The following was delivered to HawaiiFreePress.com by a legislative source:
September 28. 2020
The Honorable Scott K. Saiki
Re: Audit of the Office of Hawaiian Affairs' Limited Liability Companies
Dear Speaker Saiki:
We are in receipt of your letter dated September 24. 2020. again questioning our decision to suspend the performance audit of the Office of Hawaiian Affairs (OHA) required by Act 37 (Session Laws of Hawai’i 2019).
We have responded to your multiple inquiries by explaining the decision to suspend the audit was based upon our determination that we were unable to complete the performance audit of OHA's use and oversight of its LLCs without information that OHA has chosen to withhold, namely the minutes of certain Board of Trustees executive sessions. First Circuit Court Judge Jeffrey Crabtree's ruling on Friday that Section 23-5(a), Hawai'i Revised Statutes,1 does not require OHA to provide us with its unredacted minutes does not change that position. As previously explained, our inability to access complete, unredacted minutes of certain executive sessions creates a significant and unacceptable "audit risk" that our findings, conclusions. and recommendations may be improper or incomplete as a result of factors such as insufficient and/or inappropriate evidence or intentional omissions or misleading information due to misrepresentation or fraud.
The audit was intended to provide much needed transparency into and to hold OHA accountable for its use of the LLCs. including the Board of Trustees' creation and oversight of the LLCs. We also intended to determine whether OHA used its LLCs to disburse grants and other funding outside of OHA's spending policies and procedures.
From September 2007 to October 2015, OHA created seven LLCs to hold OHA assets such as Waimea Valley and to pursue other outside business opportunities and higher-risk ventures. One of the LLCs purchased a poorly performing poi mill on Kaua'i, which continued to lose substantial money under OHA 's ownership. The poi mill was subsequently transferred at no cost to an organization associated with an OHA Trustee's former aide and then to a public charter school's non-profit affiliate. The LLC continued its financial support for the mill and associated individuals even after the mill had been transferred by the LLC. Another LLC was created to apply for a marijuana dispensary license.
However, many of the Trustees, former Trustees, and others whom we interviewed were unable to recall or had inconsistent recollections about LLC-related discussions and decisions, many of which occurred over a decade ago. According to some interviewees, Trustees were denied information about the LLCs (including budgets and information about expenditures), even though OHA was the sole member (i.e., the owner of the LLCs) and OHA executives served in their official capacities as the LLCs’ managers. The Board of Trustees discussed and decided matters involving the LLCs in numerous executive sessions. Because the information we obtained through our fieldwork seems incomplete, inconsistent, and possibly incorrect, without the ability to confirm and corroborate the basis of the Board of Trustees’ actions, among other things, through the contemporaneous minutes from those meetings, we were compelled by Government Auditing Standards to suspend the audit.
While you may disagree with our determination, it is based on months of methodical and time intensive audit planning and fieldwork and an application of the standards presented in the 2011 revision of Government Auditing Standards issued by the Comptroller General of the United States.2 We cannot disregard or otherwise compromise the Government Auditing Standards that are the foundation of our performance audits. which require a thorough external peer review performed by reviewers independent of our office at least once every three years. 3
We are an important resource for the Legislature. As an independent. nonpartisan office established by the Hawai'i State Constitution. our performance audits are intended to hold government agencies accountable for their use of public funds by offering an objective assessment of agencies· performance and achievement of their statutory missions. However, if agencies are allowed to dictate our audit objectives, limit the scope of our audit, or withhold infonnation from us - to hide things that they do not want us seeing - they cannot be held accountable and be compelled to improve their performance.
Please be aware that your actions are being used to support withholding necessary information and undermining our ability to perform our statutory responsibilities. During a court proceeding on Friday in its lawsuit against the Office of the Auditor, OHA 's attorney used your letters as support for its argument that we do not need the minutes to complete the audit and violated Act 37 by failing to complete our audit. Your insistence that we issue an incomplete and potentially inaccurate audit report, one that contains “disclosure statements," will only serve to shield OHA's actions regarding its LLCs from meaningful and important legislative oversight.
That presumably was not the Legislature's intention when it requested the audit of OHA: rather we assume the Legislature intended our audit to be complete and thoroughly supported. Enforcing subpoenas or contending with lawsuits and other obstructions will make it challenging to complete our audit work in a timely, cost-effective manner.
As you may be aware. Section 10-14.55, Hawai'i Revised Statutes, requires the Office of the Auditor to conduct an audit of OHA at least once every four years, the most recent of which was completed in 2018. In our Report No. 18-03, we found that, not only did OHA 's spending irregularities pose risks to the Native Hawaiian Trust Fund, they appeared to violate the OHA Trustees' solemn fiduciary obligation to administer the trust fairly, equitably, and without self-interest. We also reported a pattern of undisciplined spending by the agency, finding that OHA had created discretionary spending mechanisms that allowed Trustees and OHA Administration to regularly direct trust money toward a multitude of programs, projects, and individuals, outside of OHA's formal grants process and the associated vetting, monitoring, and evaluation requirements. We questioned whether certain spending. some of which the Administration authorized without Trustee approval, was consistent with Trustees' fiduciary responsibilities to the beneficiaries of the Native Hawaiian Trust Fund.
By requiring these regular audits of OHA, the Legislature presumably believed that it was important to provide transparency and accountability. However, open access to OHA's records, including to those OHA considers to be confidential or privileged, is vital to our ability to provide the intended review. OHA and other state agencies should not be able to decide what we are able to review – and, more importantly, what we cannot review - for purposes of an audit by filing a lawsuit against the Office of the Auditor, obstructing and delaying our work, and causing the unnecessary waste of state resources.
To avoid similar issues in future OHA audits as well as those of other state agencies. we suggest the Legislature consider amending Section 23-5(a). Hawai'i Revised Statutes to clarify access by the Office of the Auditor to "all accounts, books, records, files, papers, and documents and all financial affairs of every department, office, agency, and political subdivision." Please let us know if we can propose language to ensure that we continue being a valuable resource and able to perform the audits requested by the Legislature.
We do understand your desire for "closure" to the pending audit if OHA continues to withhold the minutes we need to complete the audit. We will consider options under the Government Auditing Standards, including terminating the audit, and will inform you of any decisions affecting the audit.
If you have questions or would like to discuss the above. please contact me.
Very Truly Yours,
Leslie H. Kondo
cc: Members of the House of Representatives
The Honorable Ronald D. Kouchi, President of the Senate
1 Section 23-5(a), Hawai'i Revised Statutes, states, “the auditor may examine and inspect all accounts, books, records, files, papers, and documents and all financial affairs of every department, office, agency, and political subdivision.”
2 You indicate we cite an outdated and inapplicable version of Government Auditing Standards, but are mistaken. We initiated the audit of OHA in June 2019. The 2018 revision of Government Auditing Standards is effective for performance audits beginning on or after July 1 2019, and early implementation was not permitted. The 2011 revision, which we referred to in our September 23. 2020 letter, is the version of Government Auditing Standards applicable to the current OHA audit.
3 We appreciate you clarifying that the audits referred to in your September 21 letter are those reports on Hi’ilei Aloha LLC’s website. Those are financial audits of the LLCs, which have no relevance to the current performance audit of OHA or our ability to complete the current performance audit without sufficient audit evidence.
OHA LLC Background: