The Arkansas State Police is conducting a criminal investigation after Arkansas Rehabilitation Services found that six checks totaling $23,500 were paid to a vendor in June and July 2020 for services that were not provided to the agency, deputy legislative auditor Tom Bullington said.
A review performed by the management of Arkansas Rehabilitation Services revealed a relationship between the vendor and an agency employee, who potentially falsified documentation on behalf of the vendor, Bullington said.
After being contacted by the agency in July 2020, the vendor returned a $2,000 check that had not been cashed, Bullington said. The vendor is Lifetime Credit Services LLC.
Arkansas Rehabilitation Services is actively seeking repayment of the remaining $21,500, Bullington told the Legislative Joint Auditing Committee's state agencies committee on Thursday in his report on an audit of the state Department of Commerce for the fiscal year that ended June 30, 2020.
Arkansas Rehabilitation Services is part of the Division of Workforce Services, which is in the Commerce Department.
The employee was fired, the vendor was deactivated from Arkansas Rehabilitation Services-Division of Workforce Services' case management system and the agency initiated a criminal investigation with the Arkansas State Police, Bullington said.
Joe Baxter, commissioner of Arkansas Rehabilitation Services, told lawmakers that the terminated employee was a counselor who was supposed to check and make sure that services were rendered and she was falsifying those checks.
The money paid to Lifetime Credit Services was for authorized services to clients, who later reported "the person never showed up" and "they never received the services" as part of a regular follow-up by the agency, he said.
"Once we confirmed that, we went on and started taking action to recover the funds," and reported this matter to the Arkansas State Police on Oct. 15, 2020, Baxter said.
"We are still waiting for the results of their active investigation right now."
Sen. Terry Rice, R-Waldron, said he wants to know whether criminal charges are going to be filed by a prosecutor or whether a prosecutor needs to be contacted about the case.
Baxter said, "I don't want to impede an active investigation, but we'll do everything we can to recover these funds."
Afterward, state police spokesman Bill Sadler said, "Agents are continuing their work on the case. The investigative file has not yet been presented to the prosecuting attorney."
REPORTING OVERSIGHT
Bullington said auditors identified about $986,000 in checks written from the Commerce Department to an entity registered with the secretary of state as a nonprofit corporation that listed Commerce Secretary Mike Preston as one its directors. The nonprofit corporation is the Arkansas Center for Data Sciences.
The Arkansas Center for Data Sciences received payments from the department of $334,670 on Oct. 16, 2019; $395,000 on Jan. 6, 2020; and $256,337 on April 24, 2020, Bullington said.
These payments were part of a memorandum of understanding to expand opportunities for apprenticeships in the information technology sector in Arkansas, Bullington said.
Arkansas Code Annotated 21-8-701 requires the commerce secretary to file a written statement of financial interest that discloses these type of relationships, he said.
Transactions between the Commerce Department and this nonprofit, under the direction of Preston, are considered related party transactions for financial reporting purposes, Bullington said.
He said the audit revealed the the statements of financial interest filed by Preston for calendar years 2019 and 2020 did not disclose the director position held with the nonprofit corporation, and the year-end closing book submitted by the Commerce Department to the Department of Finance and Administration did not disclose any related party transactions.
Preston told lawmakers that "this was just an oversight on my financial disclosure" report.
He said he serves on several boards and "I report them every year and this is one that I just missed."
The Arkansas Center for Data Sciences has received grants aimed at developing information technology talent in the state through the Commerce Department's Office of Skills Development, Preston said.
"I went back and corrected my financial statements to reflect my position on the board," he said. "It's probably been about two years since I have been actually to one of those board meetings."
Preston said he has served on the group's board since about 2018 or 2019 and the nonprofit group was formed as a result of Gov. Asa Hutchinson's Blue-Ribbon Commission on Economic Competitiveness of Data Analytics and Computing in Arkansas report in 2017. Several members of the blue ribbon commission transitioned into that board, he said.
Senate President Pro Tempore Jimmy Hickey, R-Texarkana, asked whether there was any monetary benefit to Preston from serving on the center's board.
Preston replied, "No."
Beyond the $986,007 provided to the Arkansas Center for Data Services in fiscal 202o, the Office of Skills Development provided $500,000 in fiscal 2019 to the center and $1.2 million in fiscal 2021 that ended June 30 to the center, according to Commerce Department officials.
ACCOUNTING PROBLEMS
Bullington said the state also did not have the policies and procedures in place to appropriately record the financial effects of the new pandemic-related unemployment insurance programs authorized under the federal Coronavirus, Aid, Relief, and Economic Security Act of 2020.
Auditors found that operating revenue was overstated by about $53 million when a portion of the federal grant receipts was erroneously coded to a general ledger account related to operating revenues, as opposed to the more appropriate account related to non-operating revenue, he said.
The state attempted to correct the misstatement, but the modification was not made for the correct amount or to the correct general ledger account, Bullington said. Thus, the correcting entry caused a $19 million overstatement of non-operating revenue and a $72 million overstatement of operating expenses.
In addition, a federal receivable of $170.5 million related to three new federal pandemic unemployment assistance programs was not recorded, he said
Also, an unemployment benefits payable of almost $294 million for the three programs was not recorded until auditors inquired about the lack of such an entry, Bullington said. Moreover, auditors recalculated the unemployment benefits payable to be about $303 million, he said.
Auditors notified the Department of Finance and Administration about the potential misstatements, and entries were made in the Arkansas Administrative Statewide Information System to correct the the amounts listed, "so we had all of this corrected during the audit," Bullington said.
Rep. Robin Lundstrum, R-Elm Springs, said "so all the money is present and accounted for. It's just an accounting misstep."