News Column

Financial Controls Lacking at Wis. Jobs Agency

Dec. 27, 2012

Jason Stein and Kathleen Gallagher

When Gov. Scott Walker and lawmakers created the state's partly independent jobs agency 18 months ago, they left out a basic legal requirement put on similar state authorities and commonly practiced by private businesses: to compile and audit its financial statements.

The Wisconsin Economic Development Corp. has drawn criticism for poor financial reporting and oversight, from both private experts and the federal government.

This month, with the agency releasing its first-ever consolidated financial statements, prepared by outside auditors, more attention is being directed to the question of how the board of directors could function for 18 months without such a basic tool.

"If they were in my class, they'd get a big 'F,' " said Paul Lapides, a business school professor who directs the Corporate Governance Center at Kennesaw State University in Georgia.

"Every single adult citizen in the state should be saying, 'Wait, you have people on this board of directors who aren't reading financial statements and don't have a clue about how internal controls work?' " Lapides added.

He said the board could be viewed as having a "reckless disregard for their duties." Like public company directors, members of boards such as the WEDC have a duty to act in the best interest of the company and are subject to the same liability, Lapides said.

As Wisconsin's flagship jobs agency, the WEDC must prepare numerous re ports for state officials on its job creation programs and its tens of millions of dollars in taxpayer subsidies to businesses. But unlike nearly every other quasi-public authority at the state level, the corporation is not required by law to report yearly on its finances.

Before Dec. 14, WEDC's audit committee of one businessman and two lawmakers had met just twice, and neither they nor the entire volunteer WEDC board had seen full financial statements.

With the state's economy in bad need of a boost, the WEDC has tried to focus on job creation even as it's been forced to address a pack of other problems stemming from its rushed creation, early staff turnover and inadequate planning and oversight. The agency had been touted by Walker and his administration as an improvement over the former state Department of Commerce in both job creation and financial reporting, saying WEDC would run with the efficiency of a private business. For years, the state commerce department had been under criticism of its own that it was not providing enough transparency and had conflicting goals and duplicative programs.

But initially, at least, financial oversight got worse under the WEDC rather than better.

Ray Dreger, chairman of the audit committee, said the WEDC board takes seriously its responsibilities for both the economy and for taxpayers. No reviews of WEDC have turned up any deliberate wrongdoing by the board or staff.

"There is absolutely no doubt in my mind that this board is dedicated to making this organization go. The objective is make this go and create jobs in this state," he said.

Dreger, the owner of Seeds & Stuff Farm Market in the northwestern Wisconsin community of Colfax, said he also cared about accountability. "For me, I'm a taxpayer and we cannot take that lightly."

In October, the Journal Sentinel first reported that the agency had discovered it had failed to track in one centralized database dozens of past-due loans -- worth $12.2 million -- that are financed by taxpayers to businesses. As a result of the mistake, the authority's chief financial officer resigned. Walker brought in Reed Hall, the retired executive director of the Marshfield Clinic, to serve as WEDC's interim chief executive officer. The agency said on Friday it had whittled down the applicants to three finalists to serve as a permanent CEO and replace Paul Jadin, who left that job in October to take a different economic development job.

Hall has said that WEDC as an agency, not its unpaid board or others, bears most of the responsibility for the oversights. Even without a legal requirement to do annual audits, such work is an "inherent part of being a corporation," he said.

"It would have never occurred to me not to do an independent audit," Hall said.

Comprehensive financial statements might have provided an opportunity to catch the loan problems earlier, since such reporting requires a balance sheet that totals up assets such as loans to businesses and liabilities such as debt.

Most other state authorities require such financial statements be provided to state officials in the Legislature, governor or Department of Administration:

Echoing recommendations made in the 2010 "Be Bold Wisconsin" report, Walker pushed to replace the former commerce department with WEDC. In December 2010, he said the new agency would have " full disclosure and accountability."

In early 2011, Assembly Minority Leader Peter Barca of Kenosha and other Democrats repeatedly warned Walker and other Republicans that they were moving too quickly to create the WEDC and needed to take more time to plan. Barca was familiar with the process involved in creating an independent UW Hospital and Clinics Authority and pointed to the "detailed implementation plans" that went into that authority as an example of the kind of forethought that's needed in transitioning a public entity into a semiprivate one.

"Instead, there is a rather vague requirement for the authority to deliver a report to the Legislature," Barca said in committee testimony on the WEDC bill.

In its first year, WEDC had $57.9 million in revenue, nearly all from state taxpayers. Like the former commerce department, WEDC has to report each year on its subsidies to individual businesses, and it has the additional requirement of issuing a January report on its overall work and plans. It's also reviewed every two years by the Legislative Audit Bureau.

But it took until now for the board of WEDC to see a complete income statement and balance sheet for the agency, documents that will now go to the board every month.

Three WEDC board members have criticized the amount of information they were receiving, including Barca and Sen. Julie Lassa (D-Stevens Point). In a letter to Walker in September, Paul Radspinner, president and chief executive officer of FluGen Inc., also threatened to resign from the WEDC board if members weren't given more information to help do their jobs.

But most WEDC board members have been more reserved, at least publicly. Walker is chairman of the WEDC board; Dan Ariens, president and CEO of Ariens Co., is vice chairman; and Scott Klug, managing director of public affairs at the law firm of Foley and Lardner, is the board treasurer.

Even though Klug isn't on the audit committee, it is "puzzling" that as the board's treasurer he would not insist on greater rigor in financial reporting and better internal controls for dispersing money, said Jeffery Smith, associate professor and director at the Banta Center for Business Ethics and Society at University of Redlands in the greater Los Angeles area.

"The fact that you wouldn't have this agency, which is essentially a trustee of public funds, for them not to take seriously the importance of very diligent financial reporting seems to me at best ironic and at worst a breach of what we would expect as transparency when it comes to public interest," Smith said.

Another expert called the situation an "all-hands-on-deck magnitude problem." It is ultimately the board's responsibility to hire people to give it the information it needs to run the organization, said Paul Larson, chief equity strategist at Morningstar Inc. in Chicago.

"And from what I've heard, it sounds like they weren't doing that," Larson said.

No one on the WEDC board's audit committee is an accountant. Dreger, the chairman, is a grain farmer and owner of a seed store, though he did also head the audit committee for Dairyland Power Cooperative as well as help start an ethanol plant and serve on its audit committee. The other two committee members are Rep. Mary Williams (R-Medford) and Barca.

Dreger said the committee didn't see any full financial statements until Dec. 14, though he saw some preliminary numbers in the fall. He said the audit by the firm Schenck SC was brought forward at last week's board meeting because of the urgency surrounding it even though a few details are still being finished. FIPCO, a subsidiary of the Wisconsin Bankers Association, also performed a review that was released Tuesday. That review focused on WEDC's "incomplete management policies" and shortcomings in the agency's software systems and integration. It found WEDC staff to be "competent and conscientious," but frustrated with "existing software systems, lack of formal policies . . . and meetings that have not led to change."

Dreger said WEDC faced unusual challenges.

"There was not a road to go down. We made the road as we went down it," Dreger said.



Source: (c)2012 the Milwaukee Journal Sentinel Distributed by MCT Information Services


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