Official report on New Mexico Finance Authority’s faked audit report – Part 2

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

This is the second in a series of posts on the reports.  Previous post is here.

Report conclusion

Here is the conclusion to the 47 page report, which I will quote in full.  It explains the situation better than any summary I could write.  Pay attention to the range of problems that contributed to the disaster.

The NMFA released a forged audit, containing and omitting information that further misrepresented the financial balances of the company. This document was released to the public and provided to potential investors. The release of the forged audit involved criminal activity, which was made possible by the catastrophic systemic failure in the controls surrounding the audit process.

Most significantly, senior management, members of the Audit Committee and members of the Board failed to provide adequate oversight.

Organizational gaps, a lack of formal task assignments at a time of organizational transition, insufficient staffing levels in the accounting department, outdated accounting procedures, and a lack of communication at all levels contributed to a breakdown in internal controls.

This breakdown in internal controls was mirrored by a similar failure of an important external control—that of the IPA.

IPA = independent public accountant = CPA firm

The lack of internal and external controls was exacerbated by a culture of complacency at the NMFA that downplayed the importance of the audit to investors; over-emphasized and over-prioritized the importance of bond credit-ratings; operated on the presumption that the external audit was a process that required little if any input from senior management, the Audit Committee, or the Board; and engendered the diffusion of responsibility that brought about an expectation that others in the process were providing the necessary controls.

These factors coalesced in a way that provided {the former controller} with both an opportunity and, to a lesser degree, the incentive to create and forge an audit report that misrepresented the finances of the NMFA.

CEO denies responsibility

The former CEO of the authority quickly denied responsibility for the faked report and pointed fingers at everyone else. The blog Going Concern discussed the CEO’s response in their post Former CEO of New Mexico Finance Authority Not Eager to take Blame for Fake Audit Fiasco.

Going Concern’s summary:

Former CEO Richard May seems to be taking on a lot of it {the blame} and he is not happy about it. For starters, he says, this whole episode could have been avoided if anyone other than him, including external auditor CliftonGunderson, would have done what he said and/or taken some initiative:

The conclusion:

Got it? He was just the CEO. Geez.

In the CEO’s defense, it looks to me like there’s a long list of things, any one which if they had been done, would have detected the fraud earlier or even prevented it. I agree with him that many people could have done something to prevent or detect the fraud.

Unfortunately for the CEO, a few of those things that could have been done are things that could have been done by him.

Next post:  Are lots and lots of new procedures necessary at NMFA?