Having an annual audit and control policies in place and a clear line of accountability should help avoid trouble in asset management and other financial functions — or at least ensure prompt discovery and correction of any problem. But that wasn't the case at the $11.25 billion Indiana Public Employees' Retirement Fund, Indianapolis.
Though the fund has an annual audit, conducted by the State Board of Accounts, and a board-level audit and budget committee, problems occurred and recurred in investment management and other financial management areas.
Now, David J. Adams, the new executive director, and Charles Johnson, the new chief financial officer, backed by an almost entirely new board of trustees, are trying to quickly get a grip on the problems that occurred under the previous leadership, rectify them and ensure they don't happen again.
Among the problems outlined in a report on the most recent audit, the fund traded $269 million in bonds for mutual funds in March 2004 without apparent board approval.
"We questioned these transactions and brought them to the attention of the PERF investment staff," which prepared a summary for the board, the audit noted. The board on Nov. 19 — months after the trades — ratified the investment action, the audit states.
The transaction was among 30 findings of inadequate internal controls at Indiana PERF during the fiscal year ended June 30, 2004, according to a report by the auditing board and the fund. Twenty-three of the findings were repeated from the 2003 SBOA audit, the report stated.
Mr. Adams, hired last March to replace Craig E. Hartzer, who resigned in January, said of the recurring problems, "Clearly it is something that should have been corrected."
Mr. Adams said officials found no fraud, and no further investigation will be made into the problems. The new leadership is directing its attention to correcting the problems and making sure they don't recur, he said.
A key move was hiring Mr. Johnson as CFO, replacing Michael Horstman, who resigned. Information on why he left wasn't available. Mr. Johnson was chief examiner of the SBOA. "He's the most qualified to understand the issues with PERF," Mr. Adams said, noting his intimate familiarity because of the auditing experience.
In addition, two accounting firms — Crowe Chizek and Co. and Clifton Gunderson LLP — are assisting the fund in correcting problems as quickly as possible.
At the fund, the ultimate accountability is clear. It belongs with the governor, who appoints all the trustees to the fund. However, as of July 1, under a new statute, the director of the Office of Management and Budget also will have a representative on the board.
The fund had some turmoil under the previous administration outside of the audits. In 2002, Walter Kevin Scott, chief benefits officer, resigned after admitting he had served time in federal prison in the 1990s on banking fraud charges, information that wasn't disclosed to the fund.
That scandal led to the resignation of E. William Butler as executive director. Mr. Hartzer, who had no investing experience, said after he was hired in 2003, the first thing he wanted to do in his new job was to talk with Patricia J. Gerrick, CIO. Within months, she was gone. Mr. Hartzer then added a second role, becoming interim CIO. In the ensuing months, other key investment staffers left. The search for a new CIO was fruitless until Bruce Fink was hired shortly before Mr. Hartzer resigned.
Now the fund's leadership has been revitalized. Time will tell whether problems found in the audits will be corrected. But everyone will know where the accountability lies.