Eastern Region former exec scorns auditors' questions

(Editor's note: This is the second in a series examining the state auditor's new report on the Eastern Region. The Eastern Region is a 13-county consortium responsible for economic development in member counties.)

Former Eastern Region Executive Director Tom Greenwood "created receipts to document meals" he said were related to the region's business, reports the 2006 state audit of the region released Monday.

Some meal receipts were similar in content and numerical sequence, although the dates were from different months. The so-called "guest checks" submitted by Greenwood were of a type available in booklet form at any office supply store, and many drugstores.

Auditors questioned Greenwood about the receipts and reported that he said he sometimes "forgot to get a receipt so he just made one up … (and) the amounts entered on the receipts were representative of what he had spent and he did not have time to keep up with his receipts."

None of your business?
The report includes copies of numerous receipts Greenwood submitted for reimbursement. One "guest check" was numbered 293145, and contained only a hand-written receipt for $10.25 for a lunch on July 10, 2003. On Oct. 11, 2003, Greenwood turned in a stub from the same style "guest check," with the same number, for $11.83, purportedly for a lunch on that date. Auditors said similar guest checks were submitted numbered from 293129 through 293149, as well as other sequential numbers.

After a meeting in Southern Pines on April 6, 2003, Greenwood submitted a receipt for lunch in the amount of $40.78. The receipt, however, was from a restaurant in Atlanta. He turned in a receipt for $21.99 for a dinner in Richmond, Va., on Nov. 5, 2004, but the receipt was dated Oct. 25, 2004, and did not include the name of the restaurant.

Several pages of the auditor's report contain photocopies of Greenwood's questionable receipts.

"We reviewed a significant number of receipts that were either altered by having detailed information cut off and new information handwritten in, or simply included the bottom portion of the receipt with only an amount," auditors said.

Auditors asked Greenwood why he turned in receipts in this manner when submitting the originals would have been so much easier.

"It's nobody's business where I eat or what I have to eat," auditors quote Greenwood as having told them.

Greenwood received reimbursement for meals at the Kinston Country Club, and at local restaurants, without documentation that the meal was for business purposes. His guests frequently were region staff members.

"In our opinion, if there is a compelling reason to conduct a meeting outside the Eastern Region office, then the business purpose should be documented," auditors said.

"We questioned the CFO [Sylvia Nesbitt] about the documentation submitted by (Greenwood) and she stated that she did not feel comfortable questioning (him) about these issues," the report states. "She stated that (Greenwood) on more than one occasion had informed her, and other staff, that any communication with the Commission without his approval could lead to dismissal. She thought that the issues related to (Greenwood's) expenses would be addressed by the Commission treasurer, who also reviewed the summaries."

The region paid $129,901.72 for Greenwood's expenses for the three years of 2003 through 2005.

Employee or contractor?
The Eastern Region signed a contract for marketing and recruiting with Scott Frederick Enterprises on Nov. 15, 2004. Frederick's contract was terminated March 14, 2006, about a month after Greenwood left. Both left their jobs at the region during the state investigation.

Auditors discovered that the consultant was reimbursed May 11, 2005 for travel expenses in the amount of $1,087.30. The expenses reportedly were incurred between Jan. 16, 2004 and April 23, 2005. About two weeks later, he received a check for $1,128.15 "for out-of-pocket expenses that included the same items that were previously paid, and an additional $40.85 for items added to the original reimbursement request." Frederick wrote a personal check to the region for $1,087.30 on Feb. 8 about five weeks before he left.

The audit chides the Eastern Region for treating Frederick as a contractor instead of as an employee. The region paid him $3,500 bi-weekly, the same pay schedule set for employees; he was reimbursed for all business expenses; the region bought a laptop computer for him, and paid for monthly internet access at his home. The region provided office space, furniture, equipment and support personnel for his work, and a credit card to use while conducting Eastern Region business. The Eastern Region also provided Frederick's health insurance.

Internal Revenue Service regulations are specific about the relationship between a business and its employees. Those regulations consider behavior control, financial control and the relationship of the parties when determining whether an individual is an employee or a contractor.

" … we believe the Consultant should have been classified as an employee rather than as an independent contractor," auditors said. "The incorrect classification of an employee as an independent contractor subjects the Eastern Region to potential liabilities for federal and state employment taxes for that employee, plus penalties and interest."

Now you see it, now you don't
The audit devotes four pages, most containing calculations, to the region's underreporting of interest earned on its original state appropriation of $7.5 million in 1993. Additionally, a $5 license plate fee generated $14.8 million for the 13 counties in the consortium.

The region lends money for economic development to its member counties. Auditors said the region reported $2.4 in interest, $1.4 million less than it should have reported and redistributed. The region reported to the state estimated interest only on the unloaned portion of the $7.5 million. Auditors said the intent of the state appropriation allocation formula is to include all interest earnings derived from the entire amount of the $7.5 million, and not just on the unloaned amount.

"Because of the underreporting of interest associated with the initial state appropriation, the Eastern Region was allowed to use funds generated by the initial state appropriation that were intended to be redistributed among the other six economic development partnerships [in the state]," auditors stated.

Auditors' recommendations
Auditors acknowledge that economic development involves establishing relationships with key figures in business and relations take time to cultivate. However, detailed records of events "are needed to identify potential clients and assess the success or failure of the activity for future planning," they said.

The region should develop policies requiring that the commission receive detailed reports about events or trips. This would create a system of checks and balanced that will allow the region to evaluate activities and ensure consistency with its mission.

Adequate support for out-of-pocket or credit card expenses should be required, and no reimbursements made without actual receipts as well as documentation for the amount, time and place of expenditure, purpose and business relationship with the persons being entertained.

Requests for reimbursement should be made in a timely fashion and a pre-payment review should be made to ensure that a reimbursement request for the same expenses was not submitted previously.

The region should work with the state Department of Commerce Finance Center and the General Assembly to clarify interest earnings reporting.

Internal Revenue Service guidelines should be followed to determine the classification of employees and contractors. The region also should consider filing a Form SS-8 (Determination of Worker Status) with the IRS.

"Through our discussions with individuals responsible for encouraging the expansion of existing businesses and attraction of new business, we learned that the result of economic development efforts often cannot be measured immediately or directly," auditors concluded. "This fact makes it essential that the activities related to the operation of the Eastern Region be well documented to ensure that state funds are expended in a prudent manner." Next: The Eastern Region responds to state auditors.