by Andrew Walden

The April 1, 2021 State House Report on the State Auditor written by Colleen Hanabusa and released by Speaker Scott Saiki is all about hiding corruption in the Office of Hawaiian Affairs.  The report was written solely for the purpose of keeping OHA Trustees Executive Session minutes out of the hands of State Auditor Les Kondo. 

As everybody knows, Colleen Hanabusa’s political career begins in the Senate in 1999 at the side of Mafia Godfather Larry Mehau shutting down Margery Bronster’s investigation of Broken Trust by rejecting her reappointment as Attorney General.  So it is only natural that Speaker Saiki would choose Hanabusa to gin up an attack on the State Auditor in an effort to protect OHA’s LLC secrets and to hide the possible conflicts of interest of OHA’s board counsel (and former State Supreme Court Justice) Robert Klein.

See: Cayetano: Hanabusa's Broken Trust connections lead to Ko Olina

See: OHA Sacrifices $3.2M to Hide Lawyer’s Conflict of Interest?

Hanabusa and two other people chosen as window dressing have now released their report.  Its’ 81 pages can be reduced to Hanabusa’s one-sentence instruction to the legislature:

“The Legislature should require the Office of the State Auditor to terminate litigation with OHA and to complete the financial and management audit of OHA.”  -- (pg 25)

This instruction shows insiders are terrified at what OHA’s hidden executive session minutes will reveal.

In contrast to the House, the State Senate is on record calling upon OHA to comply with the State Auditor.  (See SR151 of 2019 and Senate: OHA Must Complete Audit of LLCs) 

The State Auditor’s office is peer reviewed annually (see 2019 peer review report). This report, released to the National Conference on State Legislatures (NCSL), is a real “independent” report based upon objective criteria performed by an independent CPA firm not a group of political hacks.

Here is the section dealing with OHA, from page 20-26 of Hanabusa’s report: 

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Office of Hawaiian Affairs Controversy  (p 20-26)

… The Office of Hawaiian Affairs (OHA) controversy and lawsuit brought to light the flaws in how the State Auditor's role is perceived and requires that the Legislature look to its process and how the State Auditor is to be accountable.

Financial and management audit of OHA

In 2019, the Legislature appropriated funds for the operating budget of OHA16 for the fiscal biennium 2019-2021 under the Office of Hawaiian Affairs Appropriation Act of 2019, Act 37, Session Laws of Hawaiʻi 2019 (Act 37). Act 37 included a provision that made the release of more than $3 million in general funds to OHA for FY 2020-2021 contingent upon the Legislature's receipt of a financial and management audit of OHA from the State Auditor. The Legislature appropriated $500,000 for the State Auditor to either conduct or contract for the financial and management audit of OHA. Act 37 required the State Auditor to submit the audit no later than 20 days prior to the convening of the Regular Session of 2020.

The Working Group finds that the condition precedent to the release of the funds was very unusual and not normally found in budget provisos or audit laws. The Working Group's research showed that the State Auditor requested and approved the proviso in Act 37 that required a financial and management audit of OHA be completed by the Office of the State Auditor and the report be issued to the Legislature before general funds could be released to OHA. The objectivity standard under Section 1.19 of GAGAS (2011 Version) was compromised as the State Auditor had significant influence in determining whether these funds would be released to OHA.

Instead of performing a financial and management audit of OHA as required by Act 37, the State Auditor decided without explicit legislative authorization to conduct a performance audit of the limited liability companies (LLCs)17 created by OHA beginning in 2007.18 Act 37 did not specify the focus of the financial and management audit and there is no mention of OHA's LLCs. 19 In our opinion, the State Auditor misconstrued the purpose of the financial and management audit20 with the purpose of a performance audit and incorrectly informed OHA that without the performance audit, OHA would not receive the more than $3 million in general funds authorized by the Legislature.

In addition to misconstruing the focus of the financial and management audit of OHA, the State Auditor also unilaterally decided to ignore Act 37's mandate of a financial audit. The State Auditor, in a presentation before the OHA Board of Trustees (Entrance Meeting) as early as July 2019, informed the OHA Board of Trustees that the State Auditor would not be conducting a financial audit and would rely on the audits performed by OHA. This decision violated the law. Act 37 did not give the State Auditor the discretion to determine if a financial audit would or would not be conducted.21 There is no indication of a subsequent amendment to Act 37 or that the State Auditor discussed this with the leadership of the Legislature. The Working Group contends that neither the State Auditor nor leadership of the Legislature would be able to unilaterally change the law. In addition, the Working Group questions whether the State Auditor, after unilaterally cancelling the financial audit could take the position that the Office of the State Auditor would not complete the audit. It was the Legislature’s intent to have a “financial and management audit.” If OHA is to take responsibility for not producing unredacted Executive Session minutes, then the State Auditor is responsible for not completing the financial audit.22

OHA LLCs

To comply with section 10-14.55, HRS, the State Auditor completed its last OHA audit in February 2018 (Report No. 18-03). Report No. 18-03 identified to OHA's LLCs as:

• Ho'okele Pono LLC, which was created in 2011 along with its sub-entity Ho'okipaipai LLC as economic development non-profit organizations. Ho'okipaipai houses federal economic development programs and obtains contracts from the United States Defense Logistics Agency; and

• Hi'ilei Aloha LLC, which focuses on promoting, developing, and supporting culturally-appropriate opportunities that benefit Native Hawaiians; and its subsidiaries:

o Hi'ipaka LLC, which was created by Hi'ilea Aloha LLC to manage the Waimea Falls Park in 2007 and holds the title to Waimea Valley;

o Hi'ipoi LLC, which was created by Hi'ilei Aloha LLC in 2008 to manage Makaweli Poi Mill in Kaua'i; and

(See: Conflict of Interest: OHA Audit Committee Member Secretly owns OHA’s Former Poi Mill  and  For OHA Insider Cash Bonanza Comes with Poi Mill.) 

o Hi'ikualona LLC, which was created in 2010 but has been inactive since formation.

According to the Department of Commerce and Consumer Affairs records, only Hi'ilei Aloha LLC and Hi'ipaka LLC are still active. The remaining LLCs are not active and not in good standing. More specifically: 

• Ho'okipaipai LLC has not been in good standing since 2020; 
• Ho'okele Pono LLC has not been in good standing since 2020; 
• Hi'ikualona LLC has been inactive since formation in 2010; 
• Hi'ipoi LLC was terminated in 2017-2018; and

There is no record of a seventh LLC named Ho'opakeu LLC with the Department of Commerce and Consumer Affairs.

(WRONG: DCCA BREG has it right >>> HERE <<<.  See: Secret OHA LLC Created to Sell Marijuana)

Suspension of the OHA audit and inconsistency with auditing standards

On December 30, 2019, the State Auditor suspended the audit of OHA because the State Auditor decided that the audit of OHA's LLCs could not be completed without complete and unredacted access to the executive session minutes of the OHA Board of Trustees. The Board of Trustees denied the Office of the State Auditor access to the complete and unredacted minutes of its meetings, claiming that the communications were protected by the attorney-client privilege. By requiring access to the complete and unredacted executive session minutes, which were not required to complete the audit, the State Auditor precipitated a controversy and lawsuit that was unnecessary to complete the financial and management audit required by Act 37.

Auditing standards permit the performance of alternative procedures to achieve the audit objectives, amending the audit objectives, and/or issuing a scope limitation report. An auditor with knowledge of modern audit techniques and that understood current audit practices could have avoided the lawsuit by using alternative audit methods to obtain the evidence needed for the audit to meet the four audit objectives outlined in the December 3, 2019, letter to OHA’s Board of Trustees, and to corroborate the testimony provided by former and current OHA trustees. If instead the State Auditor reported that the audit scope was impaired and thus issued an adverse audit opinion on the OHA audit, the State Auditor could have avoided the controversy and the use of attorneys.

The State Auditor's decision to suspend the audit of OHA due to the redacted minutes is not uniformly practiced or supported by the industry practice. Furthermore, past audits completed by the State Auditor were issued without having access to unredacted executive session minutes. The State Auditor's performance audit of HART, Report No. 19-03, was issued with a scope limitation that, among other things, included receiving redacted executive session minutes that "were redacted so extensively as to render them indecipherable and meaningless." The 2018 performance audit of the OHA, Report No. 18-03, was completed and issued with the State Auditor permitted to "review board minutes" that, from what the Working Group understands, included redacted executive session minutes.

OHA vs. Kondo lawsuit

As a result of the State Auditor's unilateral decision to suspend the OHA audit thereby preventing the release of general funds to OHA, OHA filed a lawsuit against Kondo, in his official capacity as State Auditor, and the State of Hawaiʻi State Auditor (1CCV-20-0000259). In September 2020, the court ruled that OHA was entitled to attorney-client privileges and denied the State Auditor access to the unredacted OHA executive session minutes. p24

Although the purpose of the litigation is moot, OHA and the State Auditor refuse to terminate the litigation. About $55,000 has been expended, with approximately $45,000 of general funds remaining as an encumbrance. Both OHA and the State Auditor should discontinue their legal claims and refrain from expending general funds toward this effort.2

Status of the OHA audit

The State Auditor has still not performed a financial and management audit of OHA as required by Act 37. On September 21, 2020, the Speaker of the House of Representatives requested that the State Auditor complete the financial and management audit of OHA. The State Auditor refused. The appropriation for more than $3 million for OHA was for FY 2020-2021. This means that on July 1, 2021, the appropriation will lapse.

Why the State Auditor refuses to perform and issue the financial and management audit of OHA pursuant to Act 37 is puzzling and enigmatic. It does not seem to be the Legislature's intent to withhold the funds or have a litigious situation. The Working Group's research indicated that the Legislature does not know that a financial audit was not conducted and that most of OHA's LLCs are inactive.

The Working Group takes note that the appropriation of $500,000 for the financial and management audit of OHA is a very strong statement from the Legislature. Aside from the State Comprehensive Annual Financial Report which costs approximately $1 million a year, the other sizeable appropriation was $1 million for the HART audits. The Working Group finds that this is a strong policy statement as to the need for a financial and management audit of OHA. It is the Working Group's understanding that the intent was to have a benchmark financial audit of OHA.24    p25

The Working Group believes that the request by the Legislature, especially if placed in law, must be respected by the State Auditor and followed accordingly. What the State Auditor has done is shown a disrespect for the law and the Hawaii State Constitution. The OHA incident affirms the need for the Legislature to look at oversight over the State Auditor's office to ensure that the ability to act unilaterally under the "guise of independence" does not become the norm. p26

…

Conclusions

With the State Auditor's failure in completing an audit of OHA and the failure to conduct or complete 10 of 25 requests of the Legislature from 2016 to 2019, and further that 12 of the 15 completed requests missed the deadline requested by the Legislature, the Working Group concludes that the State Auditor has not been in complete compliance with article VII, section 10 of the Hawaii State Constitution. p29

…

Recommendations

(5) The Legislature should require the Office of the State Auditor to terminate litigation with OHA and to complete the financial and management audit of OHA 25 p30

read … Full Report 

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FOOTNOTES:

17 Act 37 did not require an audit of the OHA LLCs. The performance audit of the LLCs was self-initiated by the State Auditor. The State Auditor disclosed his decision not to perform the financial audit to the OHA Trustees in July 2019; but failed to obtain explicit approval from the Legislature and to seek direction from the Legislature on the financial audit.

18 It is important to note that section 10-14.55, HRS, requires OHA to be audited every four years and the report to be provided on or before the convening of the next legislative session. The required OHA audit was conducted for the 2018 Legislature. The report produced on February 2018 was late and not in compliance with the Hawaii State Constitution and the law. It is also important to note that the State Auditor's report on OHA did discuss the LLCs and did not state there were difficulties with securing the information on the LLCs or executive session minutes.

19 The Senate drafts of House Bill No. 172, Regular Session of 2019, specifically required a financial and management audit of OHA's LLCs. However, House Bill No. 172, Conference Draft 1, Regular Session of 2019, which was passed by the Legislature and became Act 37, deleted the requirement that the financial and management audit be limited to OHA's LLCs.

20 The OHA audit project was originally planned to be: (1) a financial statement audit outsourced to an external CPA accounting firm; and (2) a performance audit performed by a State Auditor team.

21 In fact, it is the Working Group's understanding that the proviso and the $500,000 was made a part of Act 37 so that there would be an independent financial audit for the beneficiaries of OHA and the public.

22 The State Auditor’s decision that he would not complete the audit due to the redacted minutes is not uniformly practiced and neither is it supported by the industry practice. More specifically, the State Auditor completed the HART Audit with the same issue of redacted minutes.

23 In the Working Group’s review of Chapter 23, HRS, specific reference could not be found for the State Auditor’s use of his appropriation or of his Trust Fund for attorney’s fees and costs. As such he should be represented by the Department of the Attorney General and/or a Special Deputy Attorney General, if the Attorney General deems it appropriate. However, absent the Legislature appropriating funds for the Office of the State Auditor’s defense, the costs should be borne by the Attorney General’s Budget.

From the pleadings filed in this action, it is unclear as to what the intent of the parties are. For example, under the Rules of Civil Procedure, OHA should have a filed a pretrial statement to set this matter for trial last October (8 months after the Complaint was filed). There is no pretrial statement or extension; and no action in this matter since last year, 2020.

24 In the review of the Auditor's website of Financial Audits, the Working Group could not find a recent financial audit of OHA. The last financial audit was conducted over thirty years ago. (See Report No. 90-11, Management and Financial Audit of the OHA)

25 The Working Group believes the general funds appropriated to OHA for FY 2020 - 2021 for the financial audit is a political question and the Legislature should decide the outcome and disposition of the $500,000 appropriation.  p30  

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OHA LLC Audit Background:

• http://therealhanabusa.com/#
• Jan 5, 2020: OHA Sacrifices $3.2M to Hide Lawyer’s Conflict of Interest?
• Dec 30, 2019: State Auditor Suspends OHA Audit Over Refusal to Release Records
• Sept 28, 2019: OHA Refuses to Cooperate with Auditor—May Lose Legislative Appropriation to Hide LLC Secrets
• Kondo to OHA: I Can Subpoena You
• Court Upholds Ethics Comm Ruling Against Rowena Akana
• Legal Fees: OHA Lawyers Bill 15 Times Higher
• August 8, 2019: After Years of Illegality, OHA LLCs Hand over Check Registers—Trustees Repeal Nepotism Clause
• July 2, 2019 -- Two Days After Crabbe Leaves OHA: OHA LLCs Agree to Provide Check Register
• June 6, 2019; Crabbe Out as OHA CEO
• April 20, 2019: OHA's Crabbe out of the Bucket?
• On March 5, 2019, rare Polynesian artifacts known as ki’i were allegedly stolen from Crabbe’s home.
• HB402: Text, Status (House and Senate Conferees appointed)
• HB172: Text, Status  (House and Senate Conferees appointed)
• Court: OHA LLCs Subject to UIPA
• Secret Timeline Shows OHA Lying to Legislature While Stonewalling LLC Audit
• OHA's $139 Million Dollar Question
• OHA Trustees Vote 8-1 to Extend Audit
• Senate: OHA Must Complete Audit of LLCs
• OHA CFO: We Keep Trustees in the Dark 

COVERAGE:

Gary Hooser: A for Auditor, V for Vendetta

SA: Hawaii state auditor Les Kondo criticized in 79-page report that calls workplace dysfunctional  (Read the comments.  Nobody is fooled by this report.)

Working group criticizes state auditor’s performance, stops short of calling for his removal

HNN April 1, 2021: … in a telephone interview, Kondo said the report’s findings are misleading.

He said some of the uncompleted reports didn’t have the required approval of both the House and Senate. He also said the House tried to slash his office’s budget by more than 50 percent before backing off.

“I think the conclusions are predetermined. … This is not surprising,” he said….

Kondo said the committee declined to meet with him and that it only interviewed former employees not current staffers….

One unnamed department head described Kondo as “intrusive, inconsiderate and insensitive” to their concerns…. 

read … Working group criticizes state auditor’s performance, stops short of calling for his removal

Belatti next to Lead Effort to Protect OHA Secrets

CB April 1, 2021: … Kondo called the process that led to the working group report “sneaky and underhanded.” He said the conclusions of the  report were with him”not a surprise,” describing it as a solution in search of a problem.

“I think that the conclusions and the recommendations were all predetermined,” he said.

He disputed that the investigators ever tried to meet or speak with him.

“To say that I did not cooperate is absolutely false,” he said, adding that he sent three letters to the working group seeking clarity and more information on the investigation….

Saiki on Thursday deferred questions about the report to Majority Leader Della Au Belatti.

Belatti on Thursday said she was “disappointed but not surprised” by Kondo’s reaction to the report.

“I am going to let it speak for itself,” she said. “I believe anyone who takes the time to read it will see that was not predetermined, and neither is the next step we will take.”

She said the investigation was led by people with extensive experience in auditing and governing.

As for what comes next, Belatti said there would likely be public briefings on the report.

“I know there are a number of recommendations and findings, and I need to look at them,” she said. “I want to understand what opportunities there are to make the office of legislative auditor stronger.”…

read … State Auditor Les Kondo calls the investigation into his office “sneaky and underhanded.”