The New Mexico Finance Authority has completed its probe of fake audits and said it was reforming its accounting practices as a result.

The NMFA revealed in July that a former controller claimed its financial statements for 2011 had been audited by the outside auditing firm Clifton Gunderson when in fact they had not been audited (see Problems Uncovered with Audits of New Mexico Finance Authority).

NMFA board chair Nann Winter announced that the findings and recommendations contained in three recently published reports would provide a blueprint for procedural and oversight restructuring at NMFA. The latest report, a special audit conducted by the Office of the State Auditor and the nationally recognized accounting firm of PricewaterhouseCoopers, was presented to the NMFA Board on Friday by State Auditor Hector Balderas.

“We have already taken a number of actions to strengthen fiscal oversight and assure compliance with laws and rules governing our audits and financial activity,” Winter said in a statement.

The latest report, a forensic review of the NMFA’s books, found no evidence of theft or embezzlement of NMFA funds, but detailed numerous instances where proper management practices, statutes and audit rules were not followed, the agency acknowledged.

Winter expressed her relief that the special audit did not cite any instances where NMFA funds were compromised, especially those funds dedicated to repayment of investors. “Lax supervision and a casual attitude toward the audit statutes and rules are a thing of the past,” she noted.

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.

"Rating agencies and the investor community have been very patient waiting for the various investigations to run their course. I believe that they will react positively to this well reasoned report confirming that NMFA’s core operations were not compromised" said NMFA chief financial strategist Michael Zavelle in a statement.

While the investigations are finished, the annual financial audits have yet to be completed. The NMFA 2011 audit is expected to be finished in January 2013 with the 2012 audit complete by the end of March 2013. “After the 2012 audit is done we will again be able to issue bonds and do our part to build New Mexico’s infrastructure and improve our economy,” Winter said.

“I am pleased today’s Special Audit has confirmed that everything I have been saying since the Finance Authority’s senior management first announced the discovery of the fraudulent audit has turned out to be true,” NMFA former CEO Richard May. “There is no money missing, the former Controller acted alone in creating the fake audit, no investor lost any money, and the Finance Authority is in strong financial condition. In other words, there was no major scandal, just the inappropriate actions of a rogue employee. Questions remain why various parties have wanted to exaggerate the extent of the problem for their political purposes and to paint the Finance Authority and its former senior management in the worst possible light.”

May denied involvement in the scandal. “It is simply not true that I personally received an email from Department of Finance and Administration staff advising me in January 2012 that the FY 2011 audit had not been filed with the State Auditor’s office, contrary to the inflammatory accusations of the State Auditor,” he said in a statement. “I directed key Finance Authority staff to provide whatever information DFA requested. Further, if DFA staff was aware there were missed deadlines regarding the FY 2011 audit, DFA Secretary Tom Clifford must have known of this information. Mr. Clifford is a Finance Authority Board member. If this information was available to DFA, then it is inexcusable that Mr. Clifford failed to notify the Board and senior management of this missing audit.

The facts clearly show the entire fraudulent audit would have been avoided if the State Auditor’s contractor, Clifton Gunderson LLC, would have notified me just once between Dec. 15, 2011 and March 12, 2012 that the fiscal year 2011 audit had not been filed by the statutory deadline. Yet, no such communication was ever received.”

A spokesperson for Clifton Gunderson’s successor firm said it was satisfied with the report on the investigation. “We believe the report speaks for itself – with primary blame not placed on Clifton Gunderson,” said CliftonLarsonAllen spokesperson Jennifer Dirks. “We have no additional comment at this time.”

May defended his record while running the NMFA. “After more than five months since the discovery of the fraudulent audit, it is easy for investigators to now critique, after the fact, the Finance Authority’s organizational structure or question senior management’s expectations that well-respected staff would perform their duties properly as being insufficient to provide required oversight,” he said. “These investigators have the luxury of 20/20 hindsight and every decision and action by Finance Authority senior management prior to the discovery of the fraudulent audit can be conveniently second-guessed. Placing trust and confidence in employees who have long and stellar records of outstanding service is what every management team must do to maintain operational efficiency in any organization, but those same managers never have the benefit of perfect hindsight to guarantee that something inappropriate will never occur. In the inevitable rush to find a scapegoat, today’s report continues the highly speculative process contained in other recent investigative reviews which unfairly tarnish people’s reputations rather than focus on the conduct of the former controller who engaged in criminal behavior.

“In addition, I was only CEO of the Finance Authority for three months when the FY 2011 audit was due and was not an accountant familiar with the state audit process,” said May. “I am unfairly being held responsible for the former controller’s criminal behavior, responsible for the failures of the State Auditor’s office and of Clifton Gunderson the outside auditor, responsible for the failures of the Finance Authority Board, the audit committee, Finance Authority outside counsel, and more experienced staff who never detected the audit was fraudulent and that proper procedures were not followed.”