PBS&J: Lessons Learned?

As PBS&J strives to leave scandal behind, is the Southeast’s largest engineering firm poised to be stronger than ever?

By Scott Judy

Ever since Southeast Construction’s annual Top Design ranking first expanded to include engineering firms, Tampa-based engineering consultant PBS&J has taken the top spot. That situation was the same this year, when the firm reported approximately $301.7 million from Southeast-area projects and $537 million in total revenue in 2006.

Those numbers reflect considerable growth since that first 2003 ranking, when PBS&J reported $194.4 million in Southeast revenue and $344.5 million overall.

Looking at the numbers, it would appear that it has been onward-and-upward at PBS&J ever since that time. And, mostly, it has been.

But there have been some unbelievably bad times, too.

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Past

Earlier this year, three former managers from PBS&J were sentenced to prison on federal fraud and conspiracy charges for their roles in embezzling millions of dollars from numerous government agencies. For more than a decade, these individuals – the firm’s former chief financial officer, W. Scott DeLoach; Rosario Licata, the former manager of accounts payable; and Maria Garcia, former accounting manager and payroll supervisor – had bilked state and federal agencies by creating phony charges and then skimming those extra payments into their own personal accounts.

In all, the scheme added up to more than an estimated $36 million over the roughly 14 years that it was operational. That included overcharging the Florida and Texas transportation departments by more than $12 million and $5 million, respectively.

Luckily, and ironically, the firm was fairly conservatively managed, and it had significant reserves on hand to pay back what was due to these clients.

Otherwise, “We’d probably be somebody else’s firm today,” says John B. Zumwalt, chairman of the company.

The discovery of such criminal wrongdoing from such trusted employees had a psychological impact that was harder to calculate, Zumwalt adds.

“It was a knife through the culture of the firm,” he says. “These were longtime, trusted employees. They were part of the management team. They were trusted and should not have been trusted. Unfortunately, our oversight of what they were doing should have been more than what it was.”

Today, Zumwalt and others see that the firm’s oversight measures had not grown as quickly as the firm itself had. From 2000 on, the firm more than doubled in size, in part from numerous acquisitions and also from organic growth in hot markets such as Florida and Texas.

PBS&J began to catch up to itself when it started implementing standards from the Sarbanes-Oxley Act, the federal governance legislation that had been passed as a result of corporate scandals at publicly traded firms like Enron and Tyco. Though privately held, PBS&J was required to adhere to these standards because of the size of its employee shareholder group.

It was during this period, in 2004 and 2005, as a more robust internal accounting audit took place, that questions began to be raised about past billings.

Prior to this, Zumwalt, who has more than 30 years with the firm, says PBS&J had a culture of internal trust, where everyone was simply assumed to be ethical and acting accordingly.

“Our culture was one of a leadership-driven organization: a high level of trust, all people are good and let’s do some great things in the world of engineering and science,” he says. “Obviously this (scandal) brought that to a screeching halt. Evidently, not all people can be trusted.”

PBS&J leadership began coming clean right away.

In May 2005, Zumwalt sent a letter to then-Secretary Jose Abreu of FDOT and other agencies advising them of the company’s recent findings. The most immediate issue appeared to be the overhead rates the firm was using to bill the agency, says Terry Cappellini, FDOT procurement manager. The rates were quickly rolled back pending further results from the investigation.

 “FDOT took the matter very seriously because it affected the billings of the engineering firm that had the largest dollar volume of consultant contracts with us,” Cappellini says via email. “PBS&J did keep FDOT informed. However, follow-up issues came to light that led to further complications. The issue of trust was a major factor in internal discussions and ultimately was a part of the support that led to the firm losing six months of ability to compete on FDOT contracts during 2006.”

Eventually, ongoing contracts were amended to an overhead rate “significantly lower than the audited rate,” says Cappellini. A final settlement for repayment was finally reached in December 2006.

Overall, Cappellini says, “PBS&J has been open and forthcoming. (It) made all of the details of the investigation and the forensic audit available to the department and provided full access to its records and to the law firms and accounting firms it contracted with to conduct the investigation. PBS&J was prompt in making full restitution, once the amounts were agreed to.”

Plea deals with the three former employees were announced in early 2007, and sentencing occurred in July. The guilty trio all received sentences of more than five years for their crimes.

Present

Meanwhile, the firm has been continuing forward on the implementation of stricter corporate governance measures, with complete Sarbanes-Oxley compliance the eventual goal.

Also, shortly after the discovery of the embezzlement scam, PBS&J hired C. Lee Essrig as vice president and chief ethics and compliance officer. Essrig had previously served as Honeywell’s first-ever ethics and compliance officer.

She’d also served in the same capacity for a kidney-donation company, which she joined after it came under investigation for federal fraud, and implemented its first ethics and compliance program.

Whereas PBS&J employees were previously simply assumed to be acting ethically, the new program strives to ensure that they are actually doing so – while at the same time not negating everything about the company’s former “leadership-based” culture.

“One of the things I’ve really tried to do in my communications to employees is to reinforce the strong culture and values that the company has and to communicate the fact that I’m not here to teach them ethics or to presume that they’re not ethical,” Essrig says.

 “We don’t think everybody’s bad and we need to turn them around.”

She says her job is to educate.

“It’s not always easy today, with all of the different government regulations and laws and business challenges, to make the right decision,” she says. “And it’s not always easy to recognize what a risk is – what somebody’s doing that could be a risk to the company.”

All 4,000 employees have now been required to undergo ethics and compliance training. Additionally, PBS&J has enhanced its code of business ethics and activated an employee help line.

Future

Zumwalt says the scandal will not have a long-lasting effect on PBS&J’s long-term prospects.

“The company’s still poised for growth,” he adds. “Certainly the demand for our kind of services is growing around the nation, particularly on the infrastructure side.”

And while the company has had to slow down its acquisition plans due to the dwindling of its cash reserves, Zumwalt indicates that growth strategy should start accelerating again soon.

“We had a lot of money leave the back door, so now it’s a matter of getting ourselves in order, capitalization-wise, and getting ready to move ahead again,” he says.

Not surprisingly, Zumwalt sees transportation and water as the two brightest markets for PBS&J’s future. “Water may become bigger than transportation because we continue to have climate change and the need for water,” he says. “Florida’s definitely hot on water right now.”

The firm is also looking for additional growth by taking on construction management duties and increasing its involvement in design-build projects. It started PBS&J Constructors to venture into this arena a few years ago.

“Doing construction management-at-risk and plain old construction is prevalent now as people look for other ways to serve the construction industry than just out of the classical engineering mode,” Zumwalt says. “You’re starting to see some of the bigger firms – URS, CH2M HILL – all deriving money from construction that wasn’t there five years ago.”

PBS&J is also preparing to go international – something it first tried in the 1990s.

“We had Post Buckley International back in the 1990s that was kind of shotgunning around the planet doing things,” Zumwalt says. “We were trying to launch international work from a Florida-based reputation. I thought, before we go international, don’t we need a national reputation first? So we’ve focused on building that national reputation, and now it’s time to look at other parts of the world where we can put a stake in the ground.”