TAXWatch: Red Flags at OHA

A recent, eagerly awaited independent financial review of the Office of Hawaiian Affairs (OHA) has been in the news lately.  The review, conducted by the California-based accounting firm CliftonLarsenAllen (“CLA”), made several observations and recommendations, including the flagging of 32 transactions, representing $7.8 million, as potentially fraudulent, wasteful, or abusive.

Indeed, of the 185 transactions the firm reviewed, it had audit observations, meaning that “the results of testing revealed occurrences of noncompliance with statutory requirements and/or internal policies” or “that revealed indicators or red flags of waste, fraud, or abuse,” in 85% of them.  The transactions reviewed were not random but were those that the firm suspected would have a greater chance of irregularities.

OHA’s chair of the Board of Trustees and chair of its Resource Management Committee issued a statement pointing out that the report “did not identify actual instances of fraud, waste or abuse.”  

Sure.  That wasn’t CLA’s job.  They’re auditors, not prosecutors, judges, or juries.  What they did observe in many instances, however, was very troubling.

Page 94 of the report, for example, mentioned a contract with Absolute Plus Advisors under which OHA paid $181,499.  It was supposed to be a contract for the vendor to provide the Trustees with quarterly reports on OHA’s Trust Fund and on its Trust Funds Advisor, sort of like having the vendor keep an eye on the firm who was keeping an eye on OHA’s money.  OHA had the contract but had no documentation either of competitive bidding for the contract as required by law, or of any deliverables under the contract. So, the money was spent, but it wasn’t clear if OHA got anything it paid for.

Page 117 of the report described a contract with Mid-Continent Research for Education and Learning to provide consulting services.  The contract was signed for an amount just short of $100,000 but was amended to increase the contract price to $349,527. Procurement documents such as bid evaluations were nowhere to be found; nor could OHA staff find any of the deliverables related to this contract.  So, about $350,000 went out the door and OHA might not have gotten anything in return.

Trustee Keli’I Akina (who, by the way, should be commended rather than pilloried for his role in getting this financial review done) put together and published a digest of the CLA report called “Red Flags: An Analysis of the Independent Audit of OHA and its [Limited Liability Companies].”  The digest includes descriptions of these financial anomalies and many others.

Yes, the reports describe the smoke, but not the fire.  They don’t accuse anyone of committing fraud or other wrongdoing.  There may be instances of ineptitude or mismanagement, which would be deplorable but not criminal, or grand theft, which would carry more severe consequences.

So, we need to seriously consider going to the next step.

OHA would be prudent to consider taking this report to the law enforcement authorities who would be able to investigate whether any of the conduct described in the report rises to the level of criminal conduct, such as fraud, theft, or bribery.  OHA, you may remember, is a state agency and is funded with taxpayer money from all of us. All of us get to vote in (or vote out) OHA trustees. Thus, crimes against OHA are crimes not just against the Native Hawaiian beneficiaries but are crimes against all of us.  If it is determined that crimes were committed, the perpetrators need to be brought to justice.

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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.