NM Finance Authority: The Cheap Forgery That May Cost New Mexico Millions
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Some of it was done with Wite-out and a typewriter. Some of the forgery was so sloppy it jumps off the page. And all of the current crisis in New Mexico’s bond financing would have been avoided had management at the New Mexico Finance Authority read their own audit cover to cover.
Eyeballing NMFA’s Fake 2011 Audit
Anyone familiar with NMFA’s audits would immediately have noticed something was very wrong with the 2011 audit. But nobody at NMFA caught obvious irregularities in the 2011 audit. It was the State Auditor who triggered the current crisis by doing his job: putting NMFA on his “at risk” list because the audit was five months late. It was due in his office December 15, 2011. He contacted NMFA at the end of the month then rang louder alarms May 23, 2012, with the “at risk” listing. Even then, NMFA relied on assurances from its former controller that the State Auditor was mistaken. NMFA now blames that former employee, Greg Campbell, for the forgery, though the CEO of NMFA, Rick May, admitted at a Board meeting on July 18 the possibility that other NMFA employees may be involved.
As a result of the fake audit, Moody’s and Standard & Poor’s have put New Mexico debt on a credit watch. A downgrade could cost New Mexico millions in higher interest rates to finance public works. New Mexico may also face costly litigation and court judgments to creditors who bought New Mexico bonds based on materially false representations in the fake audit that damage the value of their investments. State Auditor Hector Balderas is publicly using the term “fraud” to describe the situation. And the question has yet to be answered by NMFA whether any money is missing from its accounts. A valid 2011 audit has not yet been conducted by the agency.
New Mexico Watchdog is in possession of a copy of the fake audit that had been posted on NMFA’s website. NMFA has since taken down the document.
The 2011 fake audit was simply copied from the 2010 audit performed by the Clifton Gunderson accounting firm, and altered to appear to be a 2011 audit from the same firm.
[James Monteleone of The Albuquerque Journal has performed a similar analysis. His excellent report appears in today's edition on the front page].
The forgery was accomplished by whiting out the zero in 2010 and replacing it with a “1″ to convert the date to 2011. Some of the instances are so crude it is obvious the date has been changed. The typeface for the final digit of “2011″ in the forged document sometimes does not match the typeface on the rest of the page. Frequently, the final forged “1″ does not match the preceding “1,” carried over from the 2010 in the original document. Frequently the forged numeral “1″ is so thin it is barely legible. Often the forged numerals stand taller than surrounding letters and numbers.
Here is an example appearing on the first page of text, the auditor’s standard introduction to the audit. Click on the image. Notice how thin the final digit in the faked 2011 date appears. This mismatch in typeface occurs repeatedly throughout the faked document. In other instances, the forged last digit is crystal clear when all the numbers around it are fuzzy and grainy. In some occasions, the forged numeral 1 is twice as wide and darker than surrounding numbers because the rest of the page had been poorly copied from the 2010 audit.
The forger had a more difficult task altering the date on pages copied from the auditor’s letters. In this example, taken from the forgery of the auditor’s letter on compliance, you can see how the last two digits in the date fail to line up with the preceding lettering and numbering. (Click on image) The bottom of each “1″ is below the level of the other characters.
The overall quality of the printing and images in the forgery also falls far below the usual crisp printing from an audit prepared at significant expense by a national accounting firm. The lettering on the forgery is uniformly larger and fuzzy. The logos used in the fake audit show obvious signs they have been copied (and rather poorly) into the forged document.
On the left is an image of the accounting firm’s letterhead from the authentic 2010 audit. On the right is the forgery. Click on each image for a comparison. One is clearly printed letterhead. One is clearly a grainy copy.
One more example along these lines. Click on each image to make the comparison. On the left, an image from the authentic 2010 audit, an emblem appearing at the bottom of the auditor’s cover letter. On the right, the grainy copy of that same emblem in the 2011 forgery.
The Forger Got Lazy
The forger may have known that his readers at the NMFA would pay little attention to detail, and not read much beyond the first pages. He, at least, changed the roster of the NMFA Board from the 2010 list to reflect the membership of the Board in 2011. That list appears on page 1. He fabricated numbers to provide data for the columns for 2011 financial conditions, something easily done on a word processor. But the platform for his forgery remained a copy of the 2010 audit. And in some instances he simply plugged in data so obviously out of date it should have leaped out at NMFA management if they had bothered to read the document.
Example: In the section on NMFA’s loss on investments, the forger simply reprinted the 2010 report on losses suffered in 2009 and provided no new information for the 2011 fiscal year.
Another example: The forger dated the report of the exit conference the same as the date of the audit itself. In all previous audits, the exit conference followed the date of the audit for a simple reason: the attendees need time to read the audit before they can participate in the conference. Curiously, the date of the fake audit conference was December 10, 2011, five days before the audit itself was even due to the State Auditor. In 2011, the audit conference was held February 28 to discuss the 2010 FY audit dated February 11.
One possible explanation: State Auditor Balderas has said that a letter was sent to NMFA management at the end of December when the NMFA’s (real) audit was not received in his office by December 15. The forger may have needed to show a completed audit to management to avoid detection at that time. That would have required all the steps–including the exit conference–to have been reported as concluded.
The final page of the fake 2011 audit should have sent alarm bells ringing throughout NMFA. It lists the attendees to a conference that was never held. Among those listed was John Duff, the Chief Operating Officer of NMFA. If he had read this document to the end, he would have seen he was listed as attending a meeting that had never occurred. At that point, well before the events that have triggered the current crisis, he could have taken action to probe what had been presented to him as the 2011 audit.
The Numbers That Matter
State Auditor Hector Balderas told us that “tens of millions of dollars are missing” in the 2011 audit. Whether that means money is actually missing from NMFA’s accounts has not yet been ascertained. The forger created entire financial schedules representing NMFA’s assets and expenditures. In many cases, the 2011 totals are substantially below 2010 levels. Antonio Corrales, public information officer for the State Auditor, has told us the Auditor’s office is concerned that the forgery was perpetrated to cover up defalcations. As of July 17, 2012, the Auditor’s office had received from the NMFA the banking data needed to send off cash confirmation requests to determine if any money is actually missing. The results of those inquiries has not been released.
NMFA was conclusively alerted to the discrepancy in the 2011 audit by the State Auditor on May 23, 2012 when it received its “at risk” listing. NMFA has not reported that it has conducted any of its own cash confirmation inquiries with its banking institutions to determine whether any money is actually missing.
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Initial analysis on faked financial statements « Attestation Update – A&A for CPAs
[...] evaluation of the quality of the forgery, you can check out Jim Scarantino’s post on July 19: The Cheap Forgery That May Cost New Mexico Millions. He has an extended discussion of the report. He’s talking photocopies and [...]