Audit of pCard program finds improper use and misuse

Maui County Department of Finance Director Danny Agsalog booked two family members’ airline tickets on his county-issued procurement card, but he did so only after paying the county upfront, a county official said Wednesday.

“There was no attempt to misuse county funds, although technically this did not follow the proper pCard procedures,” said county Communications Director Rod Antone, responding for Agsalog and the county.

The Office of the County Auditor on Wednesday released its audit of the county’s procurement card, or pCard, program over a 13-month period.

The audit does not name Agsalog specifically, but county officials confirmed that the director — whose department oversees the procurement card program — used his pCard for round-trip airline tickets to the Mainland for his wife and college-age child.

“Personal use of a county pCard is explicitly prohibited,” the audit said.

The audit notes that Agsalog’s travel was to attend an Association of Certified Fraud Examiners program in Nashville, Tenn., relating to “bribery and corruption.”

But neither Agsalog’s wife nor child is a county employee, the audit said.

“The county investigated the incident internally and took the proper administrative actions,” Antone said.

Antone said that the audit failed to mention that Agsalog tried to pay for all three airfares with his own credit card at first, but was told that the county could not reimburse his portion of the trip if he did it that way.

“So he wrote a check reimbursing the county for the trip and used the pCard to pay for the fares. The reimbursement to the county took place before the fares were booked,” Antone said.

The audit said Agsalog’s case brings additional problems to the county, such as a loss of public trust and loss of respect by county employees for its director of finance. The finance director is the county’s chief procurement officer. The Finance Department includes the county’s Purchasing Division, which handles the day-to-day operation of the pCard program, County Auditor Lance Taguchi explained.

“The person the public has entrusted with some of the county’s highest level of responsibility, accountability, and trust . . . has violated that trust,” the audit said.

As for county morale, the audit notes: “Specifically, can the county realistically expect its employees to follow rules when those rules are being broken by the person making them? Short answer: no.”

The Office of the County Auditor said it is hopeful the county will make efforts to rebuild the public trust because “county taxpayers deserve better,” and the office is confident that the county is capable of implementing many, if not all, of the auditor’s pCard audit recommendations.

But, the office added, “The director of finance needs to regain employee trust by leading by example, not by exception.”

Taguchi said he could not specifically say how Agsalog’s issue came to light because it could impact the effectiveness of his office. But he said there is a computer program that helps auditors analyze data and detect irregularities.

In the audit, which was conducted from September 2015 through May, Taguchi said that the pCard review was chosen by the office because of the high volume of purchases made with pCards and the “inherent risks related to the issuance of credit cards to employees.” Public interests and prior audit findings also were considered.

The audit was done to see if Maui County pCard use was similar to Hawaii County’s program. Former Hawaii County Mayor Billy Kenoi came under fire for using his pCard to charge more than $129,000 to the county, including trips to Honolulu hostess bars, a bicycle, surfboard and other personal items.

In November, a jury acquitted the former mayor of theft and false swearing charges related to his pCard.

Maui County’s purchasing card program and procedures were established in 2003 to streamline the processes related to the purchase of goods and services needed for official business by county employees, the audit said.

The county’s program is made possible through a contract between the State of Hawaii and First Hawaiian Bank.

In the Maui County audit, 369 pCards were used by all levels of county employees to make $4.38 million of purchases. The purchases spread across approximately 890 vendors.

Overall, the largest cumulative amount paid to a single vendor during the audit period was $491,129 to Hawaiian Airlines. Four of the top 10 vendors were airlines. Those purchases came to $808,445, or nearly 20 percent, of the county’s total pCard spending.

According to the audit, one unidentified county employee’s transactions were under active criminal investigation, and the transactions of another, also unidentified, employee were being investigated internally by the employee’s department.

The auditor said that, while using pCards inherently improves efficiency and brought in just under $80,000 of cash rebates to the county, the audit found that some of the county’s pCard use may have been fraudulent, wasteful or abusive.

On Wednesday, Taguchi said that, during any audit, he focuses on what can be learned from the review and how the county can Improve operations.

If the county implements the audit recommendations, it could decrease fraud, waste and pCard abuse, he said. While all recommendations would not eliminate all problems, they could help, Taguchi said.

One of the issues focused on during the audit was that some pCard purchases have been parceled, or broken up, into multiple smaller transactions to avoid a $500 single-purchase limit.

If single purchases are larger than $500, price quotes need to be obtained. The rules safeguard taxpayer funds, the audit said.

The audit recommended the county make pCard training a priority and monitor and document instances in which parceling continues to occur. And, if appropriate, discipline employees who do not comply.

The audit noted some irregularities in pCard transactions, and the county Auditor’s Office has been in contact with law enforcement, providing summaries and analyses of the irregularities.

In a letter responding to the audit, Managing Director Keith Regan said that the Department of Management has convened a working group to review and assess the pCard program, its policies and procedures to find ways to Improve them.

To view the full report and Regan’s letter see: www.mauicounty.gov/2032/Audit-Reports-Projects.

* Melissa Tanji can be reached at mtanji@mauinews.com.

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The Worst Ideas of the Decade

by Nick Gillespie

The dumbest government policies are almost always the fruit of the bipartisanship that sets Beltway hearts beating with patriotic arrhythmia. Think the Patriot Act, No Child Left Behind, the authorization of force in Iraq and the TARP.

A particular offender is the Sarbanes-Oxley Act of 2002, which rewrote accounting and disclosure rules for publicly traded companies in the United States. Garnering just three nay votes in the House and Senate and signed by George W. Bush (the nation's first MBA president), the act was supposed to prevent scandals like those that brought down Tyco, Enron and WorldCom. It created the Public Company Accounting Oversight Board and mandated "internal control reports" - expensive exams of how well companies are following the dictates of the board. Executives who approve shoddy paperwork face fines of up to $5 million and jail time of up to 20 years.

It was never clear how more accounting and reporting regulations were supposed to squelch fraud. But government bean-counters, even more than generals, always fight the last war.

Larger firms lobbied for passage of the act, figuring they could absorb the costs that would hobble smaller competitors - which is just what happened. According to a 2008 Securities and Exchange Commission survey of officers at publicly traded firms, Sarbanes-Oxley cost the average company $2.3 million a year in direct compliance costs (staff time, documentation and external audits), compared with supporters' estimates of $91,000 in annual costs.

The same survey found that only 20 percent of respondents believed the benefits outweigh the costs. That result echoes a 2008 report from the Association of Certified Fraud Examiners that found firms with the new controls "experienced greater fraudulent financial statement manipulations than organizations lacking these controls."

Markets don't like the law, either: Foreign companies listed on U.S. exchanges show falling stock prices compared with competitors who don't need to comply.

Even as Washington takes tighter control over U.S. business, Sarbanes-Oxley is the subject of a Supreme Court case (Free Enterprise Fund v. Public Company Accounting Oversight Board) that could undo the whole megillah. Even so, the act should be remembered as a case study in hysterical legislating, which always produces more harm than good.

Nick Gillespie is editor in chief of Reason.tv and Reason.com.