State Auditor Unearths Major Reporting Errors in Treasurer Investments

The state treasurer’s office made million-dollar and billion-dollar mistakes in reporting its investments during the most recent fiscal year, a state audit has found. The audit said the errors occurred “because new staff prepared the information, and their work was not effectively supervised and reviewed.”

The audit, done by State Auditor Beth Wood’s office, led to corrections in the year-end financial information. Treasurer Janet Cowell has been in office a little more than a year.

Errors by the treasurer’s office, which had been included in information submitted for the state’s Comprehensive Annual Financial Report, included:

• Overstating the value of foreign government bonds by about $10 billion (the state’s holdings in foreign bonds are in fact $10 million).

• Overstating cash and understated investment assets by $1.8 billion, in part because certificates of deposit were not presented according to generally accepted accounting principles.

• Understating investment income by $500 million, due to a reporting error.

“If errors of that magnitude are being made, it’s not terribly comforting to hear that those errors have been caught,” said Edward Siedle, president of Benchmark Financial Services in Ocean Ridge, Fla., which audits pension plans. “Those are enormous errors. It’s kind of like you’re a parent and your kid fell off the bridge but was caught before being injured. That’s some comfort but not much.”

Ed Regan, the executive director of the North Carolina Retired Governmental Employees’ Association, also said the level of error concerned him.

“They were overreporting and underreporting all over the place,” he said.

In a response in the audit, the treasurer’s office said the accounting staff has prepared a checklist that will be used to review the numbers that are submitted to the Office of the State Controller for the annual financial report.

“This checklist will include items such as verification of totals between schedules and that the proper valuations … were used correctly,” the treasurer said.

Dennis Patterson, a spokesman for Wood, said auditors commonly find errors in financial statements.

“There are a lot of financial statements that get fixed as we are doing our audits,” Patterson said.

Former state Auditor Les Merritt said the treasurer’s response to the audit wasn’t combative.

“They weren’t arguing, kicking, screaming or anything,” said Merritt, now the executive director of the Raleigh nonprofit Foundation for Ethics in Public Service.

Regan questioned whether some of the problems with the numbers could be traced to Patricia Gerrick, the state’s former chief investment officer who was fired last year.

“At least some of this has to be laid at her doorstep,” Regan said. “From what I read, she was sort of an absentee investment chief. She traveled a lot. She really wasn’t very focused on her job.”

Gerrick said she wasn’t responsible for reporting the year-end financial numbers.

“There’s a difference between accounting and investments,” Gerrick said. “You have an entirely different group of people who are responsible for accounting. It’s pretty easy to say something like that if you don’t understand how the system works. I will never profess to be an accountant.”

The audit also found overpayments of health insurance premiums for retired employees and problems with the department’s information systems.

The state overpaid about $669,000 in premiums during the 2009 fiscal year, the audit found. The state paid the wrong rate for about 613 people, resulting in an overpayment of about $500,000 to the state health plan for people who were eligible for Medicare. It also paid premiums for 57 people who weren’t eligible for health insurance, paying out about $169,000. The spouses of retirees who died in October 1986 or after are ineligible for health insurance.

The audit said the errors “were partially due to temporary staff members being utilized during the enrollment period and an effective control was not in place to prevent or detect this enrollment error.”

Regan said the treasurer’s office has had chronic problems with being understaffed.

“The errors that were made with improper payments to the state health plan looked like they had two problems,” Regan said. “They didn’t have enough employees, and the employees were either new or were temporary employees.”

In addition, the audit found problems with the security settings of the departments’ computers and sent the treasurer’s office a confidential letter about them.

The audit also faulted the treasurer’s office for exceeding the statutory limit for alternative investments. Under state law, alternative investments are supposed to make up no more than 5 percent of the retirement system’s assets. That limit was exceeded because plunging stock market prices boosted the relative value of alternative investments in the portfolio. In December 2009, the retirement systems’ alternative investments holdings were 5.79 percent of all invested assets.

The treasurer’s office reclassified some of the alternative investments under a 2009 law allowing reclassification; this brought the alternative investments to 4.59 percent of the portfolio — within the limit.

Merritt questioned which investments had been reclassified.

“Isn’t that a little too cute?” he asked. “You have the same risk that you had before.”

Cowell has hired Ennis, Knupp & Associates, the Chicago firm tapped by the U.S. Treasury Department to help oversee its bailout fund for banks, to review how North Carolina has invested its money. No findings from that review have been released.

Sarah Okeson is a contributor to Carolina Journal.