Reviews find flaws, errors in economic development office
South Dakota’s economic development office didn’t take enough precautions to prevent potential fraud or collect enough information from some grant recipients, two external reviews have found.
But the reviews, ordered by Gov. Dennis Daugaard after allegations of misconduct by the state's former economic development secretary, didn't turn up any new wrongdoing or major violations.
"There are a bunch of small things, but I think this should be viewed as good news that we don't have a finding of wrongdoing, but find a lot of places where there's room to improve," said Tony Venhuizen, a senior adviser to Daugaard.
A third report commissioned by Daugaard, a formal audit of the Governor's Office of Economic Development by the state's Department of Legislative Audit, is not yet complete. That audit is expected to touch more directly on GOED's involvement with the bankrupt Northern Beef Packers plant, currently under federal investigation.
The two reports released to legislators this morning included one, by accounting firm Stulken, Petersen, Lingle, Walti & Jones LLP, that examined every single expenditure by GOED from January 2009 to September 2013 for irregularities. (One part looked at the Future Fund. The other part looked at the Dakota Seeds program.)
The second, by accounting firm Eide Bailly LLP, analyzed the office's procedures for preventing fraud by employees.
One of the findings touched directly on Benda, South Dakota's Secretary of Tourism and State Development from 2006 to 2010. An investigation last year by Attorney General Marty Jackley concluded Benda had double-billed the state for around $5,500 worth of airfare expenses, and Eide Bailly said GOED didn't put a time limit on when employees could turn in expenses.
"Employees could submit expenses for reimbursement that were already reimbursed to the individual and the authorizing employee may not recall the purpose of the expense if there are significant time delays in the submission," the report says.
Benda's double-billed expenses were included in two reports filed about three months apart.
"They both covered a pretty wide amount of time, and also just a lot of travel," said Venhuizen. "Just the itemized list for each of the vouchers was more than a page long."
The reports identified only one instance where the state paid out too much money: a $189.96 overpayment to an employer who had hired an intern under GOED's Dakota Seeds program. Due to employee error, the state's reimbursement of that employer was miscalculated.
That money has not yet been recovered.
"Frankly, we did not ask," said Pat Costello, Daugaard's economic development commissioner.
But other Daugaard advisers said the state will try to get that money back now.
"The governor said it's his intention, if he learns about shortfalls and things owed to the state, as the steward of the people's money, we intend to seek those," said Jim Seward, South Dakota's general counsel.
Many of the shortcomings identified in the reports have already been addressed. Costello said his office would "identify the weakness" based on questions and discussions with the investigators and immediately try to address that weakness.
Along with the two reports, Daugaard's office released responses from the agencies that acknowledge each flaw and say what steps are being taken to fix it.
Response to the Dakota Seeds report
Response to the Future Fund report
Response from GOED to the internal controls review
Response from the state auditor to the internal controls review
Response from the Bureau of Human Resources to the internal controls review
"(Daugaard) doesn't believe that the state should be defensive," Venhuizen said. "We should always welcome opportunities to improve."
Among the reports' other key findings:
Due to a mistake, a $4,042.91 payment was actually made to the sister company of the intended recipient. The state "verified that the company... internally transferred it over."
On nine occasions, GOED accepted a company's own assurances that it had spent a grant instead of seeking receipts. It has since obtained most of those receipts, except for several companies that are no longer in business in South Dakota.
Once, the office gave an informal go-ahead for a company to spend its grant on computers, instead of formally changing the grant agreement to allow the expenditure.
GOED didn't require one company to give a copy of every employee agreement, as it was supposed to. Instead, it accepted one employee agreement and just the signature pages for every other worker.
The economic development office doesn't conduct background checks of new employees to ferret out any false information on job applications. There are currently legal obstacles to conducting those searches, but Daugaard is considering seeking a bill this year to grant the office that authority.
GOED didn't compare expense reports to expenses billed directly to the state, raising the possibility that an employee could directly bill an expense and then separately file for reimbursement.
Sales of merchandise such as hats and t-shirts at the Governor's Hunt weren't closely tracked, raising the risk that "individuals could take shirt or hat inventory and/or cash and checks received and no one would be aware of the shortage."
The same supervisor processed employee payroll and added or removed employees from the system. This raised the prospect for "fraudulent payroll disbursements through unauthorized rate changes and/or fictitious/ghost employees."
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