Official report on New Mexico Finance Authority’s faked audit report – Part 1

The New Mexico Office of State Auditor (OSA) has issued several official reports on the fabricated June 30, 2011 financial statements from the New Mexico Finance Authority.

This will be the first in a series of posts on the report.

You can find a 47 page report dated December 3, 2012 here.  You can find a more detailed 174 page report dated December 12, 2012 here.

The longer report has a very helpful 10 page executive summary. If you are a CPA interested in learning about fraud, systemic failures of internal control, the importance of tone at the top, and all the other things that we CPAs look at, you will learn a lot by reading the executive summary.

Good news from the investigation

The most important information from the OSA’s investigation is they found no indication that anyone other than the former controller was involved in creating the fake report. 

In addition, they did not find any indication of embezzlement. Their procedures intentionally look for that type of fraud and found none.

Summary of report

NewMexico.Watchdog.org has a superb summary of the report by Jim Scarantino, NM Securities Division Issues Report on Forged NMFA Audit:  “Catastrophic System Failures”.

Mr. Scarantino summarizes the 47 page report. I’ve read the executive summary of the 174 page report and browsed the rest of it. His summary is also a superb recap of the longer report.

There is a tremendous amount of blame, more than enough for everyone involved. Check out a few of the comments from Mr. Scarantino highlighting the number of people who contributed:

A “culture of complacency” prevailed inside the New Mexico Finance Authority, the New Mexico Securities Division concluded…

Internal controls inside the New Mexico Finance Authority began breaking down {for} almost a year … {before the fraud}

The external auditing firm completely dropped the ball and failed to notify anyone that the audit process had been interrupted. …

They {the CPAs} should have notified NMFA management, NMFA audit committee, and the Office of State Auditor, according to the OSA report. …

The Audit Committee didn’t do its job and missed obvious warning signals they should have seen. …

For example, they didn’t read in the financial statements that they were reported as having attended an exit meeting which never took place and they didn’t follow up on the controller’s assertion that the auditors weren’t able to attend the Audit Committee’s meeting to discuss the audit report.

…In its chronology, the report shows one standard operating procedure and legal requirement after another being cast aside or ignored as the agency slid deeper into crisis.

…a CEO lacking the qualifications he needed for the job …

The report strongly suggests {the former COO/CFO} aided and abetted perpetration of the fraud by repeatedly ignoring obvious problems with the audit and blatant contradictions in {the controller’s} explanation for delays in the auditing process.

Inadequate staffing, …

Check out the full article for much more detail.

Next post:  The report’s conclusion and the former CEO takes exception to the report.