State Auditor Les Merritt yesterday released a scathing report on the activities of the North Carolina’s Northeast Partnership, and the closely associated Northeastern North Carolina Regional Economic Development Commission, alleging that both organizations’ directors “relinquished too much authority” and insufficiently exercised “their fiduciary responsibilities.”

The audit found that Rick Watson, president and CEO of the Partnership and the Commission, had a conflict of interest “by any reasonable person’s definition” in working for the two economic development agencies while planning future employment with one of his clients, the Randy Parton Theater and Carolina Crossroads Entertainment District Project. The country music-themed attraction is planned for Roanoke Rapids, and Watson had planned to go to work for Parton, brother of Dolly Parton, next year. Watson last month was forced to leave his job with the Partnership and Commission earlier than planned, however, when directors received Merritt’s audit findings.

The Northeastern Commission is a public agency established by state law to promote economic development in 16 counties in the state. The Partnership, which Watson and some board members claim is a private nonprofit not subject to state public records laws, was created by the Commission in the mid-1990s. The Commission hands over almost all of its appropriation from the state to the Partnership. Government funding accounted for 95 percent of the Partnership’s revenue during the last three years.

Auditors determined that the directors failed to exercise adequate oversight of Watson, and of a smaller group of directors on the Partnership — the “executive committee,” led by chairman Jack Runion.

“The Commission and Partnership boards need to consider remedial action given that the president is not in compliance with his contract and the Partnership’s own Ethics and Conflict of Interest Policy,” the audit report said. “All board members should more actively involve themselves in the operations of the organization.”

“Some of these things that have come up are news to us,” said Commission board member Mack Nixon, also a Perquimans County commissioner, after reviewing the audit but before its official release yesterday. “There might be some other stuff out there also.”

The report also noted, without directly investigating, Watson’s “actual or planned personal investments…in businesses he has aided,” which “heightened public skepticism that could cause the organization’s mission and focus to suffer.”

Chief Deputy State Auditor Lorrie Dollar said her office had received several complaints about the Northeast Partnership.

“We had a number of issues raised in the past, some of which had not been thoroughly looked at, partially because of the backlog of investigative complaints,” Dollar said, adding that the audit was limited in scope to roughly the past three years.

The report confirmed the suspicions of questionable activity raised by Mecklenburg County Rep. John Rhodes, a Republican, two years ago.

“It appears there is something significant here,” said Rhodes, who had asked former State Auditor Ralph Campbell to look into the Partnership’s activities in 2004. “I think the next step would be a possible investigation, to determine if any laws have been broken.”

Noelle Talley, a spokeswoman for Attorney General Roy Cooper, did not indicate that a criminal investigation of the Partnership or Commission was underway.

“We’ve received a copy of the audit and are reviewing it,” she said. “Some of the information it contains may be helpful as we review information for the opinion requests we’re working on related to the Northeast Partnership.”

Auditors also questioned:

• “Significant” bonuses paid to Watson and other employees, including some who work in the Partnership’s offices for the state Department of Commerce. The report said no pre-determined, documented criteria served as a basis for the payments, which totaled $572,000 over a three-year period. “The organization’s staff stated that the payments were based on what [Watson] felt the individuals, including himself, deserved based on their performance,” the audit said, adding that the amounts were then approved by the executive committees of the Partnership and Commission.

• The lack of any formal process for selecting contractors and consultants. Auditors found no documentation that provided credentials, qualifications or background information about contractors for the Partnership or Commission. Payments to non-employee support staff exceeded $889,000 for the three-year audit period. “We were told that the primary method of identifying potential contractors came from leads provided by [Watson] or board members,” the auditors wrote. “The first candidate contacted could be, and often is, the only one ever approached….”

* Contract terms adverse to the Partnership’s and Commission’s interests. Eleven of 15 employment and consulting contracts with the Partnership require that the employee or consultant be paid the equivalent of a year’s salary, “even when the organization has good cause for severing its relationship with the employees or contractors.” Watson’s contract with the Partnership required he be paid $165,000 upon separation. In addition, Watson held a contract with similar terms with the Commission that called for him to be paid $110,000. “We believe the terms as currently formulated are not in the best interest of the organization or the State,” auditors wrote.

• Contractors were paid without documented evidence that they performed any work. Auditors said two contractors were paid $50,340 over the last three years, without completing required time/activity logs or providing invoices.

• Underreporting salaries and bonuses for key employees on Internal Revenue Service tax returns, Form 990. For the three-year period examined, the Partnership understated compensation for Watson and vice president Vann Rogerson, by $304,196.

• Some weak internal controls, including the reimbursement of expenses and allowing the finance officer to approve her own pay, including overtime.

• Failure to clarify with the Department of Justice, after former Attorney General Mike Easley’s 1999 advisory opinion, the Commission’s legal status “and the operational environment the Commission had created for itself.” Auditors questioned the arrangement between the two organizations and the contention that the Partnership is authorized to handle all the Commission’s statutory responsibilities, and advised the Commission board to ask current Attorney General Roy Cooper “whether the substantial delegation of the Commission’s responsibilities to the Partnership is at odds with its authority.”

Vann Rogerson, interim president for the Commission and Partnership, did not respond to a message left by CJ seeking comment in time for publication. Official responses from the Partnership board contained within the audit largely agreed with Merritt’s findings and assured that his recommendations would be implemented.

Paul Chesser ([email protected]) is associate editor of Carolina Journal.