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 official’s 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

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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. Wallace’s 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.

February 6, 2016 ADDENDUM TO PAST MANAGEMENT PRACTICES REVIEW

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As noted in my report, I did interview Mr. Wallace’s 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