NMFA needs to answer questions – now

Heath Haussamen

Heath Haussamen

As investigators scramble to figure out what’s going on at the New Mexico Finance Authority, and NMFA officials claim they were duped by a rogue employee who created a fake audit but say little else, there are questions the agency can – and needs to – answer now.

There was a lot of debate this week about whether the New Mexico Finance Authority should proceed with the hiring of an independent investigator from outside the state to get to the bottom of its fraudulent audit in an attempt to calm Wall Street’s fears.

Ultimately, State Auditor Hector Balderas and Gov. Susana Martinez are pleased that the NMFA Board cancelled the $1.275 million contract with the Washington law firm Steptoe and Johnson and subcontractors. Both essentially argued that Balderas’ special audit and law enforcement probes should come first – and NMFA had been putting its independent probe before those.

Balderas also told the NMFA Board during a special meeting on Wednesday that it could recommend to his office an outside firm to help, and it appears that will happen. The same firm may be rehired – just under new terms agreed to by Balderas.

The shift came after Balderas told the NMFA – basically the bank for government agencies in New Mexico – that it hadn’t complied with state regulations that required it to notify the auditor in writing of the facts surrounding the fraudulent audit, to recommend an outside auditor to complete the still-lingering 2011 audit, to immediately provide a list of NMFA bank account numbers and authorization to access the accounts, and to provide the auditor with the scope of Steptoe and Johnson’s planned investigation.

Balderas told NMPolitics.net he’s “pleased with the leadership of the board,” which “is now heading in the right direction in getting the agency in compliance with state law.”

Martinez spokesman Scott Darnell said the governor, who appoints the majority of members to the NMFA board, “thinks that process should be very open, and believes NMFA should cooperate fully with law enforcement and the state auditor at every turn.” He said the board’s move to cancel the contract and work with Balderas “should send a strong message about how serious the matter is being taken.”

Sen. Mary Kay Papen, who heads the NMFA Oversight Committee, wasn’t impressed. Long a fan of Balderas, she said she’s not concerned with the competence of his office. But she said Wall Street experts have advised that the state needs to bring in outside help, and New Mexico needs to take that advice. She had previously called for the NMFA Board to uphold the $1.275 million contract.

“We want to make sure that our money is safe and what we’re doing is safe,” Papen said, adding that she hopes Steptoe and Johnson is rehired.

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I honestly don’t know who’s right, but I know the stakes are high. Wall Street has put the state on notice that its credit rating could be downgraded. If it is, New Mexico will have to pay higher interest rates to borrow money for public works projects including roads and schools. That means taxpayers will have to pay more for each project, which ultimately means fewer projects will be built.

Lots of questions to answer

What I do know is that NMFA has a lot of questions to answer – to the taxpayers, to Wall Street, to investigators, to everyone. Some of them it should be able to answer immediately, but to date it has not.

Among the questions:

  • The fraudulent audit (which you can read here) says an exit conference was held with the firm conducting the audit on Dec. 10, 2011. Board member Paul Gutierrez has already said publicly such a conference never took place. And minutes of the board’s December 2011 meeting state that the audit committee never met that month. What of those officials who should have attended such an exit conference? If none happened, why didn’t they notice it needed to take place and had not?
  • The fraudulent audit was posted on NMFA’s website and circulated on Wall Street for months, but in May, the auditor’s office flagged the agency as being late on its audit because none had been submitted to it as required by law. Why did no one at NMFA notice that it was providing an audit to Wall Street while failing to submit it to the state auditor? Why did the fake audit remain on NMFA’s website until last week, when the agency had been flagged two months earlier for not turning in an audit?
  • As others have written (here and here), the audit contains obvious red flags that, in retrospect, make pretty clear that it’s not real. Why did no one at NMFA notice?
  • There are monetary differences between the valid 2010 audit and the fraudulent 2011 audit. Again, how did this go unnoticed?

At best, shocking negligence

You’ll notice I’m giving NMFA the benefit of the doubt in saying this all went unnoticed. It’s certainly possible that something more nefarious happened – that, despite NMFA’s attempts to put all the blame on a rogue controller, there was a larger conspiracy. I’m not alleging that, I’m just mentioning it as a possibility.

That possibility is why NMFA needs to do a better job of communicating with Balderas and other investigators, and with the public and Wall Street. Immediately. How are we to know this agency wasn’t involved in massive, fraudulent activity and a widespread cover-up? As Balderas pointed out, we currently know nothing about NMFA’s financial health – or lack thereof.

The fraudulent audit itself may be a crime, and the head of the state Securities Division, which is investigating, says, “we have already determined that fraudulent activity was not limited to the audit report alone.”

Right now NMFA’s only answer seems to be that it doesn’t know what happened or how and that it was deceived by a rogue employee. If that’s the case, it appears others at NMFA are guilty of, at best, shocking negligence.

Let’s hope taxpayers don’t end up paying the price for that. Martinez, Balderas, Papen and others all want to calm Wall Street’s fears before the state’s credit rating takes a hit. Let’s hope they can work together to move forward despite their current disagreement on how to do it.

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