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Audit Of HI-5 Recycling Program Finds Evidence Of Potential Fraud

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There's evidence of potential fraud within the state's HI-5 recycling program. That's according to a recent state audit of the deposit beverage container operation.

Last year, the Office of the State Auditor contracted a certified accounting firm KMH LLP to perform a financial and program audit of the Department of Health's HI-5 recycling program. According to the report, KHM performed 15 unannounced visits at 10 different redemption centers throughout the state last October. In two of the 15 visits, the amount of money KMH was paid for redeeming recyclable materials was significantly less than the amounts recorded in the redemption center's cash receipt log.

One O?ahu redemption center, operated by Reynolds Recycling on University Avenue, had discrepancies in its logs to receive a higher reimbursement from the state, the audit reported. 

According to the state auditor, this example shows the state Department of Health, which oversees the program, hasn't addressed concerns repeatedly raised in previous audits, mainly failing to develop and execute procedures to verify the accuracy and completeness of data used to support claims of the deposit and container fees paid to the program by distributors as well as the deposits and handling fees paid to the redemption centers.

Bruce Iverson, Reynolds Recycling's director of marketing and development, issued a statement saying the company has "worked through the inquiries" of the state Attorney General's Office regarding the incidents described in the State Auditor’s report, and the one individual involved.  

"We are proud of our transparency and accuracy when reporting to the State and will continue to do so into the future," he stated.

The recent audit is the latest report that warns of the need for more accountability in the recycling program.

"Historically, we've reported that the way the program is set up, the fact that it's an honor system without any kind of controls to verify independently - whether the money coming in is accurate or the money going out is accurate - is ripe for fraud," said State Auditor Les Kondo. "But in the past we've never seen instances of actual fraud. It just happens this year, we actually see instances of potential fraud."

Kondo says without accurate information, it's impossible to find out the true cost of the program.

Health Director Bruce Anderson says the DOH concurs with the report's overall findings, adding the department is now looking at outsourcing the management of HI-5.

"We've look at the possibility of outsourcing the auditing function. And we feel that's very viable, and we intend to do that," said Anderson. "That will allow for a third party auditing firm to go out and make sure that the redemption centers are accurately reporting what they've collected. And also that the distributors, who are initially paying the fees, are paying fees that are appropriate for the containers."

Anderson says the department is also looking at potentially outsourcing some of the program's financial transactions to a firm that can better manage its invoicing.

"We get several invoices from each of the redemption centers for reimbursement of their payouts," Anderson said. "That amounts to 1,300 to 1,500 invoices a year - which have to be processed by the department. Just processing those invoices is somewhat overwhelming for the limited number of staff we have."

When asked why it took this long for the DOH to respond to the auditor's concerns, Anderson said, "I think there was a hope that we would be able to develop those functions. But it's clear now, over several years at least, that we're not in a position where we're going to be able to do that.

"And that fact that we probably shouldn't be focused on that at all. We should be looking at enhancing and improving our monitoring and enforcement activities."

Anderson says the department is talking with the state Attorney General's Office to investigate any potential fraud.

You can find the auditor's summary and full audit online.

Updated March 6, 2019, 9:26 a.m.

Casey Harlow was an HPR reporter and occasionally filled in as local host of Morning Edition and All Things Considered.
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