews as one factor in awarding the Chelsea Housing Authority its highest performance rating year after year, which McLaughlin was quick to tout.
Looking back, federal officials acknowledge that they did not provide adequate oversight of the Chelsea Housing Authority, which gets $10 million in federal funds annually.
“We are very concerned that no one detected his salary on the local or the HUD level,’’ said HUD spokesman Jereon Brown
State housing head Aaron Gornstein said if his agency had discovered McLaughlin’s true salary, it would have ordered him to reduce it drastically or it would have withheld state funding.
“McLaughlin’s salary was absolutely unacceptable,’’ Gornstein said.Scott Allen of the Globe staff contributed to this report. Andrea Estes can be reached at firstname.lastname@example.org, Sean P. Murphy at email@example.com.