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Seattle City Councilmembers today called for an independent audit of Seattle Public Utilities’ financial practices in the wake of the arrest of a former employee on suspicion of stealing $1 million in developer payments for water main extensions.

City Councilwoman Jean Godden, chair of the Libraries, Utilities and Center Committee, asked the Seattle City Auditor to review financial controls that could be subject to high-risk transactions such as water main accounts.

Godden warned that there would be no discussion of utility rate increases until SPU got its financial house in order. As part of the 2012 budget, the Council approved a nearly 25 percent rate increase through 2014.

“In these tough economic times, we need to safeguard ratepayers funds,” Godden said.

Joseph Phan is expected to be charged with multiple counts of first degree theft by the King County Prosecuting Attorneys Office today. He is being investigated by Seattle police for diverting funds into a personal bank account between 2006 and 2011, when he was fired for adjusting his own utility bill.

Melina Thung, SPU deputy director for finance, said Phan presented contracts for water main extensions to customers for payment, rather than sending out an invoice. He then collected the payments and deposited them into an account he opened in his name and that of the City of Seattle.

Thung said the utility has taken immediate steps to change the process by which contracts and invoices for water main extensions are handled to ensure that invoices are issued by the utility and that checks are submitted to accounts receivable.

Councilmembers also asked what other lines of business at the utility and throughout city government might be vulnerable to abuse. The Council in 2011 added an auditor dedicated specifically to SPU and Seattle City Light.

City Auditor David Jones said SPU does about $800 million a year in business and Seattle City Light about $900 million. Previous city and state audits did not review the Project Engineering and Management Division, for which Phan worked.

Councilmembers asked Jones and SPU officials to report back with an action plan at the committee’s April 3 meeting.