New Mexico Office of the State Auditor Improving Accountability: Submission of Timely Audits and Fighting Fraud, Waste and Abuse An Update from the State Auditor NM City Management Association Conference – December 4, 2013 Hector H. Balderas State Auditor New Mexico State Auditor Tier Reporting 2013 Agenda Submission of Timely Audits . Requirements Under State Law and Regulation . Causes of Late Audits . Penalties for Late Audits . The Audit Act’s Tiered System of Financial Reporting Fighting Financial Fraud, Waste and Abuse in Government . Examples of Fraud, Waste and Abuse . Recognizing Fraud . Fraud Prevention and Detection New Mexico State Auditor Tier Reporting 2013 Submission of Timely Audits New Mexico State Auditor Tier Reporting 2013 What does the law require? If you are a state agency or a political subdivision of the state that receives or expends public money (this includes capital outlay funds), you must account for that public money on a daily basis and report on an annual basis. Under the Audit Act, this accounting may take the form of an “audit,” “tiered system certification, or “tiered system engagement.” State law also requires that the government agency bear the cost of an audit or tiered system engagement. The Audit Act requires the State Auditor to oversee these audits, tiered system certifications and tiered system engagements. New Mexico State Auditor Tier Reporting 2013 What does the law require? The State Auditor issues rules (the “Audit Rule”) which outline the specific requirements for an audit or tiered system engagement. The Audit Rule (2.2.2.NMAC) is updated annually to reflect significant changes in auditing, accounting and financial reporting standards, and related laws, regulations and State Auditor policies and procedures. The Audit Rule also contains implementing regulations relating to the contracting process, report review and submission requirements, and the performance of special audits and investigations. New Mexico State Auditor Tier Reporting 2013 What does the law require? Reasonable costs of all audits and tiered system engagements shall be borne by the agency audited. The State Auditor shall cause a complete written report to be made of each annual or special audit and examination conducted. Each report shall set out in detail any violation of law or good accounting practices found by the audit or examination. New Mexico State Auditor Tier Reporting 2013 What does the law require? The Audit Rule specifies the annual due dates for reports required by the Audit Act. Municipalities are due December 1 each year. Reports become public five days after they are officially released by the State Auditor. The agency may waive the five-day period by providing a written waiver to the OSA. The State Auditor shall provide reports of agency audits to the Department of Finance and Administration and the Legislative Finance Committee. New Mexico State Auditor Tier Reporting 2013 Why does the law require it? Government agencies must be accountable to the taxpayers for the use of public money. When government agencies account for the use of public funds: . Fraud risks decrease; . Financial health of an agency is transparent; and . It creates public confidence. Auditors make recommendations that can improve the agency’s protection over the use of public funds. New Mexico State Auditor Tier Reporting 2013 What causes untimely audits? Staff turnover and lack of financial expertise by government agency staff. High audit costs or inability to procure independent auditors. Breakdowns in communication between a government agency and its independent auditor. Lack of awareness of requirements under state law. Negligence or intentional noncompliance. New Mexico State Auditor Tier Reporting 2013 Are there consequences? Failure to account for public funds or timely comply with audit submission requirements can jeopardize a government agency’s ability to receive grants and appropriations. State law and regulations provide certain penalties for failure to submit timely audits. Most of these penalties are tied to some funding stream for the agency. Deficiencies in the agency’s handling of public funds can also impact eligibility. State Auditor has implemented the “at-risk” designation program to encourage compliance. The “tiered system of financial reporting” is a reform that is also intended to encourage compliance. New Mexico State Auditor Tier Reporting 2013 Are there consequences? Some Current Penalties: . Progressive sanctions for school districts and charter schools (Section 22-8-13.1 NMSA 1978); . Potential withholding of allotments and distributions to state agencies, counties, municipalities and higher education institutions (Section 9-6-5.2 NMSA 1978); . Executive Order 2013-006 issued by Governor Susana Martinez (applies to capital outlay for agencies); . Final budget certification withheld by DFA (2.2.3.9 NMAC); . Late audit finding in the agency’s audit report for noncompliance (2.2.2.9(2) NMAC). New Mexico State Auditor Tier Reporting 2013 Section 9-6-5.2 NMSA 1978 (House Bill 411, 2011 Legislative Session) House Bill 411 passed in 2011 legislative session and signed by the Governor. Grants authority to the Secretary of Finance and Administration to direct: . The State Budget Division to temporarily withhold an allotment to a state agency that has failed to submit an audit report required by the Audit Act; . The Secretary of Taxation and Revenue to temporarily withhold distribution of certain tax revenues to a municipality or county that has failed to submit an audit report required by the Audit Act. Became effective July 1, 2012. New Mexico State Auditor Tier Reporting 2013 Section 9-6-5.2 NMSA 1978 (House Bill 411, 2011 Legislative Session) The bill requires the State Auditor to notify the Legislative Finance Committee and the Secretary of Finance and Administration if: . A state agency, municipality or county has failed to submit a required audit report within ninety days of the due date specified by the State Auditor (in the Audit Rule); and . The State Auditor has investigated the matter and attempted to negotiate with the state agency, municipality or county but the state agency, municipality or county has not made satisfactory progress toward compliance with the Audit Act. Allotments or distributions may be withheld if the state agency, municipality or county has not submitted all past-due audit reports or has not otherwise made progress satisfactory to the State Auditor toward compliance with the Audit Act. New Mexico State Auditor Tier Reporting 2013 Executive Order 2013-006 Under Executive Order 2013-006 issued by Governor Susana Martinez, a government agency may be deemed “ineligible” to receive capital outlay funds if: . The agency fails to submit the required reports or certifications under the Audit Act and Audit Rule; or . The agency’s audit report or tiered system engagement report reveals “material weaknesses” or “significant deficiencies.” These funding decisions are made by granting agencies (either federal or state), NOT the State Auditor. Under Executive Order 2013-006 it is the duty of DFA or the state agency making the grant to determine whether material weaknesses or significant deficiencies documented in an entity’s audit report “raise concerns about the grantee’s ability to expend grant funds in accordance with applicable law and account for and safeguard grant funds and assets acquired with grant funds.” New Mexico State Auditor Tier Reporting 2013 Executive Order 2013-006 Executive Order 2013-006 provides the following for “Uniform Funding Criteria” regarding this determination: . The grantee must have remedied the material weaknesses and significant deficiencies to the satisfaction of the State agency making the grant; . The State agency making the grant must have determined that it can impose and has the resources to implement special grant conditions that adequately address those weaknesses and deficiencies; or . The State agency making the grant must have determined that another appropriate entity is able and willing to act as fiscal agent for the grant. The Attorney General recently issued a nonbinding legal opinion that stated the Executive Order violated separation of powers by adding conditions to an agency’s appropriations not intended by the Legislature. New Mexico State Auditor Tier Reporting 2013 State Auditor’s “At-Risk” Designation Program The State Auditor created the “At-Risk” Designation Program to help combat the problem of late audits. The State Auditor designates agencies “at-risk” for failing to submit annual audits in accordance with the Audit Act. Program launched in Sept. 2009. Agencies that fail to submit annual audits are notified of the “at- risk” designation and required to submit written status reports on the audit to the State Auditor by certain deadlines until compliance with the Audit Act is achieved. The OSA updates its “At-Risk” List on a monthly basis and notifies appropriate oversight agencies of the designation. Those agencies include: . Legislative Finance Committee, Department of Finance and Administration, Public Education Department, Attorney General The State Auditor will withdraw the designation once an agency achieves compliance. New Mexico State Auditor Tier Reporting 2013 State Auditor’s “At-Risk” Designation Program The “At-Risk” Designation List updated monthly and posted on the OSA’s website at http://www.osanm.org/government_score_card. Information about government agency