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Tuesday, September 01, 2009
Jemez Schools Had Clean Audit
By Martin Salazar
Journal Staff Writer
Three months before the state auditor discovered millions of dollars had been embezzled from a tiny northern New Mexico school district, the district received a clean audit opinion from an independent firm that reviewed its books.
Accounting & Consulting Group LLP gave the Jemez Mountain school system unqualified opinions on both its financial statements and on its federally funded programs.
Part of an independent auditor's responsibility is to look for fraud, but R.A. "Bobbi" Hayes, a partner in the accounting firm, said embezzlement would not typically be discovered in the course of an independent annual audit.
"In fact, according to the Association of Certified Fraud Examiners, less than 10 percent of all frauds are found by external auditors," she said in an e-mail. "In the majority of embezzlements and frauds, they are discovered as the result of an insider tip or by accident."
Superintendent Adan Delgado, who alerted the state auditor after noticing irregularities with the district's books, said he's reserving judgment on the independent audit.
"It is surprising to me that something of that magnitude didn't come out in what they were doing," he said. "The state Auditor's Office is looking at that at this point. I'm sure they'll have an opinion on that at some point after they've had some time to look at it."
An unqualified opinion is often referred to as "clean" and means an auditor believes financial statements are accurate and conform with generally accepted accounting principles.
The positive audit opinion was issued in March.
Three months later, state Auditor Hector Balderas announced the district's business manager was suspected of embezzling hundreds of thousands of dollars. The amount subsequently grew to more than $3.3 million — the equivalent of a little less than $500,000 a year over the past seven years. Jemez Mountain's annual operating budget is about $4.2 million.
Officials at the accounting firm said they could not comment specifically about the Jemez Mountain audit because of confidentiality requirements. The firm, which has offices in Albuquerque, Alamogordo, Carlsbad, Clovis and Hobbs, was selected by the school district, although the state Auditor's Office signed off on the contract.
The accounting firm did raise multiple red flags over the district's accounting methods and lack of internal controls, which act as a checks-and-balances system to reduce the likelihood of fraud and make it more likely such activities are detected.
"Those charged with governance lack sufficient governmental accounting knowledge which hinders their ability to monitor, identify, react to, and minimize accounting issues that can negatively affect the district," auditors said.
The Jemez Mountain School District had been years behind on its annual audits until this year.
The scheme
Balderas' office discovered that millions had been embezzled from the school system's coffers through a scheme in which 538 blank checks were stolen from the district. Those checks were made payable to business manager Kathy Borrego and others.
Balderas said he's not surprised the independent audit failed to detect alleged embezzlement.
"In the short two years that I've been state auditor, I've concluded that the financial auditing system we have in place is really inadequate to provide the type of protections and assurances that citizens deserve," he said.
Balderas said hundreds of millions of dollars in state funds are at risk because the state auditing function is massively underfunded. He said while his office is responsible for overseeing 600 to 700 state and local government entities, it has only about a dozen in-house auditors.
Borrego has been fired but no criminal charges have been filed in the Jemez Mountain case. Balderas' special audit has been turned over to state and federal authorities.
Education Secretary Veronica Garcia, who has taken over the district's financial operations, said she is perplexed by the unqualified opinion the district received.
Garcia acknowledged that a skilled employee in charge of a district's finances could camouflage theft.
"You would think, though, that over a period of time this would become evident," she said.
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