Nepotism. Millions of unbudgeted spending. Lack of control of cash deposits. Untracked student loans. Material weaknesses and substantial deficiencies in internal financial controls. A drumbeat of major failings concludes the just released audit of the conducted by the Albuquerque accounting firm . The audit covered the fiscal year ending June 30, 2011.

The audit resulted in an adverse auditor’s report on compliance with federal and state laws for major programs. Findings of material weaknesses or substantial deficiencies were issued in thirty areas. 

Among the more serious findings:

–The Department did not comply withrequirements regarding cash management, periods of availability, allowable costs, procurement, suspension and debarment, federal grant reporting, level of effort, subrecipient monitoring, and eligibility that are applicable to its major federal programs.

–As a result of incorrectly transferred data for student loans, in FY10 billing ceased and interest was not accrued on many active loans in repayment, and billing and interest accrual had not begun on some loans that should now be in repayment. Further, the Department did not record or track the amounts of student loans forgiven in the general ledger during the year. This condition continued through FY11. The Department became aware of these problems as early as 2009.

–The Department failed to document all cash receipts in the check log, and failed to reconcile the check log with manual deposits. For 4 of 10 disbursements made subsequent to year end, no accrual was posted to record the receipts in the proper period, for a total FY11 amount of $6,539,810. As a result, there is greater chance of theft, error and fraud in the handling of these funds.

–Capital projects activity for the year were not properly accounted for and were not reconciled resulting in a net understatement of expenditures in the amount of $3,909,676 (5 projects) and a net overstatement of revenues in the amount of $19,070 (1 project). For 12 of 34 capital projects expenditures tested, documentation supporting expenditures by project recipients was not adequate to determine that expenditures actually occurred and in what period they occurred.

–In one out of six disbursements tested, the travel and per diem reimbursements/advances were not properly approved. When approvals are given via email, no documentation (electronic or paper) was retained as proof of approval. In three out of six disbursements tested, there was not enough supporting documentation attached to reimbursement requests to determine if an event was actually attended.

–The June 30, 2011, audit report was not filed with the State Auditor until almost a year after it was legally required.

–The Department’s actual expenditures exceeded budgeted expenditures by over $30 million dollars. A negative fund balance currently exists for capital projects.

–The Department entered into a professional services contract with a company in which the spouse of a key employee had a substantial interest, and failed to disclose through public notice the employee’s
substantial interest. The Department incurred costs of $47,500 and $385,110 during the years ended June 30, 2010 and 2011, respectively. There was another key employee, the Financial Aid Director, who was Treasurer of the Board of this same entity during FY11.

–In one out of five procurements tested, the file did not contain documentation of the required open procurement policy. The purchased item had a cost of more than $10,000, and documentation was not maintained to show advertisement, collection of bids, and evaluation of contract selection.

–The Department lacked records to show that disbursements to institutions of higher education used the funds for allowable purposes. The Department also failed to monitor the appropriate use of Federal pass-through funds.

–Of the two students randomly tested for eligibility for the federal health professional loan repayment program, one file did not have documentation of an active NM license or proof of U.S. citizenship. The other file did not have documentation of proof of U.S. citizenship, and the signed employee form was signed prior to the end of period verification, therefore unable to show that employee was working full time as required by grant agreement.

–Deficiencies in federal grant reporting may jeopardize continued funding.

A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis.  A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.

What Caused The Problems?

Many of the deficiencies were attributed by the auditors to a high turnover in personal, no doubt caused by the change in administration.  In some instances, new employees did not receive adequate training.  Many key management personnel were replaced during this time frame.

Many problems were inherited from prior years and had continued for some time, including problems with data passed from the previous administration.  Some deficiencies were blamed on inadequate accounting resources within the Department.  The Department maintained a policy of approving per diem by e-mail, which the auditor criticized because such documentation is not then attached to the disbursement packet.  The auditor also found that budgetary controls applicable to the expenditure cycle simply were not implemented, thus leading to cost overruns.

We have a call in to Larry Behrens, Public Information Officer for the New Mexico Higher Education Department, and will update this report with his comments.

UPDATE: Mr. Behrens provided a statement on behalf of NMHED. Here it is in full:

“There is no doubt these violations are serious.

In almost every single case, these issues were inherited by HED when this administration took over in January 2011. In fact, all of the issues outlined in the 2011 audit were also present in the 2010 audit which the previous administration didn’t feel the need to ever complete.

HED has made personnel changes to address problems within the organization.

Cleaning up these issues has by no means been easy, but absolutely necessary and that is exactly what we’ve done.

Background:

The 2010 HED Audit was due in December 2010. Upon arriving in office, the new administration discovered their predecessors had done nothing to complete the 2010 audit, leaving HED to complete 2 audits in a single year.

For the finding “In one out of five procurements tested, the file did not contain documentation of the required open procurement policy. The purchased item had a cost of more than $10,000, and documentation was not maintained to show advertisement, collection of bids, and evaluation of contract selection.” –This issue occurred in 2011 and has since been cleared up. All other issues occurred in 2010 or prior.”