The rating agency Moody’s announced that it is placing $1.26 billion of New Mexico’s public debt on review for downgrade in the wake of revelations that the 2011 FY audit for the New Mexico Finance Authority was forged. NMFA withdrew the audit provided to investors and rating agencies when it was discovered by the New Mexico State Auditor’s Office that the accounting firm whose cover sheet and signature page accompanied the document had not actually performed the audit.
Antonio Corrales, public information officer for the State Auditor, told New Mexico Watchdog that after the 2011 audit was not received on time, NMFA was placed on the “at risk” list. Thereupon, an official with NMFA contacted the Auditor for an explanation. When the Auditor’s office told NMFA that the audit had not been received the official responded that NMFA had been under the impression the audit had been submitted and even approved by the Auditor. A check of NMFA’s files revealed an audit bearing the cover and signature pages of the Clifton accounting firm (now Clifton Gunderson after a recent merger). But the work product in between those pages had not been performed by the accounting company. Apparently, this fake audit had been provided to credit agencies and lenders, but not to the State Auditor.
NMFA is blaming the false audit on its former controller who, according to television reports, cannot be found. (Please see update below).
The audit is relied upon by investors to determine the quality of New Mexico’s debt and set interest rates for public borrowing. A downgrade by Mooody’s could trigger other downgrades and escalate New Mexico’s borrowing costs, making every financed public project more costly. Last July, Moody’s placed New Mexico and four other states on a possible downgrade list from its highest grade because of their dependence on federal funds that may be cut back. Moody’s assigned an Aa1 rating to NMFA bonds issued in August 2011.
In February 2011 Fitch Ratings withdrew its coverage on NMFA public project revolving bond funds because of insufficient information being provided by NMFA. This time last year Standard & Poor’s raised its credit rating for NMFA bonds and called NMFA’s outlook “stable.”
NMFA has hired KPMG to conduct a forensic audit, and has brought in the international law firm of Steptoe & Johnson to investigate how a fraudulent audit was entered into its files, and NMFA management misled about the status of their review by the State Auditor.
Moody’s review does not impact the State Transportation Revenue Bonds (senior lien rated Aa1/stable, subordinate lien rated Aa2/stable), which are issued by NFMA. The State Transportation Revenue Bonds are secured by various state transportation-related taxes and fees, as well as federal aid revenues. The revenues are collected by the state and deposited into state funds, and pursuant to a procedural memorandum between NMFA and the State Department of Transportation are transferred directly to the bond trustee, bypassing NMFA.
Moody’s announcement is linked at NMFA’s home page.
UPDATED Sunday, July 15: Antonio Corrales, public information officer for the New Mexico State Auditor, told us that the NMFA Board has called an emergency meeting for Monday, July 16, 2012. The State Auditor will be in attendance. New Mexico Watchdog has identified the controller who had been serving at NMFA. He is Greg Campbell. Corrales stated that he has been told Mr. Campbell has not yet been located. NMFA has also postponed the Framing the Future national conference scheduled for the end of September until the Steptoe & Johnson investigation is completed.
Further UPDATE: The Wall Street Journal in a story by Nathan Koppel is reporting (subscription required) that one bond package of $24.3 million was issued by the NMFA with the fake audit as the basis for investor’s information about the state of the agency’s finances. Like the WSJ reporter, we were unable to reach Mr. Campbell, the former NMFA controller, by telephone.
Related stories: KOB TV News coverage 7/12/12
Accounting Today: Problems Uncovered wit Audits of New Mexico Finance Authority, 7/13/12
CBS News, NM Finance Authority Issued Fake Audit 7/12/12
KRQE-TV: Finance Authority Faked Audit 7/12/12
KOAT-TV: New Mexico Finance Authority Faked Audit 7/12/12