Friday, December 07, 2012
Delayed auditor’s reports detect fraud in Hawaii beverage deposit system
“The Program lacks adequate procedures to prevent or detect whether distributors fraudulently or erroneously underreport beverage containers sold/distributed or certified redemption centers fraudulently or erroneously over-report beverage containers redeemed.”
by Larry Geller
Two audits of the State of Hawaii Deposit Beverage Container Deposit Special Fund conducted in 2008 and 2010 respectively, have appeared within the past week on the state auditor’s 2012 report page.
Perhaps Marion Higa, who also announced her retirement at the end of the year in a letter to legislators on November 27, is cleaning out her drawers… actually, correspondence at the end of the reports indicate that they are not yet in final form as published.
The audit’s tests found inaccuracies in the system that results in unsupportable payments. These reports should be a call for action.
The Department of Health administers the redemption program and has the authority to increase the Hawaii beverage tax, which it has chosen to do. Unfortunately, the program continues to rely on a fraud-prone procedure that should make the tax increase highly questionable.
A snip from the 2008 report describes the basic failure of the system to be accountable for how public money is spent:
The Deposit Beverage Container Program Is Poorly Managed
Despite previous findings and planned corrective actions reported in Office of the Auditor Report No.05-09, Audit of the Deposit Beverage Container Program, we continue to find several deficiencies indicating poor management of the Program.
Over-reliance on self-reporting increases financial risk
Over-reliance on self-reporting increases financial risk The Program lacks adequate procedures to prevent or detect whether distributors fraudulently or erroneously underreport beverage containers sold/distributed or certified redemption centers fraudulently or erroneously over-report beverage containers redeemed. Deposit and fee collections from distributors, as well as payments to certified redemption centers, are based on unverified numbers with limited inspections performed by Program personnel. Redemption center errors are passed on to the Program.
Further, the Program lacks controls to prevent or detect unauthorized beverage containers from entering the redemption stream. Since inception of the Program, exempt commercial passenger-vehicle companies have not been inspected.
Consequently, the Program may be operating at a greater cost than necessary, and the reported redemption rate may not be reliable to justify increasing the container fee.
The problem is that the program is based on self-reporting. Is the DOH monitoring or auditing distributors and redemptions centers to catch fraud? Yes and no:
Despite the performance of 176 inspections in FY 2008, these inspections are not designed to substantiate distributor reports.
In other words, the DOH is looking the other way. On the other hand, the program as designed will perpetuate fraud.
Looking again at redemption centers, since a redemption center simply reports the number of bottles (for example) processed, there is absolutely nothing to substantiate their claims or to prevent them from routinely and systematically inflating the numbers.
The 2010 report indicates that the same concerns continued unabated:
The Deposit Beverage Container Program Is Exposed to Fraud
Despite five years of experience with the Program, which began in 2005, several deficiencies expose the Program to fraud, including the over-reliance on self-reporting by Program personnel and lack of systematic compliance inspections.
Deposits and fee collections from distributors, as well as payments to redemption centers, are unsupported. For several sample distributor reports selected for testing, distributors could not support amounts reported and payments made to the Program.
Four redemption centers refused to provide support for amounts redeemed and the related deposit reimbursements requested, including two uncertified redemption centers that appear to be operating in violation of the law and rules. There is also at least one large redemption center operator that increases the weights reported on deposit redemption forms submitted to the Program to correct for errors made by redemption center employees.
Exempt commercial passenger-vehicle companies have not been inspected since the inception of the Program, which continues to expose the Program to risk of unauthorized beverage containers entering the redemption stream.
Consequently, the Program may be operating at a greater cost than necessary, and the reported redemption rate may not be reliable. Resolution of these deficiencies is necessary to alleviate public concern over the cost of the State’s beverage container recycling program, including questions on the container fee rate necessary to operate the Program.
A personal visit to a redemption center earlier this year revealed that bags of bottles were being weighed without checking whether the glass all qualifies under the program. This illustrates nothing more than a fraud in progress on a daily basis. The program allows weighing in lieu of counting if the number of beverage containers is over 200, but I did not see counting occur during my visit even for smaller batches.
The 2008 audit supports my observation:
Redemption centers have an inherent incentive to overstate the amount refunded for deposit beverage containers redeemed to increase demand for their services and consequently increase the amount of handling fees generated. There is no financial disincentive to redemption centers for overpaying on deposit redemptions because the Program reimburses redemption centers for all that they refund to consumers. The Program has failed to conduct a systematic compliance inspection and enforcement process that would limit the risk of overpayment of redemptions.
Certified redemption center errors are passed on to the Program
In our testing of deposits refunded by certified redemption centers, we found various errors in the amounts refunded to consumers based on the weight of deposit beverage containers redeemed. We found that the Program’s segregated rates used to convert deposit beverage containers to container equivalents was inaccurate compared to hand counting for several of the refunds we tested. We also noted errors in the redemption centers’ calculations for other refunds tested. As the DR-1 forms submitted by redemption centers are based on weight, it is likely that these errors are passed on to the Program, resulting in more deposits and handling fees being paid out than justified.
The program, as designed, has never been convenient for beverage consumers. Many have advocated point-of-sale redemption, but retailers have resisted.
As it is, the beverage tax increase is based on now well-established fraud and is therefore itself fraudulent.
When the Legislature tires of investing the UH concert incident, perhaps it could turn its focus to the Department of Health. In these hard economic times taxpayers should not have to bear the burden of this long-running drain on public finances either through DOH neglect or through an unjustifiable tax increase.
In the end, of course, the Legislature is responsible for the laws it passes if the laws themselves are flawed. The beverage container tax and redemption system look to be overdue for a legislative overhaul.
I'm hoping for a Christmas present of the child welfare services audit ordered in May 2010; waiting in the wings with 17 proposed law changes to
stop the abuse of Hawaii's keikis by the government.