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Legislative audit faults DBED in four areas

A legislative audit released Tuesday found that the state’s Department of Business and Economic Development was deficient in four areas, including one that was pointed out in a 2008 report.

The Department of Legislative Services started its audit in October 2007 and ended in November 2010.

The audit team found that DBED did not require applicants to the One Maryland Tax Credit program to document their project and startup costs, which are directly related to the tax credit amount.

The auditors looked at 10 tax credit applicants and found that eight applicants, which certified for $34 million in credits, “did not provide any documentation to support these reported project and start-up costs.” The state comptroller’s records showed that four of those eight businesses had taken $11.7 million in the tax credits from 2006 to 2009.

“There’s a lot of talk down at the legislature about taxes and different bills about credits, so, I think it’s of interest,” said Bruce Myers, the state’s chief legislative auditor, adding that the tax credit finding was the worst of the deficiencies.

DBED, which was notified of the findings in September, immediately began addressing them and has already incorporated a requirement for applicants to detail their costs, said spokeswoman Karen Glenn Hood.

However, the finding does not mean that DBED has been blindly giving away money.

“That is absolutely not the case at all,” said Hood, adding that when a company applies for the Maryland One Tax Credit, it has to certify, under penalty of perjury, how much was spent and how many jobs were created.

“Years and years ago, we used to have boxes and boxes of receipts from companies,” she said. Over the past years, the agency has simplified the process, and “auditors have always agreed that those processes were fair and equitable.

“What the auditors wanted us to do is to get more details of those costs,” she said.

The report also said DBED failed to recoup a $250,000 investment in an international technology company that moved its principal business outside of Maryland. The investment, one of three Maryland Venture Fund investments the auditors reviewed, was in ClassifEye Ltd., an Israeli company developing fingerprint authentication technology that uses the camera in mobile devices. DBED made the investment in June 2008 via the Enterprise Investment Fund.

EIF money is given to companies that agree to keep their principal place of business in Maryland for five years. In March 2009, the company closed its Maryland operations.

As required by state law, DBED’s agreement with the company included a provision that allows the agency to recover its money and 10 percent interest per year if the company moves out of the state within five years of the investment.

As of June 6, 2011, DBED had not attempted to recover the money, which the report estimated to be $325,000. The agency has since sent a demand letter to the company and is attempting to recover the investment, DBED said.

The auditors also recommended that DBED comply with the Department of Information’s Information Security Policy, which requires “least privilege,” by limiting access in its financial programs monitoring system to employees who need it. Specifically, the audit found that some employees had more privileges than their position needed, such as the capability to initiate bills and post payments. Others had transferred to another division in DBED or left the agency.

The auditors also reviewed the status of the findings from the previous report, dated Nov. 10, 2008, and found that DBED “satisfactorily addressed” 10 of the 11 findings. Inadequate expenditure and performance reporting from DBED grant recipients is an item that appeared on the preceding audit of the agency.

“Without such reports, DBED could not adequately monitor the grantees to ensure use of the funds was consistent with the purpose of the grants,” the report said.

In a formal response to the audit, the agency agreed with all of the findings and noted an action plan to address them.

“I do believe from when I’m talking to our internal auditors that this was the least amount of findings that this department has ever had,” Hood said. “Overall, we were very pleased with the audit and we’ve already made aggressive efforts to rectify all the findings.”

DBED went above the 75 percent state average for audit compliance from the previous report, Myers said.

“They did 10 of 11 from last time. That’s higher than our statewide average. It’s not perfect, we like to see them all,” he said, adding that the legislature has also been pushing against repeat items.

“They want to know why you even have one,” he said.