Minnesota Waterfowl Association

Minnesota Waterfowl Association
Financial Audit Division
The Office of the Legislative Auditor (OLA) is a professional, nonpartisan office in the legislative branch of Minnesota State government. Its principal responsibility is to audit and evaluate the agencies and programs of state government (the State Auditor audits local governments). OLA's Financial Audit Division annually audits the state's financial statements and, on a rotating schedule, audits agencies in the executive and judicial branches of state government, three metropolitan agencies, and several "semi-state" organizations. The division also investigates allegations that state resources have been used inappropriately. The division has a staff of approximately fifty auditors, most of whom are CPAs. The division conducts audits in accordance with standards established by the American Institute of Certified Public Accountants and the Comptroller General of the United States.

Consistent with OLA's mission, the Financial Audit Division works to:
· Promote Accountability, · Strengthen Legislative Oversight, and
· Support Good Financial Management.
Through its Program Evaluation Division, OLA conducts several evaluations each year and one best practices review.

OLA is under the direction of the Legislative Auditor, who is appointed for a six-year term by the Legislative Audit Commission (LAC). The LAC is a bipartisan commission of Representatives and Senators. It annually selects topics for the Program Evaluation Division, but is generally not involved in scheduling financial audits.

All findings, conclusions, and recommendations in reports issued by the Office of the Legislative Auditor are solely the responsibility of the office and may not reflect the views of the LAC, its individual members, or other members of the Minnesota Legislature.

This document can be made available in alternative formats, such as large print, Braille, or audio tape, by calling 651-296-1727 (voice), or the Minnesota Relay Service at 651-297-5353 or 1-800-627-3529. All OLA reports are available at our Web Site: http://www.auditor.leg.state.mn.us

If you have comments about our work, or you want to suggest an audit, investigation, evaluation, or best practices review, please contact us at 651-296-4708 or by e-mail legislative.auditor@state.mn.us

Senator Ann H. Rest, Chair
Legislative Audit Commission

Members of the Legislative Audit Commission

Representative Dennis Ozment, Chair
Legislative Commission on Minnesota Resources

Mr. John Velin, Director
Legislative Commission on Minnesota Resources

Mr. Gene Merriam, Commissioner
Department of Natural Resources

Mr. Michael McGinty, Executive Director
Minnesota Waterfowl Association

Members of the Minnesota Waterfowl Association Board of Directors

We have conducted a special review of the Minnesota Waterfowl Association's financial management of grants from the Department of Natural Resources for the period September 1999 through August 2002. The Minnesota Waterfowl Association is a nonprofit organization whose mission is to preserve, restore, develop, enhance, and protect Minnesota's wetlands and associated uplands. For fiscal years 2000 through 2003, the state awarded $3.4 million of grants to the association. The Minnesota Waterfowl Association received grant funds through a state funded project, Restoring Minnesota's Fish and Wildlife Habitat Corridors. The "Corridors" project partnered 14 private conservation organizations, state, and federal government agencies with the goal of protecting and restoring wildlife habitat on a statewide scale. Total resources committed to the project, from all sources, exceeded $20 million.

We conducted the review in response to complaints that questioned the Minnesota Waterfowl Association's financial management of state grant funds. The complaints alleged that the Minnesota Waterfowl Association had not properly accounted for state grant funds and had not complied with the terms of the grant agreement in its use of the state grant funds. Based on preliminary information obtained from the association, we decided to pursue the matter further and issue this special report.

This report is intended for the information of the Legislative Audit Commission, the management of the Department of Natural Resources, the Legislative Commission on Minnesota Resources, and the management of the Minnesota Waterfowl Association. This restriction is not intended to limit the distribution of this report, which was released as a public document on March 12, 2003.

James R. Nobles Claudia J. Gudvangen
Legislative Auditor Deputy Legislative Auditor

End of Fieldwork: January 3, 2003

Report Signed On: March 10, 2003

Table of Contents

Report Summary

Chapter 1. Introduction

Chapter 2. Grant Administration

Minnesota Waterfowl Association's Response

Department of Natural Resources' Response

Legislative Commission on Minnesota Resources' Response

Audit Participation

The following members of the Office of the Legislative Auditor prepared this report:

Claudia Gudvangen, CPA Deputy Legislative Auditor
Cecile Ferkul, CPA, CISA Audit Manager
Marla Conroy, CPA, CISA Director of Investigations
Jean Mellett, CPA, CFE Investigator

Exit Conference

The following representatives from the Minnesota Waterfowl Association and the Department of Natural Resources participated in the exit conferences on March 3 and March 4, 2003:

Minnesota Waterfowl Association:
Bruce Philipson President
Mike McGinty Executive Director
Julia Cooper-Grear Controller
Jim Hacking, CPA Auditor
Dan Wrazidlo, CPA Auditor
Department of Natural Resources:
Gene Merriam Commissioner
Mark Holsten Deputy Commissioner
Brad Moore Assistant Commissioner for Operations
Joe Kurcinka Acting Chief Financial Officer
Jerry Hampel Manager, OMBS
Bill Becker LCMR Liaison
Timothy Bremicker Director, Wildlife Division
Dennis Simon Coordinator, Wildlife Division
John Burns Internal Audit Director
C.B. Bylander Communications

Report Summary

We have conducted a special review of the Minnesota Waterfowl Association's financial management of state grants administered through the Department of Natural Resources. The Minnesota Waterfowl Association is a nonprofit organization established in 1967. The association's mission is to preserve, restore, develop, enhance, and protect Minnesota's wetlands and associated uplands through public education, legislative initiatives, and projects to benefit waterfowl, wildlife and the environment. For fiscal years 2000 - 2003, the state awarded the association grant funds totaling $3.4 million, including funding for a project entitled, "Restoring Minnesota's Fish and Wildlife Habitat Corridors," which is referred to as the Corridors project.

Our objective in conducting this special review was to answer the following question:

· Did the Minnesota Waterfowl Association expend grant funds in accordance with legal requirements and grant contract provisions?

Key Conclusions

The Minnesota Waterfowl Association did not have the financial or organizational resources to properly administer the Corridors project grant. To improve its cash flow, the association prepared but did not send checks until it requested and received reimbursement from the Department of Natural Resources. The Minnesota Waterfowl Association used grant funds for some projects to pay expenditures of other projects. The executive director circumvented a significant accounting control by forging the treasurer's signature on some association checks to expedite payments to employees and vendors. Although we do not think there was criminal or fraudulent intent, this action was totally inappropriate and demonstrates that the organization did not have an effective control structure. In addition, the association did not pay vendors in a timely manner. At times, personnel changes made it difficult for the association to continue efficient operations. The association did not anticipate the need for back up or temporary staff to ensure timely vendor payments and timely reimbursement requests.

The Minnesota Waterfowl Association did not expend state grant funds in accordance with certain legal requirements and grant contract provisions. The association claimed reimbursement for ineligible costs for two projects. It allocated payroll, postage, and telephone charges rather than determining actual costs attributable to the grant projects. The association sought reimbursement for $3,000 of work performed by vendors before the effective date of the Corridors project. In addition, the association inappropriately recorded $7,243 of work outside the Corridors geographical area in the project account.

Chapter 1. Introduction

Background

We have conducted a special review of the Minnesota Waterfowl Association's financial management of state grants administered through the Department of Natural Resources. The association is a nonprofit organization, established in 1967, to preserve, restore, develop, enhance, and protect Minnesota's wetlands and associated uplands through public education, legislative initiatives, and projects to benefit waterfowl, wildlife, and the environment. The association receives funding through grants, donations, fund-raisers, charitable gambling activities, and proceeds from memberships. For fiscal years 2000 through 2003, the state awarded the association grant funds totaling $3.4 million. Table 1 summarizes the state grant funds awarded to the Minnesota Waterfowl Association for fiscal years 2000 through 2003.

Table 1
Grant Funds Awarded and Disbursed to the Minnesota Waterfowl Association
Fiscal Years 2000 through 2003

Funding Source/Grant Program
Fiscal Year Awarded Disbursed (10)
Environment & Natural Resources Trust Fund
Restoring Fish and Wildlife Habitat Corridors (1) 2002-2003 $2,605,000 $481,035
Other Trust Fund grants (2) 2000-2001 6,600 4,938
Future Resources Fund:
Enhancing Canada Goose (3) 2000-2001 189,205 183,081
Enhancing Canada Goose (4) 2002-2003 340,000 160,195
Local Initiatives Grant (5) 2000 8,571 7,212
Game & Fish Fund:
Heritage Enhancement Grants (6) 2002-2003 197,476 197,476
Annual Minnesota Waterfowl Symposium (7) 2001-2002 13,000 13,000
Lake Hanska Fish Barriers (8) 2001-2002 70,000 69,851
General Fund Grant (9) 2002 1,600 1,600
Total $3,431,452 $1,118,388

Notes:
(1) Minn. Laws (2001), First Special Session, Chapter 2, Section 14, Subd. 4(e).
(2) Grants relating to an educational display and Minnesota Duck Habitat Days.
(3) Minn. Laws (1999), Chapter 231, Section 16, Subd. 13(k). Appropriation allocated to the Department of Natural Resources, Ducks Unlimited, and the Minnesota Waterfowl Association.
(4) Minn. Laws (2001), First Special Session, Chapter 2, Section 14, Subd. 4(c).
(5) Minn. Laws (1997), Chapter 216, Section 15, Subd. 4(c).
(6) Minn. Laws (2001), First Special Session, Chapter 2, Section 5, Subd. 8 (8). Appropriation provided funding to the Department of Natural Resources for grants to local outdoor sports clubs. Department of Natural Resources entered into four grant agreements with the Minnesota Waterfowl Association.
(7) Minn. Laws (2001), First Special Session, Chapter 2, Section 5, Subd. 8.
(8) Minn. Laws (2000), Chapter 463, Sec. 23, Subd. 2 (c) and Minn. Laws (1999), Chapter 231, Sec. 5, Subd. 7.
(9) Grant relating to Shorebird Habitat.
(10) Total disbursed to the Minnesota Waterfowl Association from September 1, 1999, through December 31, 2002.

Source: Grant contracts and the Minnesota Accounting and Procurement System.

The Legislative Commission on Minnesota Resources (LCMR) oversees the distribution of Environment and Natural Resources Trust Fund and Minnesota Resources Fund grant monies. The association's largest state grant, for the Restoring Minnesota's Fish and Wildlife Habitat Corridors project, began with a proposal to the LCMR. The commission reviewed the proposal and recommended it to the Legislature for funding from the Minnesota Environment and Natural Resources Trust Fund. (The money in the Trust Fund comes from Minnesota's state lottery proceeds.) The Legislature appropriated funds to the Department of Natural Resources and named the Minnesota Waterfowl Association, other conservation groups, and several federal agencies as partners. Through the Corridors project, participating groups agreed to work together to restore and acquire fragmented landscape corridors that connect areas of quality habitat to sustain fish, wildlife, and plants. Total resources committed to the project, from all sources, exceeded $20 million.

In July 2002, the Legislative Commission on Minnesota Resources asked the Office of the Legislative Auditor to review a complaint it received regarding the Minnesota Waterfowl Association. The complaint alleged that the Minnesota Waterfowl Association had not properly accounted for state grant funds and had not complied with the terms of the grant agreement in its use of the state grant funds.

In response to the request, we conducted a preliminary assessment to determine whether the issues warranted further review. Based on preliminary information obtained from the association, we decided to pursue the matter further and issue a special report.

Objectives and Methodology

Our objective in conducting this special review was to answer the following question:

· Did the Minnesota Waterfowl Association expend grant funds in accordance with legal requirements and grant contract provisions?

In conducting this special review, we examined the Minnesota Waterfowl Association's accounting records and interviewed its employees and certain current and former board members. We tested selected state grant expenditures for the period September 1, 1999, through August 31, 2002. We reviewed relevant documents, including the association grant agreements and reports. We also obtained additional information from the Legislative Commission on Minnesota Resources and the Department of Natural Resources. Our review was not a full audit of the association's financial records.

Chapter 2. Grant Administration

Chapter Conclusions

The Minnesota Waterfowl Association did not have the financial or organizational resources to properly administer the Corridors project grant. As a result, it used some "aggressive" cash management practices that violated the terms of the state's reimbursement grant program. The Minnesota Waterfowl Association used grant funds for some projects to pay expenditures of other projects. The executive director circumvented a significant accounting control by forging the treasurer's signature on some association checks to expedite payments to employees and vendors. Although we do not think there was criminal or fraudulent intent, this action was totally inappropriate and demonstrates that the organization did not have an effective control structure. In addition, the association did not pay vendors in a timely manner. At times, personnel changes made it difficult for the association to continue efficient operations. The association did not anticipate the need for back up or temporary staff to ensure timely vendor payments and timely reimbursement requests.

The Department of Natural Resources' $2,605,000 grant to the Minnesota Waterfowl Association for the Restoring Minnesota's Fish and Wildlife Habitat Corridors (the Corridors project) required the association to work in partnership with the United States Fish and Wildlife Service, United States Department of Agriculture's Natural Resources Conservation Service, the Bureau of Indian Affairs, Ducks Unlimited, and other contract partners. Total resources committed to the project, from all sources, exceeded $20 million. Table 2 summarizes the Corridors project's work plan and allocated budget.

Table 2
Restoring Minnesota's Fish and
Wildlife Habitat Corridors Project Budget

Work Program Trust Fund Other Sources Total

Work Program Initiatives Reimbursed through the Minnesota Waterfowl Association:

Program Coordination and Mapping $ 352,000 $ 0 $ 352,000

Restoration & Management:
Wildlife Lakes Initiative (1) 933,000 211,000 1,144,000
Partners for Wildlife (2) 70,000 140,000 210,000
Circle of Flight (3) 300,000 216,060 516,060

Conservation Easement Programs:
Conservation Reserve Program 100,000 25,000 125,000
Northern Tallgrass Prairie Proposal (2) 500,000 1,000,000 1,500,000
Wetlands Reserve Program (4) 350,000 4,064,998 4,414,998
Subtotal $ 2,605,000 $5,657,058 $ 8,262,058

Work Program Initiatives Reimbursed to Other Partners: (5)

Restoration and Management $ 2,040,000 $ 446,000 $ 2,486,000
Conservation Easement Program 1,700,000 800,000 2,500,000
Habitat Acquisition Programs 5,400,000 1,552,000 6,952,000
Subtotal $ 9,140,000 $2,798,000 $11,938,000

Total Project (6) $11,745,000 $8,455,058 $20,200,058

Notes:
(1) The Minnesota Waterfowl Association and Ducks Unlimited are partners in this initiative.
(2) The Minnesota Waterfowl Association processes reimbursement on behalf of the United States Fish and Wildlife Services.
(3) The Minnesota Waterfowl Association processes reimbursement on behalf of the Bureau of Indian Affairs.
(4) The Minnesota Waterfowl Association processes reimbursements on behalf of the United States Department of Agriculture's Natural Resources Conservation Service.
(5) Legislative Commission on Minnesota Resources Corridor Grant Partners include: Minnesota Deer Hunters Association, United States Fish and Wildlife Service, Department of Natural Resources' Division of Wildlife, Bureau of Indian Affairs, Ducks Unlimited, Department of Natural Resources Division of Fisheries, National Wild Turkey Federation, Minnesota Land Trust, The Nature Conservancy, United States Forest Service, Department of Natural Resources' Division of Forestry, National Resources Conservation Service, Minnesota Board of Water & Soil Resources, Department of Natural Resources, Division of Ecological Services, Pheasants Forever, and Trust of Public Land.
(6) Grant funds are to be expended within 11 project corridors which include: Aspen Parklands, Mississippi Headwaters, Border Prairie, Central Lakes, Lower St. Louis River, Upper Minnesota River, Alexandria Moraine, Big Woods-North, Des Moines River Valley, Southern Lakes, and Mississippi Bluff Lands.

Source: Legislative Commission on Minnesota Resources Project Budget, Work Program Expenditures and Accomplishments Spreadsheet prepared by the Minnesota Waterfowl Association.

The grant designated the Minnesota Waterfowl Association as the fiscal agent for the project. The fiscal agent is the entity that assumes the financial responsibilities for the project. It is the responsibility of a fiscal agent to safeguard project assets and ensure the propriety of all expenditures and the disposition of project assets. This encompasses a variety of duties, including timely bank account reconciliations, payments of project liabilities, and timely reporting to the grantor about the project's status and progress.

In addition to the Corridors grant, the association received various other grants. It received $189,205 for fiscal years 2000/2001 and $340,000 for fiscal years 2002/2003 for the Enhancing Canada Goose Hunting and Management Information project, funded through the Minnesota Resources Fund. These grants allowed the association to acquire leases on private farmlands for foraging sites and public hunting opportunities and to provide technical assistance to local units of government in developing controlled hunts for nuisance geese. The association also received, through the Department of Natural Resources, $300,000 from the state's Game and Fish Fund for other projects, including nearly $200,000 for the Heritage Enhancement Grant Program. Heritage Enhancement funds may only be spent on activities that improve, enhance, or protect fish and wildlife resources, such as habitat improvement projects on wildlife management area lands.

Conclusions

The Minnesota Waterfowl Association did not have the financial or organizational resources to property administer the Corridors project grant. As a result, it used some "aggressive" cash management practices that violated the terms of the state's reimbursement grant program. Finding 1 explains ways in which the association failed to meet its fiscal agent responsibilities.

The association did not restrict the costs it charged to the state's grant programs to those allowable in the grant agreement, as explained in Finding 2. It allocated payroll, postage and telephone charges rather than determining actual costs attributable to the Corridors project grant. It inappropriately sought reimbursement for $3,000 for ineligible charges incurred prior to the effective date of the Corridors project. In addition, the association inappropriately recorded $7,243 of work outside the Corridors geographical area in the project account.

1. The Minnesota Waterfowl Association did not have sufficient financial or organizational resources to properly administer the Corridors program.

The Minnesota Waterfowl Association was not prepared to act as the fiscal agent for the Corridors program, which was much larger and more complex than other state grants it had previously received. The grant agreement required that the grant operate on a reimbursement basis, requiring that the association pay all program costs and then submit reimbursement requests to the Department of Natural Resources for review and payment. The association established a separate bank account and expanded its chart of accounts to record financial transactions relating to the Corridors project, but it did not isolate Corridors project financial activity to these accounts. The association did not have the financial resources to cover the initial costs associated with the Corridors program. The executive director described the association's grant cash management practices as "aggressive," but some tactics the association used were inappropriate:

· The association improperly used Corridors project funds from the United States Fish and Wildlife Service for general association operating expenses. In October 2001, the United States Fish and Wildlife Service wire transferred $70,000 into the association's general bank account. The association used the funds to pay for expenses not related to the Corridors project. The association repaid the Corridors project account over a nine-month period, with the final repayment amount deposited to the Corridors project bank account in August 2002.

· The association used grant funds to pay for the costs of other projects. In July 2002, the association received $197,476 from the Department of Natural Resources as advance funding for the Heritage Enhancement grants. The association's August bank reconciliation identified a negative $70,414 cash balance. At this time, the association had only incurred, but not yet paid, $12,744 in costs for the Heritage Enhancement program. Thus the association used the grant funds to pay expenditures unrelated to the Heritage Enhancement program. The association had not restored the funds to the Heritage account as of August 2002.

· In some instances, the Minnesota Waterfowl Association prepared but did not send checks until it requested and received reimbursement from the Department of Natural Resources. Of the 18 Corridor project reimbursements received by the Association for the period November 2001 through April 2002, we identified 8 instances, one as recent as March 2002, in which the association appeared to hold checks to vendors until the state reimbursement was received. For example, on November 6 and 7, 2001, the association wrote seven checks totaling $19,443 for Corridor grant expenses. On November 9, 2001, the association submitted a reimbursement request to the department; it received the grant funds on November 27, 2001. The association's bank statements showed that the checks to the vendors did not clear the account until November 29 and 30, 2001. By requesting reimbursement for costs not yet paid, the association violated terms of the grant agreement. In addition, the delay in paying vendors for their services hurt the integrity of the association and the project.

· In 2001, the executive director circumvented a significant accounting control by forging the treasurer's signature on some association checks paid to employees and vendors. Although we do not think there was criminal or fraudulent intent, this action was totally inappropriate and demonstrates that the organization did not have an effective control structure. The executive director did not seem to personally benefit from the transactions. He stated that he signed the treasurer's name to expedite payment due to the treasurer's unavailability. When the board learned of the situation, it told the executive director to discontinue the practice, but did not implement any oversight practices to determine or detect forgeries should they occur.

· At times, personnel changes made it difficult for the association to continue efficient operations. The association did not anticipate the need for back up or temporary staff to ensure timely vendor payments and timely reimbursement requests. This contributed to some of the association's cash flow problems and to some of the grant compliance issues discussed in Finding 2.

· The state typically specifies that it will disburse grant funds on a reimbursement basis to maximize its investment income and to safeguard state funds from misuse. By requiring evidence that the grantee has appropriately spent the funds, the oversight agency has the opportunity to verify compliance with the grant agreement and work plan before paying for the work performed. The Legislative Commission on Minnesota Resources expects that organizations requesting grant funds have the ability to operate the program on a reimbursement basis. Had it been aware that this was a hardship for the association, it may have made other project financing arrangements, or it may not have designated the association as the fiscal agent.

When the Corridors grant program encountered cash flow difficulties, the association did not discuss the need for changes to the grant agreement with either the Department of Natural Resources or the Legislative Commission on Minnesota Resources. Since the association did not maintain official copies of board of director meeting minutes, it was not possible to determine what information the board received, what items it discussed, or what actions it took. A board member should sign a copy of the approved meeting minutes, and the association should maintain these signed copies as the official record of the meetings.

Recommendations

· The Department of Natural Resources should work with the Legislative Commission on Minnesota Resources to evaluate the Minnesota Waterfowl Association's ability to administer the Corridor project grant, including whether the association can operate on a reimbursement basis or if it should amend the grant agreement to allow for partial advance program funding.

· The Department of Natural resources should require that the association restore the Heritage Enhancement program funds.

· The association should only request reimbursement for costs it has actually incurred.

· The association should establish an organizational structure sufficient to ensure that it can competently conduct the financial activity of the state's grant programs, including making timely payments to the program's vendors, requesting timely reimbursements from the state, and ensuring independent review of financial activities.

· The board should maintain an official record of its board meeting minutes to document board discussions and actions taken.

2. The Minnesota Waterfowl Association did not comply with the terms of the grant agreement concerning allowable costs.

The Minnesota Waterfowl Association charged some ineligible costs to the Corridor and the Enhancing Canada Goose Hunting and Management Information grants. The association used estimates to allocate employee time, postage, telephone and fax expenses to these grant programs. The association believed its allocation method met contract guidelines. The grant contracts however, provided that eligible costs were those costs directly incurred by the project activities that were solely related to and necessary for producing the work products. The association should have obtained prior written approval from the Department of Natural Resources and the Legislative Commission on Minnesota Resources before using a cost allocation plan as a substitution for actual costs.

The association also included some travel expenses in its reimbursement requests that were ineligible under the Corridors grant. The Corridors grant contract limited reimbursable transportation and travel expenses to amounts established in the state's Commissioner's Plan, a bargaining agreement for some state employees. The Commissioner's Plan authorizes payment of employee meals only under certain conditions and sets limits on the amount of meal reimbursements. Although the costs claimed exceeded the limits by only nominal amounts, the association sought reimbursement for meal and beverage charges that did not qualify under the Commissioner's Plan for reimbursement.

In addition, the association requested and received approximately $3,000 for work that vendors performed before July 24, 2001, the date the commission approved the Corridors work plan and authorized the association to begin incurring Corridor project expenditures. The association used Corridors funds to pay for some vendor work performed as early as September 2000, over ten months before the effective date of the Corridor's project. The association should reimburse these funds to the Corridors project.

The association also inappropriately included $7,243 of work that vendors completed outside the Corridors geographical area in project accounts in the association's general ledger. The inaccurate recording of expenditures could result in the association overstating its level of project participation.

The association's accounting policies and procedures were not adequate to ensure that its accounting personnel were aware of grant contract provisions and financial requirements, which may have contributed to some of the exceptions noted above. Staff turnover may also have been a factor in the delays in processing accounting transactions, including vendor payments and requests for reimbursements for state grant projects.

Recommendations

· The Minnesota Waterfowl Association should repay the state for ineligible costs included on reimbursement requests, approximating $3,000.

· The Minnesota Waterfowl Association should ensure that it does not report ineligible expenditures in the Corridors project accounts.

· The Minnesota Waterfowl Association should pay program vendors in a timely manner.