An independent forensic audit could soon be underway in Fullerton after a March 2026 budget update by staff revealed publicly that nearly $10 million in general fund reserves were incorrectly categorized and are instead earmarked for specific needs, not general operations — including a $2.9 million clerical error that had gone unnoticed since 2022.
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Those findings leave city officials with less money in unassigned reserve funds that could be spent however the city needed, and with only weeks to finalize the next budget ahead of the June 30 deadline before the next fiscal year begins in July.
The initial disclosure during a March 17 staff budget presentation ignited a sharp split among council members. Some defended efforts by staff to correct the books, while others demanded answers on how the accounting error had gone unnoticed through three full audit cycles.
In response, the city has talked to Grant Thornton, a Newport Beach-based accounting and auditing firm, which for a fixed fee of $100,000, offered to conduct a phased review of the accounting. The firm said it had not identified signs of fraud based on its preliminary review of financial documents alongside the mayor, city manager and staff.
“Our purpose is really to understand what actually happened, why it happened, and who’s responsible,” a representative from Grant Thornton explained during a presentation of the firm’s proposal to the council on April 21. “If we do find instances where it appears we have (problems) with fraud, then we would immediately jump to that.”
Interim City Manager Eddie Manfro said he was prepared to retain the firm and initiate the first phase under his authority, though broader phases would still require council approval, which the council is set to discuss Tuesday. The firm said the first phase would take about five to six weeks to complete. The council took no formal action on the proposal during the last meeting.
Regarding the $2.9 million that was presented at the March meeting as a clerical error, city officials said in a later press release, “This adjustment ensures that funds are reflected in the appropriate account in accordance with accounting standards. The funds were not lost or misspent, but rather properly reallocated.”
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But it could have affected council members’ understanding of the city’s financial situation.
“We wiped out our entire reserves from one year to the next because of a clerical error of $10 million? That should raise massive red flags,” said Councilmember Ahmad Zahra, who accused city officials of downplaying the problem and pressed staff on why the error had persisted.
Mayor Fred Jung accused Zahra of “grandstanding,” adding that Zahra had been “briefed extensively” beforehand and was unfairly attacking staff, most of whom Jung said were not employed when the mistake occurred.
The city said it still holds $19.8 million in contingency reserves, which provide a restricted safety net for emergencies. Still, without corrective action, city staff warned those funds could drop if no changes are made to current spending and revenues to roughly 2% by June 2027, falling below the city’s policy on maintaining a 10% minimum in reserves in case of unexpected costs or revenue shortfalls. Such a drop would leave the city vulnerable if faced with a single major unexpected cost and could force drastic cuts to services or personnel.
“The city’s financial outlook reflects broader trends impacting many communities, including rising costs for labor, materials, and services,” Fullerton officials said in the city press release. “At the same time, revenues remain stable, with property tax revenues increasing by 6.23% due to growth in assessed property values.”
To reduce gaps in funding and improve reserve levels long-term, the city manager will present options to consider at upcoming budget study sessions, which are open to the public.
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