Financial and Program Audit of the Department of Health’s Deposit Beverage Container Program, June 30, 2022
EDITOR'S NOTE: It was only in 2022, with Reynolds Recycling employee Jill Tokuda heading for Congress, that the Legislature finally got around to passing Act 12 which requires DOH to develop a risk-based process to address criminal recycling fraud that the State Auditor has been reporting for 20 years. It sure pays off to own a Committee Chair.
Report No. 23-07 from Hawaii State Auditor, June, 2023 (excerpts)
In 2002, the Legislature established the (HI5 Deposit Beverage Container) Program through House Bill No. 1256, House Draft 2, Senate Draft 2, Committee Draft 1, which became Act 176, Session Laws of Hawai‘i 2002. The act, codified in Chapter 342G, Part VIII, Hawai‘i Revised Statutes (HRS), also created the Special Fund to hold the deposits and handling fees collected by distributors. …
In 2022, the Legislature passed Act 12, Session Laws of Hawai‘i, which noted the Office of the Auditor’s biennial reports have repeatedly demonstrated DOH’s failure to develop and implement procedures to verify the accuracy and completeness of data reported by beverage distributors and redemption centers. Act 12 requires DOH to develop a risk-based process to address the issues and concerns that we have repeatedly reported.
Review of Prior Audits
The Office of the Auditor conducted its first audit of the Program in 2005, finding that DOH’s passive oversight of the Program did not ensure a full accounting of its financial transactions or safeguard its assets. Six subsequent audits issued between 2008 and 2018 found that the initial findings and recommendations made in 2005 had not been addressed and remained relevant. For instance, we have consistently reported that DOH’s oversight relies on self-reported numbers from beverage distributors, who must report the number of containers sold and the deposits collected, and from redemption centers, which DOH reimburses based on their reporting of refunds paid to consumers who redeem their deposits. Earlier audits raised concerns that DOH did not verify those numbers, exposing the Program to possible fraud, risk, and abuse. And, in 2018, auditors identified two instances of actual fraud, which DOH reported to the Department of the Attorney General but did not otherwise address.
Instead of continuing to report the same unactioned findings, we took a new approach in 2021, examining why DOH failed to take meaningful action to address these chronic issues. In that follow-up effort, DOH attributed its inaction to understaffing; however, we also noted a belief among DOH management that the department should not be responsible for administering the Program, despite being statutorily required to do so. We found that DOH had not taken any significant steps to shore up its Program at that time, although auditors were provided a memorandum from the Solid Waste Coordinator describing a “compliance testing pilot project” that started in July 2020. However, our review of the pilot project found the proposed compliance testing would not adequately address our longstanding findings – and certainly not in a timely manner.
For instance, the pilot program would continue to rely solely on selfreported numbers from distributors and redemption centers. We were also told that due to staffing, the Program could review the transactions of one redemption center each quarter. At the time, there were 62 redemption centers in Hawai‘i; we estimated it would take more than 15 years to test compliance at every redemption center in the state.
In 2022, we again switched our approach for the management audit of the Deposit Beverage Container Program, acknowledging that, based on its representations, DOH was in the process of implementing changes to address the audit recommendations in Report No. 21-13, which was issued in December 2021, and the requirements of Act 12. Given the short amount of time since the last audit and potential challenges due to the COVID-19 pandemic, this report summarizes the status of ongoing corrective actions as provided by the department in August 2022….
Audit Scope and Methodology
Given the short amount of time between the issuance of Report No. 21-13 and this one, we determined that it would be unrealistic to expect DOH to have implemented recommendations or to have made significant changes to the administration of the Program. As a result, we changed the approach for the 2022 review. The Office of the Auditor contracted KMH LLP, a certified public accounting firm, to conduct this financial and program audit for the year ended June 30, 2022. We requested that the Program report the status of its implementation of our recommendations, and we summarize its self-reported implementation status in the report below.
What We Reported in 2021
The most recently completed financial and management audit of the Program, Report No. 21-13, was issued in December 2021. In prior reports, we had sampled a small number of records maintained by both distributors and redemption centers. That work is the Program’s responsibility, not the job of the Auditor. However, because DOH was not actively involved in managing the Program, there was nothing for us to audit with respect to the Program’s performance or management of the Program. The approach for that report was modified to assess why there have been no significant changes to the Program despite the same types of findings and recommendations being repeated in prior reviews. Instead of testing distributors and redemption centers’ compliance (again, it is the responsibility of management, not an external auditor, to develop processes to ensure compliance) and arriving at the same conclusion as prior audits, the review was modified to consist primarily of a series of interviews with DOH and Program management. Report No. 21-13 contained operational recommendations similar to those in the seven prior financial and program audits. It also included management recommendations to establish objectives, internal controls, policies and procedures, and an action plan for implementation of other recommendations. The 2021 recommendations are attached as Appendix A.
2023 Status Update Provided by Program
The Program provided a status update on its implementation of the most recent audit recommendations in August 2022, which included excerpts from corrective action plans that were part of the Department of Health Corrective Action Plan Updates for Findings and Recommendations for the State for fiscal year ended June 30, 2021. The Program provided additional status updates on actions taken as of August 26, 2022. The ongoing corrective actions related to the Program are summarized below.
Ongoing Corrective Actions
In August 2022, DOH’s Office of Solid Waste Management, which oversees the Program, reported that it was actively recruiting its fourth inspector since February 2021, as well as filling other vacancies. According to the Program, filling the vacant inspector positions is key to meeting the audit recommendations: “A fully staffed enforcement section will perform significantly more inspections at redemption centers, expeditiously resolve complaints, and conduct enforcement actions on redemption centers and distributors.”
In July 2021, the Office of Solid Waste Management increased the frequency of its inventory inspections to document and track the type and volume of beverage containers collected and stored at redemption centers. The office initially reported that inspections would be performed at every redemption center on a quarterly basis; however, additional staffing allowed the Program to further increase the frequency to every other month. Inspectors document the bales of redeemed deposit beverage containers and corresponding estimated weights, which the office’s accountants use to verify the reasonableness, generally, of the redemption centers’ reports. After the beverage containers have been shipped out of state or sent to permitted recycling facilities, the accountants can reconcile redemption center reports with documented weight tickets from independent end users to provide some level of assurance about accuracy in reporting. According to the Program, significant variations between the redemption reports and independently documented shipping weights will be forwarded to enforcement staff for investigation and corrective action.
Redemption Center Certification
The Office of Solid Waste Management revised its redemption center certification application for new applicants and those renewing certification. The new application, dated September 2021, requires applicants to provide an operational plan that incorporates fraud prevention procedures to ensure that the collected beverage containers are secured and that all receipts given to customers for redeeming deposits correlate with the deposit containers collected. The Office of Solid Waste Management inspectors are responsible for enforcing the requirement that fraud prevention plans are submitted, actionable, and implemented by redemption centers.
Distributor Report Analysis
Act 12, Session Laws of Hawai‘i 2022, requires DOH’s Office of Solid Waste Management to adopt recommendations from the 2018 audit report and requires beverage distributors to conduct independent third-party audits to verify that their reports and payments to the State are accurate. This will require amendments to the administrative rules for deposit beverage container recycling (Chapter 282, Title 11, Hawai‘i Administrative Rules). To assist in updating the State Integrated Solid Waste Management Plan, the Office of Solid Waste Management anticipated convening an advisory committee in November 2022. The advisory committee’s responsibilities would include developing any new administrative rules related to the Program.
Modernizing Data Management and Reporting Systems
The Office of Solid Waste Management began implementing a multi-year/multi-phase project with the DOH Environmental Management Division’s software developer in January 2021. The first phase, which finished at the end of 2021, included development of a foundational “warehouse” to store and interface with all Program data. The second phase will include a mobile application for use by state and county inspectors in the field. According to the department, this phase was delayed until late 2022 because the software vendor was redirected to develop a sampling interface for DOH following the fuel leak at the U.S. Navy’s Red Hill Bulk Fuel Storage Facility.
Future phases would add an online portal for distributor reports and payments, followed by digitization of redemption center reporting. The Office of Solid Waste Management currently receives hard copy reports but intends to transition to online submissions to reduce errors, improve data management, and free up staff to analyze reported inconsistencies.
We appreciate the status updates provided by the Office of Solid Waste Management about its progress in implementing longstanding audit findings to improve the Deposit Beverage Container Program operations and reduce the risk of fraud. We look forward to assessing these efforts in our next review….
read … Full Report
SA: DOH recycling program receives 2-year audit
CB: Why Is It So Hard To Fix Hawaii’s Bottle Deposit Program? “one of the main complaints about the program — that it relies on self-reported data to track the funds it is owed by beverage distributors or owes to redemption centers — remains unchanged.”
TOKUDA RECYCLING FRAUD BACKGROUND: