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.
Are lots of new procedures needed inside NMFA?
As is usually the case in such a fiasco, there are pages of recommendations and long lists of things that will be done to make sure this never happens again.
After reading the executive summary and browsing the rest of the 174 page report, I am struck by the astoundingly long list of things that weren’t done. There is a large volume of players who didn’t do what they were supposed to do.
Some of those things would have detected the fraud much earlier.
There are quite a few other things that could have been done between September 2011 and January 2012 which would have closed the door on the opportunity for fraud and prevented the faked report from being prepared. If any one of multiple players had indicated the audit process had ground to a halt, corrective actions would have been taken before preparation of the fake report in January & February 2012.
The irony to me is that the best way to prevent recurrence would be for those dozens of things that ought to have been done to actually be done in the future. A CEO or CFO that has appropriate skill and experience or an audit committee that takes their responsibilities seriously or an appropriate tone at the top or appropriate internal controls in operation or segregation of duties or a CPA that follows up when the audit is a mess or any one of several other things would have prevented this fiasco.
However, because of the way we handle disasters, there will be many new procedures implemented.
We have the following comments on all the changes in a report from Accounting Today, New Mexico Completes Investigation of Fraudulent Audit. Think about all the corrective actions that are taking place behind the scene:
CEO John Gasparich listed a number of examples of recent improvements at the agency. The audit committee was restructured to include the Secretary of Finance and Administration and is chaired by the State Controller. An experienced CPA who has been both an auditor and a CFO is now NMFA’s CFO. An internal auditor position has been established and is expected to be filled early next year. The NMFA accounting staff, management and board are now actively involved in NMFA’s financial audit. New loan servicing software will improve transparency and provide additional safeguards.
Additional training for staff, management and board members will also be a high priority in the new year to ensure that lessons learned will result in lasting change. Gasparich explained that additional goals will require more time to complete. “We need to do a thorough analysis of our staffing levels,” Gasparich said.
I don’t have any ideas how to do things differently at an overall level. It just seems so odd to me that when there is a catastrophic failure of a dozen or more procedures by lots of players, the solution is to add even more procedures and several more players.