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Saturday, December 08, 2012
Auditor: HI-5 Program is Exposed to Fraud
By News Release @ 4:52 PM :: 5459 Views :: Environment, Hawaii State Government, Taxes

Financial and Program Audit of the State of Hawaii Deposit Beverage Container Deposit Special Fund

Hawaii State Auditor, June 30, 2010 (Released December 2012)

Executive Summary

Section 342G-107, HRS, requires the Office of the Auditor to conduct a management and financial audit of the Deposit Beverage Container Deposit Program and Special Fund in fiscal years ending in even numbered years, after the initial audit for the fiscal year ended June 30, 2005.

The Office of the Auditor hired the certified public accounting firm of Accuity LLP to conduct this financial and program audit for the fiscal year ended June 30, 2010. For the full text of this report, visit the Auditor’s website at http://www.state.hi.us/auditor.

The Deposit Beverage Container Program Is Exposed to Fraud

Despite five years of experience with the Program, which began in 2005, several deficiencies expose the Program to fraud, including the over-reliance on self-reporting by Program personnel and lack of systematic compliance inspections.

Deposits and fee collections from distributors, as well as payments to redemption centers, are unsupported. For several sample distributor reports selected for testing, distributors could not support amounts reported and payments made to the Program.

Four redemption centers refused to provide support for amounts redeemed and the related deposit reimbursements requested, including two uncertified redemption centers that appear to be operating in violation of the law and rules. There is also at least one large redemption center operator that increases the weights reported on deposit redemption forms submitted to the Program to correct for errors made by redemption center employees.

Exempt commercial passenger-vehicle companies have not been inspected since the inception of the Program, which continues to expose the Program to risk of unauthorized beverage containers entering the redemption stream.

Consequently, the Program may be operating at a greater cost than necessary, and the reported redemption rate may not be reliable. Resolution of these deficiencies is necessary to alleviate public concern over the cost of the State’s beverage container recycling program, including questions on the container fee rate necessary to operate the Program.

Agency response

The Department of Health concurred with many of the findings and conclusions in the report. However, the department objected to the formatting of the report, which it believes highlights criticisms without providing underlying reasons for existing problems.

The Program sought to clarify several items in the draft report. The department also provided specific comments for each recommendation, indicating it is addressing the findings.

  *   *   *   *   *

Financial and Program Audit of the State of Hawaii Deposit Beverage Container Deposit Special Fund

 

Hawaii State Auditor, June 30, 2008 (Released December 2012)

 

Executive Summary

 

Section 342G-107, HRS, requires the Office of the Auditor to conduct a management and financial audit of the Deposit Beverage Container Deposit Program and Special Fund in fiscal years ending in even numbered years, after the initial audit for the fiscal year ended June 30, 2005.

 

The Office of the Auditor hired the certified public accounting firm of Accuity LLP to conduct this financial and program audit for the fiscal year ended June 30, 2008. For the full text of this report, visit the Auditor’s website at http://www.state.hi.us/auditor.

 

The Deposit Beverage Container Program Is Poorly Managed

 

Despite previous findings and planned corrective actions reported in Office of the Auditor Report No.05-09, Audit of the Deposit Beverage Container Program, we continue to find several deficiencies indicating poor management of the Program.

 

Over-reliance on self-reporting increases financial risk

 

The Program lacks adequate procedures to prevent or detect whether distributors fraudulently or erroneously underreport beverage containers sold/distributed or certified redemption centers fraudulently or erroneously over-report beverage containers redeemed. Deposit and fee collections from distributors, as well as payments to certified redemption centers, are based on unverified numbers with limited inspections performed by Program personnel. Redemption center errors are passed on to the Program.

 

Further, the Program lacks controls to prevent or detect unauthorized beverage containers from entering the redemption stream. Since inception of the Program, exempt commercial passenger-vehicle companies have not been inspected.

 

Consequently, the Program may be operating at a greater cost than necessary, and the reported redemption rate may not be reliable to justify increasing the container fee.

 

Management materially misstated the Fund’s FY 2007 financial statements

 

Although Program management is responsible for adopting sound accounting policies, establishing and maintaining effective internal control over financial reporting, and the fair presentation of the financial statements in accordance with U.S. GAAP, it did not perform reconciliations or ensure proper cut-off, resulting in a $5 million restatement of the beginning fund balance. Accordingly, the Deposit Beverage Container Deposit Special Fund restated its opening fund balance as of July 1, 2007, to correct the error relating to the calculation of the beverage container deposit liability.

 

Agency response

 

The Department of Health concurred with the findings and conclusions in the report. However, the department objected to the formatting of the report, which it believes highlights criticisms without providing underlying reasons for existing problems. The department also provided specific comments for each of the recommendations, indicating it is working to address the findings reported.

 

LINKS:

State of Hawaii Deposit Beverage Container Deposit Special Fund Financial and Program Audit, June 30, 2010

State of Hawaii Deposit Beverage Container Deposit Special Fund Financial and Program Audit, June 30, 2008

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