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WV has paid nearly $1.5 million more than expected on audits


Charleston Gazette-Mail

CHARLESTON, W.Va. — When Ernst & Young bid to complete West Virginia’s annual statewide audits — a four-year contract — the accounting firm said it could do the job for about $675,000 less than the only other bidder.

Once work got started, though, an Ernst & Young representative kept asking for more and more money, claiming it took significantly more time to complete the audits than the firm originally anticipated and required work outside its original agreement, documents obtained by the Gazette-Mail show.

The state has paid the firm nearly $1.5 million more than it had originally planned to, documents show, and there’s still a year left in the contract. That’s compared to the $4.5 million the firm said it needed to complete four years of financial audits.

“We strive for no surprises and no hidden charges, just fair and transparent fees,” wrote Susan Wheeler, an Ernst & Young partner who submitted the bid back in 2014.

The Gazette-Mail obtained a large cache of documents after it first reported that West Virginia was late submitting its Single Audit, an accounting of all agencies that receive federal money. This was the third year in a row the state submitted its Single Audit late.

Because the state was late for a third time, the U.S. Department of Education slapped financial sanctions onto the public two- and four-year colleges and universities that will slow down how the schools access federal financial aid money for students.

To complete the Single Audit, which must be submitted to the federal government each year by March 31, the state needs to first complete a Comprehensive Annual Financial Report. The CAFR is used by bond rating agencies, investors thinking of purchasing the state’s bonds and federal funding agencies to evaluate how financially healthy the state government is.

The responsibility to complete the CAFR and the Single Audit falls on the shoulders of the state’s Department of Administration, which ultimately contracts the work out. Officials in that department’s finance division gather financial information from more than 200 state agencies and send the information on to Ernst & Young, to audit and compile the information.

Last week, the governor’s chief of staff, Nick Casey, gave an update on an investigation the Governor’s Office is undertaking into why the audit was submitted late.

Ernst & Young, which is the 11th-largest private American company according to Forbes, is one of four multinational groups known collectively as the “Big Four.” These four firms audit most of the world’s largest public entities and private companies.

The only other bid in 2014 was from a group called BDO USA, which offered to execute the four-year contract for $5.17 million. The firm said it would cost about $1.18 million to complete 2014’s audits. That cost would increase every year until the 2017 audits, which would cost about $1.34 million.

At the time of the bid, Ernst & Young was finishing up a similar four-year contract with the state, and Wheeler pressured officials not to switch to another auditor. Her firm already knew the state’s system and teaching a new group would be expensive, she wrote.

“Changing auditors is costly and time consuming under normal circumstances, but the risk and demands on your people are even greater because of your planned IT conversion for July of 2014,” Wheeler wrote.

That year, the state implemented wvOASIS, a complicated supercomputer system meant to handle payroll, accounting and asset management. A recent report from the state’s Legislative Auditor found that the system wasted millions of taxpayer dollars.

Staff members in the Finance Accounting and Reporting Section of the state’s Department of Administration logged 1,600 hours of overtime by late-May, to help staff members from Ernst & Young complete 2016’s financial audits, according to an email from Dave Mullins, the department’s acting director of finance.

Part of the trouble with wvOASIS is that the auditors didn’t have access to the system.

“The staff at the DOA’s Finance Division devote hours of time taking screen shots within Oasis [sic] to give to the auditors as support for the samples,” wrote Susannah Carpenter, the assistant secretary and chief financial officer, in a July 20 email.

As auditors complete the 2017 financial audits, they will have limited access to the wvOASIS system, according to Department of Administration spokeswoman Diane Holley-Brown.

The first time Ernst & Young asked for more money was in September 2015. Wheeler wrote in a letter to Ross Taylor, then the director of finance, that her firm needed $470,000 more to complete the 2015 fiscal year audit.

She pointed to “known deficiencies in internal control including material weaknesses and significant deficiencies that have not been remediated, and delays in receiving client assistance” as part of the reason for the extra cost.

Five months later, in February 2016, the firm asked for an additional $500,000 to complete the same audit. Wheeler pointed to the same reasons from before, but she also said her firm needed to spend more time reconciling reports from wvOASIS to other ledgers. Delayed reports from the state’s Consolidated Public Retirement Board and from the higher education system also meant the firm needed more time to complete its work, she said.

Dave Mullins, the department’s’ acting director of finance, would sign off only on an additional $270,000, documents show.

That was until two months later, when the firm sent a nearly identical letter asking for another $150,000 — still for working on the audit for the 2015 financial year. Mullins signed off on that one in full.

In January of this year, as the firm worked on the 2016 fiscal year audits, Wheeler said her firm needed an additional $550,000. In May, Wheeler asked for another $45,000. Both requests were approved.

All of these added increases might not have come as a shock to the government, because the last time the state contracted with Ernst & Young, it ended up paying about $1.3 million than expected over four years, documents show.

John La Place, an Ernst & Young spokesman in its New York headquarters, said his firm does not comment on work with clients, citing “professional standards.”

Ed Magee, the vice chancellor of finance for the West Virginia Higher Education Policy Commission, offered in a March 10 email for his organization to spend money on an additional auditor, to help Ernst & Young. He and others at the HEPC had hoped the state could avoid the federal financial sanctions if the state submitted the Single Audit on time.

Carpenter wrote back to say the state couldn’t switch firms in the middle of the audit.

“Furthermore, while there are many factors affecting the completion of this year’s Single Audit, I do not place blame on E&Y for the delay,” Carpenter wrote. “The main focus is on getting external audits included in the CAFR in a timely manner.”

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