SANTA FE, N.M. (AP) — New Mexico’s top security regulator said Wednesday that potential fraud within a state financing authority extended beyond a faked financial audit that has national credit rating agencies considering whether to downgrade the agency’s bond ratings.
The disclosure by Securities Division Director Daniel Tanaka came Wednesday as the New Mexico Finance Authority’s governing board scrapped a plan for an outside law firm to investigate how the audit was faked. The board instead wants a similar legal and accounting probe to be handled through the state auditor’s office to ensure the independence of the review.
The authority provides low-cost financing to New Mexico governments for capital projects.
At issue in unfolding scandal are financial statements, which were faked to indicate they had been audited by an outside accounting firm. The financial information is relied upon by creditors and investors in the authority’s bonds.
Authority officials have blamed a former controller, who left in June, for the fake audit.
However, board member Paul Gutierrez said the problem was caused by management and the board failing to carry out their responsibilities. He pointed out there was never an “exit conference” between authority officials and the agency’s outside auditor. That’s supposed to happen before an audit is approved. However, the fraudulent documents included a faked letter from the auditor and a statement that an exit conference had been held last December — on a date that was a Saturday. The audit and its financial statements were made available to the investment community as part of a bond issuance by the authority in March.
Gutierrez said it’s uncertain whether there was any misuse of money.
“We failed as a board. We failed as management and that’s all we know,” said Gutierrez, who is executive director of the New Mexico Association of Counties.
Authority CEO Rick May said management relied on statements from former comptroller Greg Campbell that the audit had been completed.
“It was a rogue employee who misled the board, who misled the staff and who misled various consultants,” said May.
State Auditor Hector Balderas plans a special audit and will report any criminal violations to law enforcement. Tanaka’s agency is investigating whether there were violations of New Mexico’s securities laws.
“I can say with confidence that we have already determined that fraudulent activity was not limited to the audit report alone. We don’t yet know the full extent of the wrongdoing but we are determined to discover the true financial condition of the Finance Authority,” Tanaka told the board.
Tanaka declined after the board meeting to provide details of the other fraudulent activity, saying it was “related but not the same” as the audit.
Balderas told the board there were discrepancies in numbers in the financial statements that should have tipped authority staff or others to the potential fraud if the documents had been carefully examined. The fake audit was discovered after the auditor’s office questioned in May why it had not yet received the authority’s 2011 audit — something that should have been supplied last December.
Tanaka voiced objections to the board about having an outside law firm — hired and reporting to the authority — trying to conduct an investigation of the audit. He said that could compromise the work of his agency. He dismissed suggestions that the outside law firm, his agency and the state auditor could interview witnesses at the same time, saying that approach would have a “chilling effect” on witnesses and their willingness to share information with his investigators.
Board members voted to cancel a $1.2 million contract with the law firm of Steptoe and Johnson, which has offices in New York, Washington and internationally.
The authority’s top management hired the firm last week to determine how the fraudulent audit occurred and prepare a report on what the authority needed to do to fix any problems. The contract included money for an accounting firm to do a forensic audit and a “crisis management” firm.
Evan Barr, a partner in the law firm and a former federal prosecutor in New York, assured the board that its investigation would be independent.
“We follow the evidence where ever it goes. If it goes up the chain, so be it. We are independent and impartial. We don’t care who we antagonize,” said Barr.
A majority of board members expressed concerns that the planned investigation wouldn’t be perceived as independent if the law firm and accountants answered to the authority and the board. They decided instead to negotiate a contract for a similar probe by lawyers and accounts but have the firms answer to the state auditor. However, the authority would pay for the work.
Board member Bill Fulginiti opposed that approach, saying it likely wouldn’t send the right signal to the financial markets that the authority was aggressively trying to address its problems. May voiced similar concerns and warned that “an effort to delay this contract will have a dramatic negative impact on the finance authority moving forward.”
National credit rating agency have said they’re considering whether to downgrade the authority’s bond ratings because of concerns that the forged financial documents show a potential lack of financial oversight. A lower credit rating could increase the costs of borrowing for New Mexico governments, mainly local governments that get loans from the authority. The authority’s financing is separate from bonds issued directed by state government using tax revenues to retire the debts.
The NMFA is governed by a board of directors, a majority of them appointed by the governor.
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