HART board chokes on forensic audit
by Joe Kent, Grassroot Institute, July 7, 2017
There has been much confusion lately regarding the potential “special audit” of the Honolulu rail project that the directors of the Honolulu Authority of Rapid Transportation (HART) last month decided to cancel.
What kind of an audit was it, exactly, that the HART board — amid some fairly embarrassing comments by some of its members — decided to forego?
Turns out it was to have been an independent forensic audit, to which Honolulu’s significantly over-budget and behind-schedule, mammoth rail project has never been subjected. It has been subjected to a variety of other audits, including at least one scathing performance audit, but never a forensic audit.
According to TheLawDictionary.org, a forensic audit is “the process of reviewing a person’s or company’s financial statements to determine if they are accurate and lawful.”
So the HART board, whose actions in this case flew under the radar for most of the public, had actually talked about providing funding for a forensic audit — to look into whether the financial statements for the rail project were “accurate and lawful” — in its proposed budget for fiscal 2018 budget.
But at the Nov. 10th, 2016, meeting of HART’s finance committee, board member John Henry Felix noted that it had not been added to the budget after all, and he raised the issue with HART Chief Financial Officer Diane Arakaki:
John Henry Felix: When we met last week, with yourself, (HART acting executive director and CEO) Brennon (Morioka) and (HART board member) Mike (Formby), we discussed the importance of a forensic audit, which is endorsed by the City Council. So, I thought we were going to put that in. Mike instructed that you add it in.
Diane Arakaki: We … could add it in if you so wish to, if the committee wishes to add it in. I do remember … discussing it with the chair.
Terri Fujii (HART Finance Committee chairwoman): So, when we say forensic audit, John Henry, can you help me? What are we talking about?
Felix: We’re talking about a thorough, in-depth audit which would include a management audit as well as a fiscal audit. The purpose of this is to clear up the past, see what went wrong with specificity, and restore public confidence in this project. And (former HART board member) Colleen (Hanabusa), in her parting words, said that she endorsed it, and Mike Formby endorsed it, Brennon endorsed it, and City Council endorsed it.
HART board member John Henry Felix said that a forensic audit of the rail project should be added into the budget.
At the previous meeting, on Oct. 27, 2016, then-outgoing HART Chairwoman (and now U.S. Rep.) Colleen Hanabusa mentioned the forensic audit in her farewell speech to the board:
Hanabusa: I also would like to put in a plug, because I hate to leave loose ends, and I just want John Henry Felix to know that I am listening to him, when he brings up his forensic audit. And I do believe that, yes, there may be a sense that you don’t want to delve in the past, but I also happen to believe that unless you understand what happened in the past, you’re going to tend to make the same mistakes again. So I hope that the board considers how we can proceed with that.
Then-outgoing HART Chairwoman (and now U.S. Rep.) Colleen Hanabusa endorsed the idea of a forensic audit in her parting words to the board.
At the Nov, 10 finance committee meeting, HART board members, perhaps trying to wiggle out of a forensic audit, said that historical reviews, peer reviews and small financial audits have already been and continue to be performed on the rail project. Felix, however, dismissed those reviews as “cursory.”
Felix: I have every confidence in the staff; however, you cannot audit yourselves.
Fujii: No, that’s correct.
After more debate, the finance committee left the scope of the forensic audit open, and started calling it “special audit services”.
Morioka: We can always add in $250,000 for an audit, of which the scope can be determined at some point in the future by the board.
Felix: I’m going to have to arm wrestle with Ann Kobayashi to answer this.
Fujii: OK, so if we add it into the budget, and with the work that is being done with the timeline and everything, we determine that the matter or the questions issues have been addressed, then we save ourselves $250,000?
Morioka: We just don’t have to spend it, yes, correct.
Now fast forward to June 22, 2017, when the HART board as a whole approved the “special audit” for inclusion in the FY 2018 budget, although not without an odd exchange, as some board members suggested ditching the audit.
Ember Shinn (HART board member): And my last question has to do with the $250,000 for the special audit. And it’s less of a question and more of a comment about that. I understand that the board put this in the budget in November when it approved the budget, and I would just ask that before that money is spent, assuming it’s not going to be spent for the mandatory audits that you have to do — you know, your regular financial audits — but whatever the special audit, whether it’s a forensic or something else, that the board has an opportunity to discuss, debate and determine whether or not it’s a wise use of funds, given the fact that when the board put this in the budget in November, we did not have the APTA (American Public Transportation Association) peer review, and I thought we weren’t getting the regular reports from PMOC Jacobs (Project Management Oversight Contractor).
HART board member Ember Shinn said, “It’s not my intent to muck around in the past.”
And so, as a new member of the board, it’s not my intent to muck around in the past, and try to figure out what we did wrong in the past; (emphasis added) it’s more trying to get forward, and trying to make sure that we’re spending appropriately, and we’re cost … doing very cost-conscience decisions, and we’re monitoring everything going forward. And what I like about the APTA peer review as well as the PMOC reports, is that it primarily talks about management and process, as opposed to saying, “We made a screwy, stupid decision back then.” And I think, going forward, that’s what I would like to do, unless there’s some critical issue where we suspect there’s, like, fraud or embezzlement or something like that, that really does need that type of an audit. As I said, I’d rather not spend the money (on a forensic audit) and use it in another way that would be moving the process forward.
Wes Frysztacki (HART board member): I can’t resist, I need to jump in again. I would like to see your comment No. 2, or your question No. 2, linked with your question No. 4, because part of my difficulty is I have no budget whatsoever to look at what needs to be done to make the transition to comply with charter amendment No. 4. So rather than them spending the $250,000 in looking at the past, and then wondering what we do about it — maybe we’ve already fixed the things that would be uncovered, and I think we have, actually (emphasis added) — I would like to ask the board to think about doing the things that you said: Let’s sit back and kinda look at this budget item. Given what the (City) Council said, I think we have discretion to change that and use it for something positive.
HART board member Wes Frysztacki argued against a forensic audit.
At the end of the June 22, 2017 meeting, the HART board emerged from executive session and voted to cancel the forensic audit:
Terri Fujii: So, in our discussion on the budget, we noted that there was a line item for special audit and that at times have been referred to as a forensic audit. That 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.
HART board member Terri Fujii made a motion to cancel the forensic audit.
Although the forensic audit was canceled, the $250,000 for “special audit services” was approved for inclusion in the FY 2018 budget; however, it’s still unclear whether HART will actually use the money for a true forensic audit.
To sign the Grassroot Institute petition to audit the rail, visit www.AuditTheRail.com.
Transcripts of the audit discussions can be found below.
HART board meeting, Oct. 27, 2016; transcript begins at 29:50. Video available here.
Colleen Hanabusa (HART Chairwoman): It’s been an honor to serve with my fellow board members, and I believe that HART is in good hands. I do want to make a plug for the fact that the charter amendment No. 4, which discusses the quote, “The Structure of HART,” which is Sub-Part 3, I believe, is very important, because I hope what the public realizes is that this board has functioned very well, has taken on oversight, and taken it to heart, so to speak. But more importantly than that, it needs to have the structural change within the charter in order to continue to do the good work that I know that this board is so capable of.
I also would like to put in a plug, because I hate to leave loose ends. And I just want John Henry Felix to know that I am listening to him, when he brings up his forensic audit. And I do believe that, yes, there may be a sense that you don’t want to delve in the past, but I also happen to believe that unless you understand what happened in the past, you’re going to tend to make the same mistakes again. So I hope that the board considers how we can proceed with that.
We’ve had so many discussions, and I’m always the one that raises, “Ahh, that’s pre-HART,” or “HART didn’t exist then,” or “Why did we sign that contract then? Why didn’t we wait?” And those are critical considerations that I think the public wants answered.
We as a board have come, in my opinion, a very long way to building public confidence, and we have to continue to do that. We have to always remember that this project is really for the people of the City and County of Honolulu. It is not HART’s project, per se. We serve a specific constituency — not only the people of the City and County of Honolulu but the people of the state, and people who come to Hawaii.
HART finance committee meeting, Nov. 10, 2016; transcript begins at 1:10:41. Video available here.
John Henry Felix (HART board member): When we met last week, with yourself, Brennon (Morioka) and Mike (Formby), we discussed the importance of a forensic audit, which is endorsed by the City Council. So, I thought we were going to put that in. Mike instructed that you add it in.
Diane Arakaki (HART chief financial officer): We … could add it in if you so wish to, if the committee wishes me to add it in. I do remember … discussing it with the chair.
Terri Fujii (HART Finance Committee chairwoman): So, when we say forensic audit, John Henry, can you help me? What are we talking about?
Felix: We’re talking about a thorough, in-depth audit which would include a management audit, as well as a fiscal audit. The purpose of this is to clear up the past, see what went wrong with specificity, and restore public confidence in this project. And Colleen, in her parting words, said that she endorsed it, and Mike Formby endorsed it, Brennon endorsed it, and City Council endorsed it.
Fujii: Well, I guess I asked the question in order to figure … I mean, I guess management will need to understand exactly what this forensic audit is going to entail in order to come up with a cost estimate to include in the budget.
Felix: A quarter of a million dollars.
Fujii: I’m sorry what?
Felix: A quarter of a million dollars.
Fujii: $250,000
Brennon Morioka (HART acting executive director and chief executive officer): Maybe if we can offer or suggest, um, that we are in the process of developing an historical timeline that will document for the board, for elected officials, for the public, to be able to digest and comment on a timeline, with the changes throughout the project’s history of budget and schedule, and some detailed discussion on what were some of the root causes of those changes and adjustments to both budget and schedule. And so hopefully, that might be something that could address member Felix’s issues in trying to make sure that we better understand some of the history, and some of the things that went on that has put us in the situation that we are currently in, both from a fiscal standpoint and from a schedule standpoint. And maybe if we can provide that, and we are working on it right now, so hopefully maybe we can target another month or so to make a presentation on that. Hopefully that might suffice in providing some of the information that you’re looking for? And if not, we can continue to see how we can amend the budget process in inclusion of something for a form of an audit, whatever form that the board so chooses.
Fujii: Because, in addition, Brennon, you mentioned the peer review?
Morioka: We have the peer review coming in; that is going to look at our change management, our construction-management issues, our technical capacity of our staff, for oversight of this project. And so a lot of that will be reviewed by the peer review committee that is coming in within the next month. And I believe their intention is a report by the end of the year? Is that right, Sam?
(off camera): That’s right.
Morioka: So, January, they will probably have a report issued to us.
Fujii: Plus, we also have a financial audit on an annual basis.
Arakaki: The board has engaged a financial auditor, an independent financial auditor, and I believe we are subject to performance audits by the city auditor. There’s been two conducted here to date in my four years here. And we also are subject to federal audits — the improper payments audit on an annual basis — and other types of procurement and contracting reviews. The FTA (Federal Transit Administration) conducts a triennial review.
Morioka: There was a performance audit recently by the city auditor which had a number of findings and recommendations of which we are trying to work through, of which the project controls positions are one of the things that we’re trying to comply with in terms of one of the recommendations or findings. And then, part of the peer review process that APTA (the American Public Transportation Association) will be doing is meant to look at some of the other findings as a part of our organizational structure, and our technical capacity, and the way we manage our contracts and such. So some of the findings that the (city) auditor did put in his report is a part of our process that we are taking a deeper look at our organization and how we operate.
Fujii: So, … my understanding is, once the history and timeline and all of that is put together, if that addresses the forensic audit need and the questions that were raised, that’s great. If not, we still have the opportunity to potentially amend the budget before it’s approved and final, if we need to add in the cost for a forensic audit at the time?
Morioka: There will be at least three readings of the budget through the City Council process that we can always make a request for amendment to add something in at the board’s request to the City Council as part of their review of the budget.
Fujii: And it may be possible that in the city doing some of their performance audits and others … these different entities could potentially do some additional work, maybe expand their scope a little to cover some of the other questions that have come up, rather than — I’m just throwing it out there — rather than having a totally separate forensic audit which could cover a wide range of different pieces and areas? John Henry?
Felix: I have every confidence in the staff; however, you cannot audit yourselves.
Fujii: No, that’s correct.
Felix: So, … it would behoove us to move in a responsible way and determine what happened with specificity in the past. In-depth, which cannot be determined by a standard audit, which is rather cursory.
Morioka: We can always add in $250,000 for an audit, of which the scope can be determined at some point in the future by the board.
Felix: I’m going to have to arm wrestle with Ann Kobayashi to answer this. (laughter)
Fujii: OK, so if we add it into the budget, and with the work that is being done with the timeline and everything, we determine that the matter or the questions issues have been addressed, then we just saved ourselves $250,000?
Morioka: We just don’t spend it, yes, correct.
Arakaki: You have ‘til June 30th to put it in next year.
Fujii: Thoughts members?
Terrence Lee (HART board member): That would go in the operating budget, right?
Fujii: Yes. Any thoughts board?
Ford Fuchigami (HART board member): You know, we can put it in the budget, and we’re not going to spend it, … but I think there’s been a lot of reviews, there’s been a lot of audits that have been external and abundant internally. I think if we can just recap that, take a look at …, I think the history report that Brennon is talking about will highlight exactly where some of the problems occurred, and I think we as board members actually know by just reading some of the information that’s there. So, again, there’s no harm in putting things into the budget as long as we don’t spend it and then if we need to remove it at a later date; we can go ahead and remove it at a later date.
Fujii: I guess, too, I would be for it if it was something that would teach us what we could have done better in the past that we can implement going forward, as opposed to, “This is what was done in the past, it’s done and there’s nothing we can do about it” kind of thing. So do I need a motion to add the $250,000?
Felix: So moved.
Fujii: Can I get a second?
Fuchigami: Second.
Fujii: All in favor?
All: Aye.
Fujii: Ok, so we’ll add $250,000 order for a potential audit. … I don’t know if I’d exactly call it a forensic audit? Performance audit?
Fuchigami: We can call it audit services, and …
Fujii: Yeah, just call it, cause that means many different things.
Fuchigami: Correct.
Fujii: And we’ll figure out what the scope is, should one be needed.
Lee: It can be called “special audit services,” ‘cause, you know, we already do an annual audit, so. …
Fujii: Yeah, differentiate that from the financial audit.
Arakaki: OK. Will do. So it will be in your packets for your Nov. 21st meeting.
HART board meeting, Nov. 21, 2016; transcript begins at 16:30. Video available here.
Diane Arakaki (HART chief financial officer): And, … as we work our way down here, we’ve added a, … at the finance committee hearing, added $250,000 for special audit services. HART’s currently engaged in a peer review to address contract administration and change-order management processes in addition to completing HART’s annual financial audit. The peer review may also recommend other programmatic improvements. Funding for these special audit services at $250,000 are being included in the budget, should the board determine other audit services being needed for a scope of work yet to be determined.
HART board meeting, June 22, 2017; transcript begins at 1:02:00. Video available here.
Ember Shinn (HART board member): And my last question has to do with the $250,000 for the special audit — and it’s less of a question and more of a comment about that. I understand that the board put this in the budget in November when it approved the budget, and I would just ask that before that money is spent, assuming it’s not going to be spent for the mandatory audits that you have to do — you know, your regular financial audits — but whatever the special audit, whether it’s a forensic or something else, that the board has an opportunity to discuss, debate and determine whether or not it’s a wise use of funds, given the fact that when the board put this in the budget in November, we did not have the APTA (American Public Transportation Association) peer review, and I thought we weren’t getting the regular reports from PMOC Jacobs (Project Management Oversight Contractor).
And so, as a new member of the board, it’s not my intent to muck around in the past, and try to figure out what we did wrong in the past; it’s more trying to get forward, and trying to make sure that we’re spending appropriately, and we’re cost … doing very cost-conscience decisions, and we’re monitoring everything going forward. And what I like about the APTA peer review as well as the PMOC reports, is that it primarily talks about management and process, as opposed to saying, “We made a screwy. stupid decision back then.” And I think going forward, that’s what I would like to do, unless there’s some critical issue where we suspect there’s like fraud or embezzlement or something like that, that really does need that type of an audit. As I said, I’d rather not spend the money (on a forensic audit) and use it in another way that would be moving the process forward.
Wes Frysztacki (HART board member): I can’t resist, I need to jump in again. I would like to see your comment No. 2, or your question No. 2, linked with your question No. 4, because part of my difficulty is I have no budget whatsoever to look at what needs to be done to make the transition to comply with charter amendment number four. So rather than them spending the $250,000 in looking at the past, and then wondering what we do about it — maybe we’ve already fixed the things that would be uncovered, and I think we have, actually — I would like to ask the board to think about doing the things that you said, let’s sit back and kinda look at this budget item. Given what the council said, I think we have discretion to change that and use it for something positive.
So I will make that request at the right time. I don’t know whether … Is this the right time right now to perhaps make that request?
Krishniah N. Murthy (HART interim executive director and chief executive officer): Can I request the chair? Please give us an opportunity to, since we are in the process of doing some restructuring of the organization, to fit into the upcoming projects that we have to handle and the financial issues that we need to deal with, so I think we may need some assistance from outside, the specialty type of individuals or firms to do some type of audit-type of work for each group that we have within HART.
So I would like to come up with a proposal to the board to consider using part of that $250,000 to do those things.
Damien Kim (HART board chairman): Well, we do have an item on top of the agenda today regarding an audit, so we can take a look at that time. But we also can have corp (city corporation counsel) weigh in on looking about the changing where (HART board) member Hoyt (Hoyt H. Zia) had talked about — whether we can. You know, how does it affect what we need to go back to the Council or not? My understanding from the past, and be being here the longest, is that we submit our budget to the City Council for approval. It’s not mandatory that we do it, but we do it out of consideration for the City and County Council because, just like what we’re going to be doing today, we also have to get their approval of getting government bonds issued for us on our behalf. So if they don’t agree, they may not agree to giving us bonds to pay for this. So it’s all a matter of courtesy, and it’s been working all these years, as far as letting them review it. And if there is any changes where we need to meet, then it’s brought before the board again to talk about, without changing the overall cost of what was already accepted in there. OK? Thank you. Ember, is that, four?
Shinn: Done, thank you.
Kim: Thank you.
==
Break for testimony
==
Kim: Anybody else wishing to testify? If not, on the table is resolution 2017-7, Adopting the Operating & Capital Budgets for Fiscal Year 2018, and that is just for the Fiscal Year 2018 itself. Can I get a motion?
Shinn: I move approval.
Kim: Can I get a second?
Zia: Second
Kim: Any more discussion board? If not, all those in favor, aye.
All board members: Aye.
Kim: All those oppose? Motion carried.
==
3:06:56
Kim: Thank you we are back from executive session regarding to item No. 15. … Terri?
Fujii: So, in our discussion on the budget, we noted that there was a line item for special audit and that at times have been referred to as a forensic audit. That 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.
Kim: Okay there’s a motion on table. Do I have a second?
(off-camera): Second.
Kim: Second. … Before we take a vote, is there anybody that would like to testify public testimony? OK, seeing none, all those in favor aye?
All: Aye.
Kim: All those opposed? Motion is carried.