As most of the state’s affordable housing system headed toward a scandalous collapse, Meyners + Company audits gave the housing authorities clean bills of health. Why the discrepancy between the audits and reality?
Five independent audits of the state’s affordable housing system turned up none of the widespread problems that led to its scandalous and nearly total collapse in 2006, a review of public documents reveals.
The five audits, completed by the firm Meyners + Company, didn’t flag any of the major problems that preceded the Albuquerque-based Region III Housing Authority’s default on $5 million in bonds it owed the state.
Meyners’ attorney says the company became aware of problems in early 2006, but by the time Meyners says it first notified the state auditor in writing of troubles on May 31, 2006, two newspapers had already reported on alleged misconduct and the attorney general was investigating possible fraud.
In addition, the system was already collapsing. Region III defaulted on the first of two $2.5 million bonds on the same day Meyners says it sent its letter to the state auditor.
Meyners’ largely clean audits raise questions about how well the company did its job. The state auditor and State Investment Council (SIC) have both since released damning reports about the operations of the housing authorities during the time Meyners was conducting its audits. The state auditor found that, whether due to corruption, ineptitude, mismanagement or other factors, the authorities were running amok with public money and there were inadequate controls in place to stop it.
Frances Williams, a former board member for the Las Cruces-based Region VII Housing Authority and the whistleblower who first revealed problems to the public in early 2006, said she believes the Meyners audits should have found those problems.
“I most certainly do,” she said.
But Meyners attorney Sam Bregman defended the firm’s performance, saying the financial audits conducted by Meyners weren’t intended to serve as much more rigorous inquiries known as forensic audits.
“I think Meyners + Company did their job correctly and appropriately, and when they determined something was wrong (in 2006), they ceased working for them because they lost faith in the Region III Housing Authority, and notified the state auditor,” Bregman said.
The questions about Meyners’ performance on the housing authority audits come as the firm’s managing principal, Bruce Malott, is battling allegations from a former state investment officer that he used his position on a state board to reward campaign contributors to Gov. Bill Richardson with state investment contracts. Malott denies the allegations.
The problems with the housing authorities are at the heart of a criminal investigation by the state attorney general, who is preparing to take the case before a grand jury. AG spokesman Phil Sisneros said the fact that some of the Meyners audits were not completed in a timely manner “is part of what we are investigating.” He said he could not comment further.
Bond money spent improperly
The Meyners audits include financial statements provided by the housing authorities. Those statements reveal that Region III was using “long-term debt” — the bond money, according to Bregman — to finance its operations, and was loaning hundreds of thousands of dollars to some other regions to fund their operations.
As the state auditor and SIC later pointed out, using that money to fund operations was a clear violation of the terms of the bonds, which were to be spent directly on affordable housing.
But Meyners never indicated in its audits that the way the bond money was being spent was problematic. In fact, the audits all gave “unqualified” opinions about the financial statements. That means the auditor found the statements to be accurate, presented fairly and in compliance with standard accounting principles.
Meyners picked up on the improper use of bond money in early 2006 while auditing Region III’s 2005 books, Bregman claims. There’s no written correspondence to back up his assertion that Meyners notified the state auditor once it became aware of that problem.
The bonds had been used improperly since at least 2004. Between 2004 and 2006, Meyners completed two annual audits for Region III, two for Region VII and one for the Grants-based Region I authority. At the time, Regions I and VII were using bond money loaned by Region III to fund operations.
None of those audits includes a finding about the bond money being spent improperly.
The audits of regions I and VII contain no findings at all. Meyners’ audits of Region III for the 2003 and 2004 calendar years revealed a handful of minor findings — that audit reports weren’t being completed in a timely manner, some bank deposits were not fully collateralized and the authority wasn’t tracking employees’ annual leave.
“Clearly the (Meyners) audits didn’t uncover all of the facts,” said Lt. Gov. Diane Denish, who has championed housing authority reform in response to the scandal.
Asked about that, Bregman repeated his statement that Meyners became aware in 2006 of the problem with the way the bond money was being spent and told Region III that it needed to secure other funding for operations.
Region III ignored the concern, so Meyners quit the job and notified the state auditor of the problem, Bregman said.
Letters paint a different picture
But written correspondence between the firm and state agencies, provided by Meyners, makes no mention of the problem with the way the bond money was being spent.
The May 31, 2006 letter from Meyners to Vincent “Smiley” Gallegos, who was then the Region III director, puts in writing what Meyners staffers told Gallegos during a meeting held the day before: that the company was postponing its audit of Region III’s 2005 books.
In the letter, Meyners expressed concern about the AG probe, the financial stability of Region III and the possibility that it might default on the bonds. The letter also lists findings the firm had identified to that point in the 2005 audit, including inadequate listing of fixed assets such as property, untimely bond repayments and inconsistent recording of home sales.
Missing from the letter is a finding that Region III had been improperly spending bond money on operations. No correspondence provided by Meyners or the state auditor indicates that such notification ever occurred.
The letter is dated the same day that Region III defaulted on the first of the two state-owned bonds. Though the letter indicates that a copy was sent to then-State Auditor Domingo
Meyners never completed Region III’s 2005 audit. On Nov. 17, 2006, following the bond defaults, the release of the SIC report and a great deal of media coverage, Meyners sent a letter to Martinez notifying him that the company was quitting the job. Despite Bregman’s claim, the letter didn’t mention frustration with Region III’s unresponsiveness to its concern as the reason.
Instead, the Meyners letter states that the company believes “the current circumstances (newspaper articles and various other external reports) interfere with our ability as auditors to form independent and objective opinions and conclusions.”
Financial versus forensic auditing
In defending Meyners’ work, Bregman said it was a Meyners auditor who, several years ago, uncovered the fraud that occurred during the construction of the Bernalillo County Metropolitan Courthouse, which led to the convictions of former Senate President Manny Aragon and others.
The Meyners auditor, appointed by a court to deal with the financial problems of an engineering firm involved in that scandal, forwarded the findings to the FBI, Bregman said.
In the metro court situation, the Meyners auditor was doing forensic work, which includes significant investigation and is intended for use in a legal proceeding. That’s different than the financial audits that are conducted of government agencies each year, such as those Meyners did for the housing authorities.
Financial auditing is primarily a review of financial statements.
“You’re not looking for criminal activity in there, you’re just looking to see if the books match up,” Bregman said of financial audits.
But financial audits are nonetheless expected to help root out fraud, waste and abuse. The state auditor rule — which lays out requirements of firms that audit government agencies in
One provision requires that independent auditors check compliance with a number of state laws, including those related to procurement, per diem and mileage, personnel, the conduct of government officials and the investment of public money.
Auditors must also create a plan to “provide reasonable assurance” that financial statements don’t contain errors or fraud and document their consideration of the possibility of fraud.
And, according to the rule, they must “notify the State Auditor immediately, in writing, upon discovery of any possible criminal statute violation” they discover.
Bregman said Meyners “complied with all statutes and rules in performing its engagement in the Region III matter.”
“(Meyners’ auditors) interpret the provisions and the rules very conservatively and, regardless of whether a potential crime was involved, they report to the client or the state auditor any transaction that may be in violation of some legal or contractual obligation,” he said.
Media revealed problems before Meyners
Disclosure of the problems with the housing authorities didn’t wait for Meyers’ May 31 letter to Region III — the letter that indicates a copy was also sent to the state auditor.
During the spring of 2006, Williams, the housing authority whistleblower, was complaining to anyone who would listen about problems with Region VII.
Weeks before Region III defaulted on the first of its two state-owned bonds, I authored an article, published in the Las Cruces Sun-News on March 12, 2006, that detailed alleged problems with Region VII. In that article, Williams accused Gallegos of fraud based on a letter from the AG alleging that a company Gallegos set up to work with the authorities was improperly operating as a nonprofit. Williams also accused Gallegos of buying homes to resell them for a profit instead of for the benefit of low-income New Mexicans.
And then-Region VII Board President Bennie Barreras alleged that almost $50,000 could not be accounted for.
None of those concerns were reflected in the 2005 Meyners audit of Region VII, which was completed at the end of January 2006 but not submitted to the state auditor until May 2006.
Next came an April 3, 2006 Albuquerque Journal article detailing the allegations of fraud. Two days later,
Throughout that time, Meyners didn’t notify the state auditor in writing of any concerns.
From there, things moved quickly toward the first bond default on May 31, which is also the day — according to Meyners — of the first official correspondence with the state auditor about any problems. Within three months, Gallegos had resigned, several of the authorities had shut down, the SIC had released its report and the AG probe had become a broad, criminal investigation.
The audits
Here are the Meyners audits: