‘Special audit possibly coming down the line’

by Mark Coleman, Grassroot Institute, Aug 9, 2017

To audit the rail or not: That is the question.

You might think it would be easy to answer, but apparently not for some Honolulu policymakers, despite the obvious predicament facing the city’s planned 20-mile rail system: billions over budget and years behind schedule, with the most difficult leg of the local megaproject — through downtown Honolulu — still to be done.

Part of their struggle has to do with what is meant by the word “audit.” Longtime proponents of the rail system, who at this point seem to want to just finish the project no matter the cost, have been making the case that the rail already has been audited many times, and continues to be scrutinized on a regular basis by a variety of reliable sources, so what could it mean that we should “audit the rail”?

Honolulu Mayor Kirk Caldwell told HART board members July 20 he didn’t want the audit debate to be a distraction.

For example, Honolulu Mayor Kirk Caldwell, the city’s leading cheerleader for rail, spent 20 minutes at the July 20 meeting of the Honolulu Authority of Rapid Transportation telling its board members about the many audits and reviews to which the project has been subjected:

>> “We have the city (performance) audit that was done in April 2016,” he said. “Very extensive, a lot of good points made here.

>> “We have this PMOC (Project Management Oversight Committee) report, … done in June of 2016; fine, very good.

>> “We have the APTA (American Public Transportation Association) peer review, which Mike Formby, your (former acting) executive director, … and I pushed hard for after meeting with the FTA (Federal Transportation Administration) in San Francisco. … We asked them, ‘Well, what else can we do to find out where we’re making mistakes?’ And they said, ‘Do an APTA peer review, a review by your peers, of this transportation authority.’ It was done. It’s excellent.”

>> And then, said Caldwell, there is the federal Office of the Inspector General, which has been auditing “what the FTA is doing on our project and other western projects,” and “It’s just interesting to see how they’re criticizing what the FTA can do better.”

The point is, the mayor said, “there are so many things you could spend a lot of time improving, just with this (information).”

But Caldwell wasn’t finished yet.

“In addition,” he continued:

>> “You have monthly reports to the HART board of directors, from (HART Interim Executive Director Krishniah) Murthy and others.

>> “You have the HART board finance committee and project oversight committee looking at things.

>> “You have monthly reports to the FTA, the project oversight committee.

>> “You have monthly meetings with the project management oversight committee person.

>> “You have quarterly meetings with the FTA.

>> “You have FTA tri-annual reviews.

>> “You have FTA and PMOC audits.

>> “You have financial audits from the independent financial institutions yearly.

>> “You’re audited by the (City) Council every time you go before them. And look at the hearings: You can sit there for hours and hours and hours while they ask questions, and you have to provide information.

>> “You go before the City Council finance and budget committee.

>> “You go before neighborhood boards all the time.

>> “You have weekly meetings with me  — which sometimes I wish everyone else could sit in that meeting to see how they go, and the last couple were not very pleasant, right Murthy?” he said, flashing a smile at Murthy.

>> “You have (the requirements of the) Improper Payments and Elimination of Recovery Act of 2010, where you’re being reviewed to see are you doing the payments correctly.

>> “You have the city auditor who’s auditing.

>> “And you have the National Transit Database reporting requirements.

“The point is,” he said again, “you have a lot of reports being given, and it’s what you do with that information.”

The point about making the point

Why was Caldwell making the point about all these “reports being given”?

Because since last year the HART board has been considering commissioning a “forensic” audit of the rail system, at the behest of board member John Henry Felix, who at the board’s Nov. 10, 2016 finance committee meeting defined it as “a thorough, in-depth audit, which would include a management audit as well as a fiscal audit,” the purpose of which would be “to clear up the past, see what went wrong with specificity, and restore public confidence in this project,” All other audits and reviews of the system so far, he said, had been only “cursory.”

The board apparently had agreed earlier to fund such an audit, even allocating $250,000 to pay for it, but by the Nov. 10 meeting, that item had disappeared from the budget.

After Felix brought it up, the committee restored the funding, but not for a “forensic” audit; it was now to be called “special audit services.”

This is the meeting at which board member Ember Shinn, former city managing director under Caldwell, infamously remarked that she had no desire to “muck around in the past, and try to figure out what we did wrong in the past.

“Unless there’s some critical issue where we suspect there’s, like, fraud or embezzlement or something like that,” she said, HART “really does not need that type of an audit.”

In June, the board voted to make it clear that it opposed a forensic audit, approving a motion suggested by Terri Fujii, who also is an audit partner at CW Associates, that the “special audit was not meant to be a forensic audit, and therefore I motion that no forensic audit is needed or needs to be conducted.”

But the issue hasn’t died.

>> In April, the Grassroot Institute of Hawaii launched an online petition to “audit the rail,”so far signed by thousands of Hawaii residents.

>> In mid-June, local media gave widespread coverage to a letter that Felix had written to his fellow members on the HART board, recommending that an “expedited, independent forensic audit” be conducted immediately, because “the credibility of rail transit on Oahu has virtually disappeared.”

>> Numerous Oahu residents — including the usual high-profile rail critics such as businessman Cliff Slater; retired law University of Hawaii law professor Randall Roth and UH Civil and Environmental Engineering Department Chairman Panos Prevedouros — have raised the audit issue at HART, City Council and other public meetings and forums.

>> At a town hall meeting in Kapolei on Aug. 3, former HART chair and now U.S. Rep. Colleen Hanabusa told constituents she had openly supported the idea of a forensic audit for rail when she was still on the HART board — “out of sheer frustration of not being able to get a straight answer as to how we can go up in cost.” The former State Senate president said it is inexcusable and not fair to the people who will end up paying for it, and, according to a KITV report, said she “anticipates a rail audit will happen, regardless, since the Legislature would most likely require it before considering any additional funding.”

>> Perhaps most important, on July 20, the same day as the HART board meeting, City Council member Trevor Ozawa introduced Resolution 17-199 requesting that HART conduct an “economy and efficiency audit to determine the causes for the cost overruns for the Honolulu high-capacity transit corridor project.”

Ozawa’s gesture was especially significant because his vote was considered the difference-maker when the City Council voted in June to authorize the sale of $350 million in bonds to fund short-term rail expenses: It takes six out of nine members, instead of the usual five, to grant final approval to bond-related measures. In an earlier vote that allowed the rail bond-sale measure to advance to its final reading, Ozawa had sided with its opponents.

Interviewed about the resolution, Ozawa said he introduced it because “I’ve always been about transparency on the rail,” and he thought it was within the Council’s purview to recommend policy to the HART board.

A previous resolution related to HART that he had introduced prompted the semi-autonomous city agency, in early 2015, to start televising its board meetings on Olelo — an action that was praised at the time by Mayor Caldwell.

“I thank Councilmember Ozawa for proposing this sensible idea which will allow the public to more closely monitor the actions of HART and increase transparency,” Caldwell said.

Ozawa said an “economy and efficiency” audit by HART also would enhance transparency for the rail, by seeking to determine, according to the resolution, “(1) the causes of inefficiencies or uneconomical practices; and (2) whether the entity audited has complied with laws and regulation on matters of economy and efficiency.”

A rose by any other name

Ozawa said he did not go out of his way to avoid using the term “forensic audit,” though it’s “probably the same thing.”

“I’m just looking for what I want to find out,” he said, “which is how did we get here? Why is there overspending?”

Noting the project’s financial magnitude, Ozawa said, “It’s valuable when you’re talking about billions of dollars here that we know perhaps there’s nothing tremendously wrong. So long as everybody knows it’s just the timing, the lawsuits, the construction costs, the recession, the presidency … I mean, everything is lining up. That’s why I keep saying in my remarks, ‘Let’s build to what we’ve already signed up for, which is $4.7 billion worth of work to Middle Street, from what I understand, and beyond that, don’t obligate us with anything more until we know what’s going on.’”

Ozawa said another reason for introducing the resolution was out of concern for the Council’s reputation, which has been sullied by the continuing embarrassing revelations of the rail project’s ballooning costs and extended deadlines.

“It’s so easy for the public to look at the City Council and say, ‘Oh, vote this way.’ ‘Vote that way.’ You know: ‘Stop the rail.’ ‘You guys are increasing the costs.’ ‘You guys …’ Well, no, the City Council’s responsibility is not increasing the costs; we are responsible for protecting the financial returns and cleaning up the mess.

“So for me, I want to know: Who made the mess? Because I remember almost two years ago being told, when they were asking us to approve a five-year extension (of the state general excise tax rail surcharge to help fund rail), that by no stretch… What did they say? They gave me an analogy, like the sun would have to not rise — you know, something like that — for this calculation to be wrong. That was (when the estimate was) at something like six-point-something billion. …

“So that’s why I supported the extension at that time, because we had very credible people saying six-point-something billion — and then, literally less than three months later, we get the headlines: nine billion, could be up to eleven.

“My point is, I did not do that. And I’m not shirking the responsibility; it’s just not my kuleana, you know? So, if it’s truly just construction costs, etc., well, break it down, you know?

Ozawa said he hadn’t polled his Council colleagues about whether they would be supporting R 17-199, “but I think they will.”

“I can’t see anybody not supporting it; put it that way,” he said.

Will Budget Committee take resolution to HART?

Council Chairman Ron Menor referred the resolution for an Aug. 23 hearing before the Council’s Budget Committee, whose four members — Joey Manahan, Brandon J.C. Elefante, Ikaika Anderson and Kymberly Marcos Pine — like Menor, have all been strongly supportive of rail, and could be inclined, for whatever reason, to vote against it.

On the other hand, Ozawa did join with those five members to authorize the city’s rail bond sale. Also, transparency is a politically popular concept, and those Council members all have personal and institutional reputations to uphold as well, so it’s just as likely they could approve the measure and send it to the full Council, where it would be virtually guaranteed to gain final approval.

“If it comes out of Budget Committee, I would support it,” said Council member Ann Kobayashi, who noted as well that she had voted “from the beginning” against the city borrowing money for rail.

“I think it would be good for the public to know where their money went — before HART, too, actually, because before HART (which began operations in 2011), there was no one watching,” she said.

Will HART take R 17-199 to heart?

If approved by the full Council, the resolution would go to the HART board, where the legal effect would be purely symbolic, though powerful nevertheless.

“I think it HART board has that decision-making discretion on their part to do it,” said Murthy, the interim executive director of HART since December.

“Probably as you’re aware,” said Murthy, interviewed Aug. 1, “this came up at the last board meeting (July 20), and they did not come to a resolution on that, and hopefully when the city request comes in, they may take it up and direct the staff to go ahead and do the audit.”

Interim Executive Director of HART Krishniah Murthy said his staff would be happy to do whatever the board wants.

He said that upon receiving the Council’s request, “Either they (the HART board members) can agree, and then they direct their staff, ‘OK, let’s do it,’ or they can come up with some other, more prescriptive or definite language that directs the HART staff to seek an outside, independent firm to do the type of audit that the HART board wants us to do. Whatever the HART board directs us, we will be happy to do.”

Murthy said he did not know whether the $250,000 already allocated by HART for “special audit services” would be enough.

“It depends on what kind of audit and how deep they (the HART board) want us to go, and how far back into the history of this project you want to go, because this project has a very long history,” he said.

Which brings us back to the July 20 HART board meeting.

Are any of us looking for litigation?

Continuing his pitch to the board about the many audits and reviews he has seen through the years, including when he was a state representative for six years, Mayor Caldwell finally arrived at his main concern:

“Do we do another audit?” he asked. “You know: What is a forensic audit? The only time I’ve heard of a forensic audit is as a lawyer … when you’re doing an audit preparing for litigation. I don’t think any of us are looking for litigation (emphasis added). We’re looking to be better, or confirm practices that are good; we need to know that. So, perhaps more audits — well, obviously there are going to be a lot more audits — but, for us, an audit on how you control construction costs, or why did construction costs go up, is something that could be worth looking at.”

Interviewed several days before the July 20 HART board meeting, former UH law professor Randall Roth, of “Broken Trust” fame, said he, too, thinks that the term “forensic audit” suggests eventual courtroom proceedings.

“As soon as you use the word ‘forensic,’ (people) think you’re looking for a crime,” Roth said, “and I think that will turn off a whole lot of people unnecessarily, because even if someone could guarantee to me no crime has been committed, I would still feel the need for a forensic audit.”

A forensic audit in his mind, Roth said, “is the kind of audit where you don’t assume anything.”

Instead, he said, “You go in with some real basic questions, like: Why are we six years behind schedule? Why are we $4.7 billion over the estimate at the time of the full funding grant agreement (with the FTA, in 2012)?

“And, of course, when they say it’s because of those lawsuits, then you say, ‘OK, let’s take those lawsuits one at a time,’ and the federal lawsuit clearly did not slow down construction or even construction bidding, so obviously the financial impact of it is minimal, and, in fact, HART put a number on that as less than one-tenth of 1 percent of the estimated construction cost, so that’s an irrelevant factor; that rounds off to zero.

“There’s the other lawsuit, and obviously because the (state) Supreme Court ordered construction stopped until the archaeological survey could be completed — you know, it was shut down for 13 months — clearly there were some costs from that lawsuit. HART has tried to determine what those costs were, and they got that number and, again, it’s a tiny percentage of the $4.7 billion.

“So we’ve now pushed to the side lawsuits as a significant explanation for the $4.7 billion. And then, of course, they’ll come in and say, ‘Well, we changed our mind: We put out the bids for somebody to build three stations at a time, and then we changed our mind. We wanted to break it down so more companies could bid separately.’ OK. Let’s figure out to what extent did that add to the time on the project, and did that time delay translate into an increase in the estimated cost?

“And you just methodically keep going until you’ve accounted for the $4.7 billion and the six years of delays. And if they throw up their hands and say, ‘Well, we’ve run out of ideas, we have no clue as to how there’s an additional $2 billion that’s unaccounted for or whatever,’ then obviously that’s a very big concern, because now you do make an assumption that there is something untoward going on, if they can’t explain … several billion dollars — again these are estimates — and now you have got a big problem.

Slater, who also runs the website Honolulutraffic.com, said he has no problem with the idea that a forensic audit is about “looking for trouble.”

Cliff Slater told the HART board that “everything should come up on the table, as John Henry Felix is calling for.”

“It means you’re looking for criminality,” he said.

Interviewed in June, Slater said he thought the chances of HART calling for a forensic audit were slim.

“If there’s criminality staring them in the face, that’s one thing that will trigger them to go, for example, to the management or the board of directors and say, ‘Hey, there’s some criminality around,’ OK? Normally that’s not what they’re doing. They’re not looking for trouble.”

Local certified public account Natalie “Bike Mom” Iwasa agreed that such audits usually are targeted toward “looking for things that are not right from the prospect of possible fraud.”

A certified forensic examiner herself, as well as president of Cycle on Hawaii, Iwasa said that in a financial audit, “they’re looking at the numbers and disclosures on the financial statements, and there’s a lot of latitude there with respect to a term called materiality. So, you know, it might be like, well, there’s a million dollars off here, but that’s really not material when you’re talking about something like a few hundred million dollars. Whereas a forensic audit looks to see if something is not being done properly, whether there is, I guess, intentional abuse.

“So, I guess I was thinking about that because there have been a number of former employees from the (rail) contractors who have come forward and made certain accusations, and I think that would be a good starting point, potentially.”

Meanwhile, wrapping up his case that he prefers the HART board not authorize a forensic audit of the rail project, Caldwell said the main lesson of audits and reviews generally is that “they need to be read.” More important, he said, is “they need to be implemented.”

“So I guess in a roundabout (way), if … this board feels that you need another audit done in some way, that’s your decision to make. And I would support (it). But I would be asking: What kind of an audit? What is its goal? How does it build off the audits we have? And then what are we going to do with it? Because … if you’re not using it, it’s just a piece of paper you put on your shelf.”

Caldwell said he also doesn’t want the debate about audits to become a distraction.

“There are so many other issues coming up that I think are even more important to pay attention to,” including, said Caldwell, electrification of the rail system, utility relocation along Dillingham Boulevard, and the last “city center RFP” (request for proposals)” concerning construction of the last 4.8 miles of track and stations from Middle Street to Ala Moana Center.

“So don’t forget the big picture,” he urged. “There are so many things coming up that are so critical that I don’t want to lose sight over this dispute on how many audits and what type.”

Not done with ‘forensic audit’ yet

Later at that same HART meeting, the board took up agenda item No. 10, concerning “Letter to the Editor Regarding Special Audit.” The item had been introduced by Shinn, who was concerned about the board apparently not having a policy “on how we react to the media” — especially after recent media reports about the HART board discussions on a potential forensic audit.

Board Chairman Damien Kim, however, started the discussion by immediately announcing, “A special audit is possibly coming down the line.” He added, however, that he thought the board should wait until HART’s new permanent executive director is on board, because “we want input from that person as well.”

Chairman Damien Kim said he wanted input from HART’s new executive director on a possible “special audit.”

That person will be Andrew Robbins, an executive with Canada-based Bombardier Transportation, whose selection was announced July 31; he will start on the job early next month, working for a few months alongside Murthy, whose employment contract runs through December.

Again speaking about the possible “special audit,” Kim, who also is the business manager and financial secretary of the International Brotherhood of Electrical Workers Local 1186, affirmed that “this matter is just being deferred; it’s not that we do not want a special audit; I just want to make that clear to add as well.”

This prompted board member Felix to “respectfully disagree.”

“I feel that it’s imperative that we conduct a forensic audit,” said Felix, a longtime successful businessman in Honolulu who also served for 16 years on the City Council. “The public has a right to know. Transparency has to prevail. There’s a lack of confidence in this project. And I think with a forensic audit, we’ll get to the root causes of the problems of the past, so that we can make the necessary corrective action and proceed with this project with great vigor and in a robust way.

HART board member John Henry Felix was persistent in recommending a forensic audit of rail.

“We have to revisit the past,” he continued, “and that can only be done through a thorough, intensive specific forensic audit. Not a general audit. Not the audits that the mayor referred to. Not the peer reviews that we’ve heard referred to. Those are very helpful, very instructional, but they are not the type of audit that we need. We have to find out where the money went and why, and not repeat the mistakes of the past.”

For some reason, Felix’s remarks reminded Kim that Brennon Morioka, who resigned from the HART board in 2016 to go work for Hawaiian Electric Co., was supposed to put together a “time line” from the past “to show the major events that happened along the way, and cost-wise.” He asked interim CEO Murthy to follow up on that.

Felix spoke up: “Mr. Chairman, a time line is not a forensic audit.”

“Yes, I know that,” said Kim. “But it will help explain, because I know we have a lot of new board members that need to be brought up to speed on some of these things along the way.”

Getting back to Shinn’s concern, the board agreed to designate the chair “or his designee” as “the rapid responder to any media events that need to be addressed because they include inaccurate statements that are known to the agency.”

Then, getting back again to the issue of audits, non-voting member Kathy Sokugawa, who also is acting director of the Honolulu Department of Planning and Permitting, said she could not support a forensic audit “at this time,” due to “time and cost implications, and it distracts us from the main goal of building the rail.”

She proposed that the HART staff instead create a summary of “all the effective audits that we are now obligated and responding to,” saying it would not take as much time or cost as much as “conducting a whole new audit,” and could be helpful to the newer board members as well the media and public in general.

Again Felix spoke up: “So it’s your thought that this would make the forensic audit unnecessary?”

“No, not necessarily,” Kim jumped in. “I believe the motion is just to summarize all the previous audits we had, to make sure of where we are in case we did miss something along the way.”

Later Felix gave calling for a forensic audit one more shot, before the group moved on to the next agenda item:

“The concern of the average person on the street is, ‘Why is the administration so reluctant to have a forensic audit? Are they fearful?’ I’m saying transparency would go a long way toward restoring public confidence in this project. Transparency is the big issue here.”

At this point, Council member Hoyt Zia, former general counsel and corporate secretary for Hawaiian Airlines, jumped in:

“Mr. Chair. … I’m not sure I agree that the average person requires, desires that there be that amount of money to be spent on, you know, a forensic audit, because I’m not sure any of us understands at this point what that forensic audit would concentrate on …

HART board member Hoyt Zia expressed a desire for clarity about a possible forensic audit.

“However, my question is for this group … I’m a little confused: Where we going with this? Do we need an executive session right now to discuss what we’re going to do with respect to pursuing it? Where are we in this discussion?

“Before there is any decision made to pursue a forensic audit, I assume we’re going to have to discuss that further. I just want to know when that’s going to happen — or if it’s going to happen.”

Yes, inquiring minds would like to know.