NYS Public Authority Accountability Act

NYS Public Authority Accountability Act

For far too long public authorities have operated behind closed doors without any real oversight or accountability...."

Richard L. Brodsky (D-Westchester)

Revealing Operations behind Closed Doors

The result of public authorities operating behind closed doors without: "real oversight or accountability," according to Richard L. Brodsky (D-Westchester), NYS Assemblyman Chair of the Committee on Corporations, Authorities and Commissions, "has been a systemic pattern of corruption and mismanagement." Consequently, the "systemic pattern of corruption and mismanagement," led to the passage of the NYS Public Authority Accountability Act. This paper examines the NYS Public Authority Accountability Act, the S-OX Rule 404, a related report by the NYS Comptroller, and a report by the AG and the State IG, requested by NYS Governor, which addressed the sale of certain land rights bordering the Erie Canal. This researcher also explored:

Factors contributing to the passage of the NYS Public Authority Accountability Act and its intent.

Ways this act addresses legislative concerns, along with its potential to succeed.

A synthesis of the NYS Public Authority Accountability Act's particular provisions, internal controls the act mandates, and enhanced powers the act created.

This researcher additionally assesses the effectiveness of this act's provisions and proposed controls. Ultimately, as this researcher relates recommendations regarding revealing operations behind closed doors and whether the NYS Public Authority Accountability Act's provisions should be extended to other state agencies, other aspects of the legislation deemed to warrant analysis are discussed.

The NYS Public Authority Accountability Act, enacted in 2005, Act draws from select principles of the Sarbanes-Oxley Act (S-OX) and Rule 404 of the SEC, making those principles applicable to the governance of public authorities in NYS. As this act additionally imposes specific controls by statute; the possibility exists that some provisions may be applicable to state agencies in certain respects, either by legislation or executive order. Also, the NYS Public Authority Accountability Act made the NYS Office of the Inspector General a creature of statute.

Circumstances and conduct that prompted the enactment of the NYS Public Authority Accountability Act include one scenario in 1990, after the Commission on Government Integrity examined public authorities, and determined that a dearth of basic rudimentary information about these entities existed. The fact that a seemingly simple question regarding the number of existing public authorities New York State could not be easily answered, but required extensive research utilizing a number of sources also contributed to this act's passage.

Accountability," the primary word in the NYS Public Authority Accountability Act, this researcher purports, denotes the main goal for the initiation of this act. David R. Riemer reports that "a sea of accountability" engulfs the American society today. From the bed and individual sleeps on by the safety standards the U.S. Consumer Product Safety Commission set; to the water that meets that meets U.S. Environmental Protection Agency ("EPA") standard. Treated wastewater "must meet conveyance and treatment requirements of both the EPA and the state's department of natural resources." The U.S. Department of Agriculture monitors the accountability of the farmers' eggs, and simultaneously monitors pesticides used on wheat ultimately milled and baked in bread, along with overseeing the safety of a myriad of other food products. City and state law enforcement officers, as well as local, state and national public employees, routinely check an individual's compliance with laws and regulations. In addition, private employers maintain their roster of individuals for accountability.

Despite numerous methods currently in place to help ensure accountability, Segal contends that knowing how to reform chronically corrupt agencies constitutes one of the most perplexing problems in public administration. Although Segal completes a case study of the New York City school custodial system and focuses on roadblocks with the potential to derail traditional control in what in 2002 was deemed a "deeply corrupt system that has resisted decades of reform efforts," a number of points Segal presents also prove applicable to this paper's focus.

The "Act" Itself

The NYS Public Authority Accountability Act consists of:

An act to amend the public authorities law, the environmental conservation law, the legislative law and chapter 899 of the laws of 1984 relating to creating a public benefit corporation to plan, develop, operate and maintain Roosevelt Island, in relation to enacting the public authorities accountability act of 2005 and to amend the executive law, in relation to the office of the state inspector general

Specific Provisions of the Public Authority Reform Act

Defines and identifies 733 public authorities and their subsidiaries by Class, making some provisions mandatory for Classes a and B. And recommended for Classes C. And D (the Classes over which the State has less direct control).

Places controls on public authority debt.

Controls the proliferation of public authority subsidiaries by requiring approval by the Legislature.

Creates a Temporary Commission on Public Authority Reform to review the purpose and mission of each public authority and recommendations for mergers, consolidations or elimination regarding Class a and Class B authorities by April 1, 2006 and regarding Class C and Class D by April 1, 2008.

Creates a Public Authorities Inspector General with appropriate powers to thoroughly investigate allegations of wrongdoing and issue reports of findings, as well as provide training to authority officials regarding their legal, fiduciary, ethical and personal responsibilities.

Creates a Public Authorities Independent Budget Office to receive reports from public authorities, analyze their budgets and finances, and make recommendations for improvement.

Provides rules for public authorities in selecting firms to perform audit services and prohibits authorities from engaging the same audit firm for certain non-audit services in order to eliminate conflicts of interest.

Improves corporate governance of public authorities by:

requiring transparent compensation policies and disclosure of compensation, mandating separation of Chairman and CEO roles, providing for independent members, requiring that Board members approve financial statements, requiring that Boards establish Audit, Procurement, and Employment and Compensation Committees, defining procedures for removal of authority officials, and requiring each Board of Class a and Class B public authorities to adopt principles of corporate governance and fiscal integrity.

During the first half of 2003, public controversy surfaced regarding the Hutchens agreement, an "effort to foster economic development along the Erie Canal, the New York State Canal Corporation, in 2001, sold broad and exclusive rights to cut new residential access channels into the Canal to an upstate entity named Richard Hutchens & Associates ('RHA'), a company primarily owned by Richard Hutchens." Concerns included complaints of minimal, if any, professional competence by the Canal Staff's senior members, their ethical lapses, Thruway Authority and Canal Corporation staffers provided internal documents to Hutchens, and reported Appearance of Favoritism, forbidden by the Code of Ethics. Two weeks after the Joint Assembly Standing Committees on Corporations, Authorities and Commissions, and on Transportation, hosted a public hearing in early October 2003, Assembly members challenged the deal's fiscal prudence, as well as the question of fairness ultimately confirming the deal. Two weeks after the hearing, the New York State Comptroller's Office conducted its own investigation and voided the Hutchens' contract. The following figure notes concerns challenged in Hutchens' contract.

Figure1: Areas Compromised by Hutchen's Contract

Three main categories of the Code of Ethics of New York State's Public Officers Law include:

the disclosure of confidential documents, the political solicitation of campaign contributions, and the creation of the appearance of favoritism.

Consequences of violations of the NYS Public Authority Accountability Act, just as repercussions from non-adherence to precepts set forth in the Code of Ethics, may not merit criminal charges, however, these are serious. "... Public officials should be held accountable for their ethical transgressions."

They, this researcher, along with a number of others cited for this paper, contends, "should be guided by the simple principle of transparency."

SOX Rule 404 the Sarbanes-Oxley Act of 2002 (SOX), a report by the NYS Comptroller, related to the NYS Public Authority Accountability Act, instructed the SEC to issue final rules to implement Section 404, and launched a requirement for management to:

1) "state its responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting and 2) "make an assessment, as of the end of the most recent fiscal year, of the effectiveness of the internal control structure and procedures for financial reporting."

In addition, an independent auditor who prepares or issues the audit financial statements' report on financial must confirm and report on management's assessment. Also, as required, the SEC presented the SOX requirement, often referred to by its location within SOX as "Section 404," which specifies final rules management and the independent auditor are to comply with.

Romano reports that Congress introduced a series of corporate governance initiatives into the SOX Rule 404, considered a noteworthy law change, which also made an exodus from the regulation mode. Until the passage of the SOX Rule 404, the federal regime had primarily consisted of disclosure requirements instead of substantive corporate governance mandates, traditionally left to state corporate law. Federal courts also characterized the SEC's efforts to extend its domain into substantive corporate governance as beyond its jurisdiction. SOX provides explicit legislative directives for SEC regulation, altering this authority division, of what was once perceived as the states' exclusive jurisdiction.

Rule 404 of the SEC

The following Executive Summary reflects the Rule 404 of the SEC:

Auditors can't critique their own work and must avoid the appearance of conflict to comply with section 404 of the Sarbanes-Oxley Act. That gives CPAs a new consulting opportunity to document and test non-client companies' internal controls.

A firm interested in developing this niche has to know the skills it will need, the time and staff required, the depth of the market, the best way to approach clients, the limits on auditor involvement and what information technology tools are available.

The market exists because companies temporarily may be unable to meet the project management and staffing needs to design the section 404 internal audit functions that later will be checked by the company's external auditor. Others may be dealing with new concepts and technology.

What controls a company tests and exactly how its consulting CPA does so largely will depend on company circumstances and the internal control objectives.

One firm not only documents internal controls for nonaudit clients but also recommends improvements such as eliminating unnecessary manual controls in low-risk areas or adding some controls for high-risk transactions. It says small companies should pass any questions by their external auditors rather than guess at the PCAOB's intentions.

An auditor should keep some distance from management's internal control compliance project; it may explain to its client how a cash disbursement system works but should not advise the client how to assess its risks or which controls management needs to test, for example. Designing controls requires the CPA to have a high skill level and extensive knowledge of the client's business.

Opening Closed Doors of "Internal Control"

Internal control encompasses more than a company's accounting functions. A number of definitions of the term "internal control" primarily focus on "clarifying the portion of a company's internal control that an auditor should consider when planning and performing an audit of a company's financial statements." This, albeit, did not improve the level of understanding of "internal control," nor satisfactorily provide the guidance that auditors sought. In time, successive definitions followed and increased understanding. In time, it was determined that transactions be executed in accordance with management's general/specific authorization; that transactions be recorded as necessary; to permit preparation of financial statements in access to assets only in accordance with management's general and/or specific authorization, and during regular intervals, recorded accountability for assets be compared with existing assets.

Discussion of Amendments Implementing Section 404

Section 53 depicts duties and function of the state inspector general. he/she shall possess the following duties and responsibilities:

receive and investigate complaints from any source, or upon his or her own initiative, concerning allegations of corruption, fraud, criminal activity, conflicts of interest or abuse in any covered agency; inform the heads of covered agencies of such allegations and the progress of investigations related thereto, unless special circumstances require confidentiality; determine with respect to such allegations whether disciplinary action, civil or criminal prosecution, or further investigation by an appropriate federal, state or local agency is warranted, and to assist in such investigations; prepare and release to the public written reports of such investigations, as appropriate and to the extent permitted by law, subject to redaction to protect the confidentiality of witnesses. The release of all or portions of such reports may be deferred to protect the confidentiality of ongoing

Acts in the Interest of the People of NYS comprehensive legislative package aimed to reform public authorities will be jointly introduced with the New Jersey Legislature by Senator Loretta Weinberg (D-Bergen) and Assemblyman John Wisniewski (D-Parlin). The package, which consists of two broad bills requires passage in both states. One bill solely focuses on the Port Authority of New York and New Jersey ("PANY/NJ"). The second bill expands New York's Public Authority and Accountability Act of 2005. As noted by Brodsky at the introduction of this paper, some argue that:

For far too long public authorities have operated behind closed doors without any real oversight or accountability and the result has been a systemic pattern of corruption and mismanagement. " This researcher recommends, along with Brodsky, that reforms York's public authorities in 2005, but the reforms need to be further implemented; that the Port Authority be given oversight. This "new" legislative package will help ensure, as Brodsky notes, "Soviet-style bureaucracies finally work in the interest of the people of this State."

Ermann and Lundman 1982, cited by Segal, stress that employees' systemic wrongdoing, violating society's norms while maintaining their organizations' internal norms' support "assumes that corruption can be reduced through accountability devices such as oversight, surveillance, audits, performance evaluations, sanctions and structural reorganizations (Sherman 1978; Susan Rose-Ackerman 1993; Maynard-Moody, Stull, and Mitchell 1986, cited by Segal). Contemporary debates contribute to one conventional belief that posits, if/when adequate controls exist, managers enforce them and subordinates adhere to the controls (Gardiner and Lyman 1993; Ward and McCormack 1987, cited by Segal). Various types of audits are reportedly needed to achieve varying levels of fiscal accountability (Sheldon 1996, cited by Segal), as well as the deterrent value of criminal and civil sanctions (Walt and Laufer 1992; Coffee 1980, cited by Segal), and the role of inspectors general (Gates and Moore 1986, cited by Segal). When reforms to not trigger the dissipation of scandals, experts utraditinoally recommend tightening existing controls (Anechiarico and Jacobs 1996; Segal 1999,cited by Segal). Corruption, however, may not be rooted in more than an organization's internal accountability mechanisms.

Corrupt agencies' culture or shared values about appropriate behavior (Rainey and Steinbauer 1999, cited by Segal) may contribute to employees regarding wrongdoing to be their personal prerogative. On the other hand, it may contribute to an individual's fears and stifle change and/or their empowerment. "The more entrenched the culture and the more alienated employees are from society's values, the more fiercely they will fight corruption controls."

Along with the number of factors potentially contributing to a deviant culture's tenacity and virulence, management and/or government officials sometimes set a corrupt example. Accountability concerns may also increase when misconduct is not punished.

Senate Passes Legislation to Reform Public Authorities

Senate Passes Legislation to Reform Public Authorities," reflects a few contemporary accountability concerns this researcher purports needs to be eradicated:

The New York State Senate today passed legislation, sponsored by Senator John Flanagan (R-C, East Northport), to strengthen the Public Authorities Reform Act of 2005 and make important reforms to ensure greater openness, transparency and accountability in New York State's public authorities.

New York State has literally hundreds of public authorities operating with multi-million dollar budgets," said Senator Flanagan, Chairman of the Senate Committee on Corporations, Authorities and Commissions. "Until we enacted the Public Authorities Accountability Act of 2005, these agencies in many ways operated independently of any real external oversight. Today, the Senate Majority improves upon the actions we took two years ago by implementing effective budget review and control procedures, strengthening the fiduciary and governing responsibilities of authority board members, and ensuring strict taxpayer accountability."

The Senate has been a leader in making improvements and reforms to the governmental process so it is more open and effective for the people of this state," said Senate Majority Leader Joseph L. Bruno. "We have taken strong steps to reform New York's public authorities in the past, and this legislation will build on those reforms to create even more accountability and oversight within our public authorities."

The legislation (S.3491-a) would:

Create an Independent Budget Office: The Reform Act will create an independent Authority Budget Office (ABO) to review public authorities. The ABO will be headed by an independent director appointed by the committee of the Attorney General, Comptroller, Governor, Assembly Speaker and Senate Majority Leader. The director will serve a 5-year term, and the ABO will collect, distribute and assess information about the authorities' budgets and operations for the coming year, as well as make reports and provide information to the public and elected officials.

Require Public Authorities to Submit Certain Contracts to the Comptroller: This bill will allow the comptroller to provide prior review of contracts.

Control Public Authority Debt: This legislation will begin the process of controlling public authority debt. The boards of directors will submit limitations on public authority debt to the ABO, and the ABO will submit to the Legislature and Governor recommendations on reforming debt issuance by public authorities.