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Financial Audit of the Department of Land and Natural Resources

Report No.  92-2


The Office of the Auditor and the certified public accounting firm of Coopers & Lybrand conducted a financial audit of the Department of Land and Natural Resources pursuant to Section 23-4, Hawaii Revised Statutes, which requires the auditor to conduct post audits of the transactions, accounts, programs, and performance of all departments, offices, and agencies of the State.

In the opinion of Coopers & Lybrand, the department's financial statements present fairly its financial position, the results of its operations, and the changes in its proprietary fund as of June 30, 1991.  All were in conformity with generally accepted accounting principles.  Coopers & Lybrand found no instances where the department did not comply with applicable laws and regulations, nor did the firm find weaknesses in the department's control measures that would affect an opinion of the financial statements. 

We were pleased to note that many of the recommendations contained in our prior report (Report No.  85-11) have been implemented by the department.  However, we found that there were weaknesses in the administration of leases within the land management division.  In one instance, a time certificate of deposit (TCD), held in lieu of a surety bond, was released to a lessee who was delinquent in lease payments and in default of the lease agreement.  The lessee was in default for failure to provide proof of fire and liability insurance, in addition to being delinquent in lease payments.  The reason given for releasing the certificate was that the lessee would use the cash from the TCD to pay the delinquent balance and obtain a loan, the proceeds of which would be used to obtain the necessary insurance coverage, and provide a surety bond to replace the TCD.  The lessee did pay the delinquent balance, but had not obtained the loan and the insurance and surety bond had not been received by the department.

We also found that the requirements of Section 171-20, Hawaii Revised Statutes, had not been complied with.  This section stipulates how delinquent leases should be handled.  Specifically, it lays out how notices of default of lease agreements should be served, and specifies the time within which default of a lease should be remedied.  Additionally, we found that there was a lack of follow-up procedures to ensure that surety bond requirements were being met.  In this case the source of the problem was that there was no "tickler" system to assist in monitoring surety bond expiration dates.

When certificates held in lieu of surety bonds are released to lessees, particularly to lessees in default of the lease agreement, there is no assurance that the release of the certificate will cause the lessee to remedy the default.  Failure to follow statutory procedures is simply unacceptable and should not be allowed to continue.  Establishing good follow-up procedures to identify surety bond expiration dates will enable the department to follow up and enforce the requirement that lessees provide an enforceable surety bond.

Recommendations and Response

We recommended the department cease releasing certificates of deposit to lessees in default, and that the department establish policies and procedures governing the release of all certificates of deposit or other forms of cash performance bonds to lessees, whether in defaulter not.  We also recommended that the department comply with the requirements of Section 171-20, Hawaii Revised Statutes.  We further recommended that the department establishes and implement procedures to ensure that all lessees' surety bonds are maintained on a current basis.

The department does not dispute the findings.  The department will make appropriate corrections to comply with statutory processing requirements.  The department, however, does not believe that formal procedures need to be established to replace current written and unwritten policies and procedures.  Instead, the department believes that it can implement many of the findings with internal memorandums reminding staff of their responsibilities.

We believe that formal procedures and policies are made even more necessary by the sheer number of accounts being managed by the department.  The department has approximately two thousand accounts for which it is responsible.  Established written policies and procedures, consistently followed, are necessary to ensure that all accounts are being administered in the best interest of the State.


The financial audit was for the fiscal year July 1, 1990, to June 30, 1991.  Examined were the department's financial records and its systems of accounting and internal controls.  We also reviewed all records and systems examined for compliance with applicable laws and regulations.

Since its creation in 1959, the Department of Land and Natural Resources has been responsible for managing, administering, and exercising control over public lands, water resources, and minerals.  These responsibilities include programs for soil conservation, forests and forest reserves, aquatic life and wildlife resources, aquaculture, state parks and historical sites. 

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