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Culture of Trust


The founders' no-debt philosophy has helped the company deal with its recent financial blow. It had $60 million on hand that it was able to use to pay bills from its lawyers and accountants and to repay clients. From left, founders Alex M. Jernigan, Howard M. "Bud" Post, Robert P. Schuh and John D. Buckley.
Photo:
PBS&J

In 1959, Howard M. "Budd" Post, a young engineer with the Florida road department, was offered a chance to help create Miami Lakes, the state's first master-planned community.

Putting up $500 each, Post and three fellow engineers formed a company that grew as quickly and dynamically as Florida itself.

Along with managing design and construction of Miami Lakes, the young men who made up what became Post, Buckley, Schuh & Jernigan engineered the 65-mile Card Sound Bridge that connected the mainland to the Florida Keys. They designed the first reverse-osmosis water treatment plant in Florida, Aquarina, and created the Orlando Easterly Wetlands, one of the biggest wetlands for wastewater treatment.

By the 1980s, the Miami-based firm, now known as PBS&J, was on its way to becoming the Florida Department of Transportation's largest engineering consultant. It was named general engineering consultant to the Orlando-Orange County Expressway Authority in 1981 and to Florida's Turnpike Authority in 1988.

But when Florida tumbled into recession in the early 1990s, then-Chairman Bill Randolph decided that PBS&J needed to focus growth outside the state. Acquiring firms from here to California, he doubled PBS&J's size by the turn of the century. Between 2000 and 2005, the current chairman, John B. Zumwalt III, doubled it again -- to more than half a billion in annual revenue.

Zumwalt was particularly proud of preserving PBS&J's trusting, small-firm culture as the company grew to 4,000 employees in 75 offices in 24 states and Puerto Rico. But he and the rest of PBS&J's engineer-dominated leadership also made some key miscalculations. The biggest: As the employee-owned firm grew -- it posted $540 million in revenue last year -- it was slow to institute the kind of basic accounting procedures that are standard in large companies. "The firm grew far more rapidly," Zumwalt acknowledges, "than our internal-control system."


"The firm grew far more rapidly than our internal-control system," says company Chairman John B. Zumwalt III, who disclosed the embezzlement scheme immediately -- to the SEC, employee-shareholders and clients. "From dayone, I made the decision that we would be totally transparent with everyone."
Photo:
Jeffrey Camp

Suspicious invoices

What grew into a $36-million embezzlement scheme began very small, as is typical in fraud cases. In the early 1990s, according to prosecutors and auditors, two women who'd worked in PBS&J's finance department since 1978, Maria Garcia and Rosario Licata, began identifying old vendor invoices, issuing checks in those amounts, cashing the checks themselves and splitting the proceeds. Later they began to write checks to family and friends, paying for services that had never been rendered.

Their boss, William Scott DeLoach, PBS&J's controller and an up-and-comer in the company, soon called them on the suspicious invoices. But when he discovered what Garcia and Licata were doing, he decided to join the two rather than expose them.

From 1999 to 2003, Licata, as an accounts payable supervisor, would issue checks to DeLoach from one of the company's major bill-paying accounts. To avoid calling attention to either the number of checks or the amounts, DeLoach deposited them in various personal accounts he'd opened throughout Miami. In turn, DeLoach wrote checks to Garcia and Licata.

Along the way, DeLoach remained one of the most-trusted members of the firm's close-knit senior management team, which Zumwalt kept spread around the nation so managers could work "shoulder-to-shoulder" with employees. DeLoach was in Miami, Zumwalt in Tampa, the anointed fourth-generation leader, company President Todd J. Kenner, in Las Vegas.


Company controller William Scott DeLoach discovered the criminal behavior of two subordinates. But rather than report them, DeLoach decided to join in.Photo: PBS&J

In 2002, DeLoach was named to the firm's board of directors. In 2003, he was tapped as board treasurer. That same year, he, Garcia and Licata began to divert money from PBS&J's medical benefits account. Licata opened secret bank accounts and created what auditors describe as a phantom political action committee, "PBSJ PAC." The signatory on the secret accounts was DeLoach, who over two years transferred in millions of dollars from the medical benefits account.

The scheme could not have worked without all three: They collaborated to post unsupported journal entries in the company's ledger and then manipulated the bank reconciliations. Sometimes, they simply deleted fraudulent checks from the statements; at others, they added false deposits to inflate account balances.

Meanwhile, DeLoach continued to climb the corporate ladder. In January 2004, he was named CFO.

In addition to bilking their fellow employees, DeLoach, Garcia and Licata embezzled from clients, including Florida taxpayers. To make up what they were taking out the back door, they created bogus expenses and billed them to clients using general and administrative (G&A) accounts, which charge for project management, administration and overhead. Their manipulation of G&A accounts inflated overhead rates for government contracts.

Prosecutors say the three misappropriated some $36 million. Garcia bought sleek sports cars, Rolex watches and an interest in a local restaurant. Licata bought real estate in Florida and Nicaragua and engaged in high-stakes gambling. DeLoach had a multimillion-dollar home in Aventura and another in the Keys, sports cars and a yacht. His checks written from the phony PBSJ PAC account include more than $125,000 to ProPlayer Stadium, $92,000 to pay his American Express card and $38,000 to Neiman Marcus. He even gave $10,000 to Wake Forest University, where he'd earned his bachelor's degree in accounting.

"They were very generous people," says Cecil Bragg, inspector general for the Florida DOT. "It's easy to be generous with other people's money."


When internal auditor Melissa Eubanks couldn't get a satisfactory answer about a bank reconciliation of $804,223, she notified the company's audit committee.
Photo:
Gregg Matthews

Fessing up

The generosity ended after the employee-owned company began a voluntary effort to comply with the 2002 Sarbanes-Oxley Act, the federal law passed in response to major corporate and accounting scandals such as Enron and WorldCom. The act, which only public companies must follow, requires among other measures a corporate audit committee with independent members and internal audit personnel.

PBS&J's internal auditor was 35-year-old Melissa Eubanks. In January 2005, she couldn't get a satisfactory answer about a bank reconciliation of $804,223. The reconciliation noted, "less check voided to wrong bank code."

Eubanks went to the audit committee, which hired a team of securities lawyers from Holland & Knight. They in turn brought in forensic auditors, who found significant differences between original bank statements and the statements that DeLoach and the others had put in PBS&J's files.

Part of the fraud was decidedly low-tech: Using white correction fluid, someone had wiped thousands of dollars off statements with a few brushstrokes -- in one instance, $52,362.86 became $362.86. "This was not a complicated scheme at all," says Bragg.

As soon as he knew a forensic audit was under way, a remorseful DeLoach fessed up. He brought his lawyer, Jane Moscowitz, to work, admitted everything and turned over all his assets, including his homestead residence, 401(k) and marital assets. "It's the most extraordinary remorse I've seen in 30 years of practice," says Moscowitz. "He was in way, way over his head for his job." DeLoach, Garcia and Licata pleaded guilty to mail fraud in a deal with prosecutors and were to be sentenced last month.

Zumwalt decided to immediately disclose everything -- to the SEC, PBS&J's employee-shareholders and clients, including the two largest, the Florida and Texas transportation departments. "From day one, I made the decision that we would be totally transparent with everyone," says Zumwalt. PBS&J retained Holland & Knight and two top accounting firms for an internal investigation that took nearly two years. Financial sleuths pored over company records, investigated employees and scoured hard drives to determine the extent of the fraud and make sure it was limited to three people. Rod Bell, head of H&K's securities group in south Florida, says he's confident the scheme stopped with DeLoach, Garcia and Licata.

The cost to figure out the fraud and to calculate how much PBS&J owes its clients has reached $20 million, Zumwalt says.

The scandal also cost PBS&J a significant amount of business. The company was suspended by the Texas transportation department and voluntarily stopped pursuing Florida DOT jobs as the agencies conducted their own investigations. Lowell R. Clary, assistant secretary for finance and administration at Florida's DOT, says the agency pegged its loss at $12 million. PBS&J has repaid in full and is back in business with DOT, where it is program manager to five of the eight districts.

Other Florida governments overbilled included the Orlando-Orange County Expressway Authority and Orange and Polk counties. The company has either repaid or is in the process of repaying those agencies. In January, it paid $6.4 million to the U.S. Department of Justice to resolve overstated overhead rates on hundreds of contracts with more than a dozen federal agencies.


No regrets: Tom Barry, a longtime Department of Transportation official who served as the agency's secretary from 1997 to 2003, went to work for PBS&J in 2003 as a senior vice president in charge of Florida transportation operations. He says in the wake of PBS&J's recent problems, old friends have asked him if he's sorry he took the job. "I tell them it's reinforced my decision to join the company," Barry says. "The way the company has handled this throughout the process and the transparency ... it's been a huge positive in my mind." Photo: Gregg Matthews

In November, with outside auditors digging into its own books, OOCEA decided to put longtime monopoly contracts out to bid, including the PBS&J contract that has earned the firm more than $82 million over the past quarter-century.

But overall, Clary and others say the quality of the firm's work and the trust it earned over nearly 50 years in business helped maintain goodwill with clients. The company also has been able to weather the financial blow, in large part thanks to the no-debt business philosophy carried forward from Budd Post, John Buckley, Bob Schuh and Alex Jernigan. "They always made sure they could pay the bills, even if it meant personal sacrifice," says Phillip Searcy, an independent board member who worked for PBS&J from 1972 until his retirement in 2001. The firm had in reserve accounts the nearly $60 million required to pay its lawyers and accountants and repay clients.

The biggest question mark that remains for PBS&J, its employees and clients is an ongoing FBI investigation into illegal campaign contributions at the firm that was sparked by the embezzlement probe. Federal officials found DeLoach illegally contributed to U.S. Sen. Mel Martinez's campaign in 2004 and asked four PBS&J employees to do the same. Employees and their spouses made contributions totaling $11,000, and DeLoach reimbursed them courtesy of PBS&J. Zumwalt says the practice is strictly forbidden at the firm and was part of the fraud. The FBI has declined to comment on its investigation.

While the damage to the firm's reputation and finances has been painful, PBS&J employees say the blow to the firm's culture hurt the worst. After becoming president in 2000, Zumwalt had redoubled efforts to keep the company close and community-oriented as it grew, with efforts such as "Leadership PBS&J" modeled after the Leadership Florida program. DeLoach was a graduate, and Zumwalt held him up as a model of the firm's commitment to succession planning and promoting from within.

Zumwalt also had opened the company's employee-ownership program to all full-time employees. The 45% who owned a piece of their workplace have watched their equity shrink in the wake of the embezzlement. "This was a very family-oriented company, where everybody knew everybody, and everybody was close," says Scott Lawson, senior vice president and national service director in PBS&J's Atlanta office. "It was just like finding out your own brother had done something to destroy the family."

"The way I see it is that we were in Camelot," says Zumwalt. "Now we are coming out of Camelot, and the real world is upon us."


"I hope we never lose that deep-founded trust in each other," says President Todd J. Kenner, who moved from the company's Las Vegas office to Florida last June.

Fresh start

While the embezzlement rudely booted the firm from Camelot, it hasn't swayed Zumwalt and other company leaders from their goal of becoming a $1-billion firm -- "the only $1-billion firm with a culture," Zumwalt likes to say. The company is focusing on the transportation, water and facilities markets. It's also targeting the fast-growing applied technologies services market, which includes risk and emergency management and high-tech mapping and surveying.
Ironically, just as the firm goes global, it also is returning to its Florida roots -- pulling all senior managers to Tampa, where it moved its headquarters last year in an effort to "make a fresh start, a different way of going forward," says Zumwalt.

In addition to gathering its senior managers under one roof and strengthening its accounting and audit procedures, the firm has hired an ethics officer and recruited an outsider with public-company experience as CFO. Donald Vrana was the chief accounting officer, controller and treasurer at Omaha-based Sitel Corp., where he oversaw implementation of Sarbanes-Oxley internal controls. Lawson, the national service director, says with employees, clients and the government all clamoring for tighter controls, "now it's like the pendulum has swung in the other direction, where our processes and controls are better than anyone else's in the field because everything we do from now on has to be beyond question. There's a general attitude that we'll all be smarter and stronger because of this. But it's been tough."

Kenner, PBS&J's 45-year-old president who has worked for the company in Las Vegas since a 1992 acquisition, relocated to Tampa last June and is expected to take the reins from Zumwalt someday. PBS&J's trusting culture may have led to its greatest crisis, Kenner says. But he also predicts it's what will pull the firm through. "I hope we never lose that deep-founded trust in each other," says Kenner, a marathoner with his eye on the long run. "That doesn't preclude us from verifying, from really challenging each other, which is what we didn't do as
effectively as we should have.

"But we have to keep the commitment to our culture, to the sense of purpose and cause we feel personally and professionally," Kenner says. "I really don't see it as worthwhile without that."

High-Ranking

Engineering News-Record ranks PBS&J 22 among top U.S. design firms based on 2005 revenue. Here's how the company ranks in specific categories:

Category Industry Rank
Transmission lines and aqueducts 4
"Pure design" 5
Multiunit residential 8
Sanitary/storm sewers 8
Highways 8
Transportation 9
Bridges 12
Mass transit and rail 14
Airports 9
Sewer/solid waste 11
Wastewater treatment 16
Water supply 13
Water treatment/desalination plants 14
Retail 22
Source: Engineering News-Record, June 2006

PBS&J Projects

Significant PBS&J projects outside the Sunshine State:

? Sacramento, Calif.: For the largest infill project in the U.S., PBS&J is preparing the environmental impact report that will reshape Sacramento's decades-old rail yards into a multiuse complex.

? Fort Belvoir, Va.: PBS&J is part of the team selected to oversee the high-profile, complex task of preparing Fort Belvoir to address Base Realignment and Closure recommendations.

? Hartsfield-Jackson Atlanta International Airport: PBS&J provided engineering services and construction documents for site preparation and paving and lighting of the new fifth runway.

? Central Texas: The company has a contract with the Texas Department of Transportation's Austin District for Highway 45, Loop 1 and Highway 130, part of which opened ahead of schedule in 2006.

? Washington, D.C.: PBS&J is designing protective perimeter security systems at the Russell Senate Office Building, Ford House Office Building and the Capitol Power Plant.

? Centers for Disease Control, Atlanta: PBS&J was recently awarded a five-year, $1.5-million contract and a three-year, $1.2-million contract by the CDC Health and Environmental Safety Division for hazardous waste management and environmental management technical assistance.

? California: The firm is mapping more than 13,000 miles of levees, canals and flood-control features, setting the stage for advanced analysis and risk assessment.

? Las Vegas.: PBS&J is providing environmental, permitting, land surveying and right-of-way services for the conveyance system that will remove highly treated effluent from a water body known as the Las Vegas Wash directly into Lake Mead.