Auditor says probe of rail agency raised ‘red flags’

Honolulu Auditor Edwin Young told City Council members Wednesday that if fraud had occurred at the agency overseeing the troubled East Kapolei-to-Ala Moana Center rail project, there were no mechanisms in place to report the improprieties.

And while he found no evidence of fraud while conducting an audit of the Honolulu Authority for Rapid Transportation last spring, “the red flags were there” to suggest there may have been, Young said.

“We found that the internal controls were so weak, that if fraud, waste or abuse were to occur, HART and (others) would not have detected it, could not prevent it, and could not have taken corrective action, if it had occurred,” Young said at a Council Budget Committee meeting Wednesday.

“They do not have an internal audit function, and those individuals who were reporting to the executive director were trying to establish one for their own purposes, not for the purposes of (ensuring) openness and transparency in the expenditure process,” he said.

If former HART Executive Director Dan Grabauskas were still in charge, Young said, he would recommend a forensic audit or investigation be conducted either by prosecutors or police. But under the new leadership, he said, an audit of the scope being sought by the Council would be sufficient for now.

The Budget Committee voted unanimously to forward Resolution 17-199, calling on Young to conduct an economy and efficiency audit of the project, which has seen its price tag soar by billions of dollars in the last few years. Council members want the audit to tell them why.

Councilman Trevor Ozawa said he introduced the resolution because the audit that Young’s office conducted and released in April 2016 focused on HART’s operational costs rather than on its enormous capital, or construction, budget.

“The increasing costs are due to increases in the capital budget,” Ozawa said. “That is what people have problems with.”

Young supported the call for an audit, reiterating Ozawa’s point that this audit would focus on construction contracts and look through the paper trails of how much, and when, money was paid to contractors and their subcontractors. HART’s operating expenses amount to about $18 million annually, far less than the $8 billion in construction costs the transit authority is managing.

Young said it would generally take his office a year to 18 months to conduct an audit like the one being sought by Council members, but that it will strive to get it done by the end of 2018.

Officials with both HART and the Caldwell administration testified that they support the resolution and the audit.

City Managing Director Roy Amemiya said the audit should make it clear if HART has followed the auditor’s recommendations from the first audit.

“I think it’s good for both the administration as well as the City Council, and the people at-large, to determine whether or not this audit was taken seriously by HART and those recommendations were implemented,” Amemiya said.

HART Board Vice Chairman Terrence Lee and Interim Executive Director Krishniah Murthy told Council members that they are focused on abiding by the 2016 audit’s recommendations.

Murthy told reporters after the meeting that HART has instituted many of the policies and procedures recommended by auditors in their 2016 report, and filled vacant positions in its finance office.

HART supports the new audit and will cooperate fully, Murthy said.

Lee also assured Council members that if there were evidence of wrongdoing, he and other HART board members would seek an independent forensic audit.

A portion of Wednesday’s meeting was devoted to discussion of a confidential memorandum that Young sent to former Council Chairman Ernie Martin in the wake of Grabauskas’ scathing rebuke of the April 2016 audit.

Grabauskas, who had received an advance copy of the draft audit from Young’s office, called a news conference several days before the document’s formal release blasting Young and the audit.

“I’d say that this so-called audit is a joke, but it hasn’t been funny,” Grabauskas told reporters then. “It’s a mess.” He said HART agreed with only some of the auditor’s 21 findings and that it was rushed to get those responses in early.

Young’s communication to Martin talked about the contentious and uncooperative manner Grabauskas and other top HART officials displayed when speaking with members of his office. “The memo highlights the unprofessional behavior on the part of HART during the course of our audit and some of the improper things they did to try to compromise and discredit the audit,” Young said after the meeting.

He said he decided to provide the memo to Martin “so that the Council chair was aware of some of the limitations that we ran into during the audit.”

Martin declined to provide a copy of the memo to the Honolulu Star-Advertiser and referred the query to current Council Chairman Ron Menor. Menor said he wants to hear from Corporation Counsel Donna Leong’s office before making it public.

Martin reiterated that the memo focused on Grabauskas’ reaction to the audit, adding that Young previously had told him verbally that Grabauskas and HART leadership were hostile and defensive when queried by the auditor’s staff.

Grabauskas could not be reached for comment at his New York-based consultant’s office late Wednesday.