Ka Wai Ola - Office of Hawaiian Affairs, Volume 22, Number 6, 1 June 2005 — OHA responds to state audit [ARTICLE]

OHA responds to state audit

Agency's leaders weleome recommendations, but take issue with some findings By Derek Ferrar In late April, State Auditor Marion Higa released her latest report on the Office of Hawaiian Affairs, researched between November 2003 and May 2004. By law, a state audit of the agency is required every four

years. While the audit did note improvement in the way OHA's $350 million Native Hawaiian Trust Fund is managed, Higa's report was sharply critieal of the agency's performance as a whole, charging that "overall, OHA has shown little improvement in meeting its obligation to improve conditions of all Hawaiians." "After being in existence for over 25 years, the Office of Hawaiian Affairs continues to operate like a fledgling agency," Higa wrote. "It is still struggling to put its own house in order and remains casual in the administration of the funds over whieh it has a fiduciary

duty of loyalty to its beneficiaries." In response, OHA's trustees and administrator said that they welcomed the audit's recommendations for improvement, but took issue with some of Higa's findings, whieh they said did not square with the facts. "I really don't have any problem with the auditor's recommendations; in fact, a lot of them were already in the process of being implemented," said Administrator Clyde Nāmu'o. "I was mueh more troubled by the way she chose to word her findings, making these very broad, sweeping statements that OHA is not serving its beneficiaries. That is an

unfair criticism." OHA's leaders especially pointed out the fact that the auditor's report wasn't released until nearly a year and a half after it was begun, during whieh time substantial changes were made at the agency. "OHA has initiated many positive changes in program management and financial operations between the time the field work was done and the issuanee of final report," OHA's trustees said in a statement. "An update in field work would have disclosed the improvements made during the 17month lapse in time." See AUDIT on page 5

AUDIT from page 1 Here are some of the major issues addressed in the audit report, along with OHA's responses: Master plan Higa's primary criticism of OHA was that "the Board of Trustees still has not provided the state with a comprehensive master plan for bettering the conditions of its beneficiaries." The auditor did commend the agency for adopting a five-year strategic plan for 2002-2007, but said "the need for a comprehensive master plan still exists to serve as a foundation for OHA's programs, as well as the programs of other agencies that provide services to Hawaiians." OHA's response pointed out that the agency did in fact eompile a master plan in the 1980s and '90s, but acknowledged that the plan has not been updated for some time. The agency's statement also emphasized that "the elements of a master plan have been in plaee at OHA since at least 2001. ... Where we fell short is in consolidating these elements into one master plan." Nāmu'o said he is committed to publishing an updated master plan by the end of this year, but added that the plan would have to take into account that OHA is essentially a transitional agency that will eventually be replaced by a Native Hawaiian governing body. "So to suggest that the creation of a comprehensive master plan is some kind of panaeea, I think, is naive on the part of the auditor," he said. Reorganization The auditor charged that OHA was still "reeling" from "poorly planned" reorganizations in 2001

and 2003. "In the midst of organizational change, OHA lacks basic policies and procedures to guide the actions of its staff, and its organizational charts and functional statements are inconsistent," Higa wrote. "This situation is compounded by confusion among program directors on how OHA's priorities translate into the agency's budget." OHA responded that the characterization of its reorganization as "poorly planned" is "not true and made without foundation. ... We wish to assure you that two years of careful analysis went into the recent reorganization, leading to an organizational structure that we believe best serves our mission." The agency's response also pointed out that, since the time of the audit field work, all department heads had received extensive budgeting training and experience, making that portion of Higa's criticism "moot." Expenditure controls The audit charged that inadequate controls over such expenditure items as petty cash, trustee expense accounts and the protocol fund used for OHA events opened the door for "questionable transactions" and the "possibility of abuse." The auditor recommended that OHA revise its procedures to clarify the purpose and accounting of such expenditures. OHA's response acknowledged that "we share your belief in the importance of organizations establishing management controls on expenditures." In fact, the response letter said, clarification of such eontrols is currently underway, with "approximately half our new board policy manual ... devoted to the elements of fiduciary duty." The agency objected, however,

to the auditor's characterization of OHA's financial oversight as "casual," calling that conclusion "a major leap of logic." Revolving loan fund One program singled out for criticism by the auditor was OHA's Native Hawaiian Revolving Loan Fund (NHRLF), whieh is designed to provide low-interest business loans to Native Hawaiian entrepreneurs who have had difficulty obtaining loans elsewhere. The auditor stated that the loan fund "continues to experience high delinquency and default rates," whieh she said suggested "deeprooted problems" and "inadequate collection efforts." Her report recommended that OHA provide tighter oversight of NHRLF loans, including providing further training and technical assistance to recipients. OHA responded that the report had failed to acknowledge the substantial improvement in loan defaults since the last audit in 2001, nor the extensive efforts the fund has made to provide recipients with business training and assistance. In addition, OHA pointed out that the calculations used by the auditor to reach the delinquency rate included loans that should have been "written off" the books as uncollectible. When those loans are omitted - in accordance with procedures recommended by the federal Administration for Native Americans, whieh co-funds the loan program - the true delinquency rate is mueh lower. Investment management The auditor's office contracted the accounting firm KPMG to review the investment portfolio of OHA's Native Hawaiian Trust Fund. The firm found that "OHA has taken a number of

important and well-reasoned steps in investing its assets" - particularly through retaining the services of investment firms Goldman Sachs and Frank Russell - but that the agency's investment policies and procedures still "laek key components." Among the firm's recommendations were that OHA should: • more clearly define investment duties and responsibilities; • establish consistent benchmarks and reporting forms for investment performance; • explore options to lower the investment management fees OHA is currently paying. OHA did not take major issue with any of these suggestions, and said that it would take them into account in the creation of new trustee policy manuals. The agency did question, however, why more prominence was not given to the fund's "excellent" investment returns in recent years, including a return of 24.3 percent in 2003, whieh the auditor's report itself said was "better than 86 percent of other puhlie investment funds." In conclusion, OHA's response to the auditor pointed out that "since your previous audit, OHA has successfully implemented one of the most ambitious educational and advocacy agendas in its history, always in the interest of our Hawaiian beneficiaries, but benefiting the larger publie as well. We have made significant internal improvements, including a strategic plan developed with extensive external input. "We believe that your audit could have done mueh more to capture the heart and soul of what we do, how we have done it and what we plan to do." To read the auditor's full report, along with OHA's response, visit www.state.hi.us/auditor/Years/ 2005reports.htm. G