DALLAS — The New Mexico Finance Authority “over-emphasized and under-prioritized the importance of bond credit ratings,” in a “culture of complacency” that led to a fraudulent audit, according to an investigative report from the New Mexico Securities Agency.

The scandal over the phony audit has led to criminal charges and frozen the agency’s ability to issue debt on behalf of state and local governments.

NMFA “operated on the presumption that the audit was a process that required little if any input from senior management, the Audit Committee or the Board,” according to the long-awaited report on the fraudulent audit that was discovered in July.

The report says former NMFA controller Gregory Campbell created an audit report sometime prior to Feb. 3 that included three fabricated opinions from an independent public accountant.  The audit was attributed to the auditing firm of Clifton Gunderson, Which is now known as CliftonLarsonAllen following Clifton Gunderson’s merger with LarsonAllen.

Campbell has pleaded guilty to one count of forgery in a plea bargain with prosecutors. 

While Clifton Gunderson confirmed to state investigators that the audit was never conducted, the report from the New Mexico Securities Agency criticized the firm for not alerting state officials earlier that the regular auditing process had been interrupted.

“On March 22, 2012, the NMFA held a competitive bid bond sale,” the report noted. “There were eight bidders, each of whom received a copy of the forged audit and misclassified financial statements as part of the POS (preliminary official statement).”

On March 31, the NMFA “caused the forged 2011 audit to be uploaded to the Municipal Securities Rulemaking Board (MSRB) website as an annual disclosure,” the report said.

On April 23, the NMFA audit committee met, and Campbell presented the fraudulent audit. The committee accepted the report, even though no accountant from Clifton Gunderson attended as required by policy, the report said.

On June 30, 2012 NMFA chief operating officer John Duff learned that the 2011 audit had not been conducted when he called Clifton Gunderson to discuss the upcoming fiscal year 2012 audit, according to the report.

The report traced the original event leading to the fake audit as the reversion of $21 million from the NMFA’s account to the state’s general fund in April 2010.

In January 2011, NMFA management became concerned with how credit-rating agencies might view a second reversion in as many years.  The NMFA “believed that it would give the appearance that state legislators might begin to regularly raid the NMFA to make up budget shortfalls,” according to the report.

On April 28, 2011 the NMFA took approximately $18.6 million from uncommitted cash balances in several funds and contributed it to the state’s general fund, reducing fund balances to near zero, the report said. The NMFA maintained 22 separate funds, which it segregated based on lending and grant programs.

“Reporting revenues at this level would likely have negative consequences for how the public viewed the NMFA’s financial stability and ability to back its bond issues, so Campbell decided to reclassify the 2011 contributions as grant expenses,” the report said. “Campbell stated that Duff agreed with the reclassification.”

Despite the transfers, Standard & Poor’s rated NMFA’s senior-lien debt AAA and Moody’s Investors Service rated the debt Aa1 in July, 2011.  Moody’s assigned the same rating on the issue last March.  In the wake of the fraud, the ratings agency put NMFA on watch for downgrades.  On Oct. 22, S&P shifted the outlook to negative.

Within two weeks of telling Duff on March 1 that he planned to resign, Campbell provided the forged 2011 audit to the chief financial strategist, who in turn, posted it on the NMFA website the same day, according to the report.

Five days earlier, on March 7,  NMFA conducted a ratings call regarding the upcoming sale of their Series 2012A bonds backed by the revolving fund. The chief financial strategist told the NMFA’s disclosure counsel that the 2011 audit still had not been released by the Office of the State Auditor.

While Campbell deliberately reported false information and forged the signatures of Clifton Gunderson auditors, investigators found no evidence that he profited from the fraud in any way.

“He appears instead to have been motivated by a desire to protect the NMFA’s bond ratings and by internal and external pressures to meet statutory and other bond sale deadlines which required completion and submission of the 2011 Audit Report,” the report said. “These pressures were exacerbated by his workload, insufficient accounting staff, outdated accounting procedures, and his own prioritization of the annual audit.”

Around 2004, the NMFA began to solicit higher ratings from the national ratings agencies, the report said.

“Over time, this goal appears to have led to an institutional culture that placed an excessive importance on bond ratings,” the report said.

“The NMFA’s concern for ratings drove the NMFA’s decision to 'donate’ money to the state in lieu of a reversion and its decision to misclassify that donation as a grant expense. The same concern for ratings appears to have likewise influenced Campbell’s decision to create and submit a fraudulent audit.”

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