LOS ANGELES — Hawaii officials say they will upgrade an antiquated accounting system to ensure that the state won't repeat the violations it self-reported to the Securities and Exchange Commission.
The violations stem from a failure to report in 2011 and 2013 bond offerings that the state was extremely tardy in completing comprehensive annual financial reports for fiscal 2009 and 2010.
Hawaii and Minnesota were the only two states among the 71 issuers that self-reported disclosure failures between 2011 and 2014 under the SEC's Municipalities Continuing Disclosure Cooperation initiative.
The MCDC initiative promised underwriters and issuers lenient settlement terms if they self-reported instances over the last five years in which issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements.
Hawaii was 14 months late filing its comprehensive annual financial report for the fiscal year ended on June 30, 2009 and more than 10 months late in filing the CAFR for the fiscal year ended June 30, 2010.
Hawaii Director of Finance Wes Machida is working to fine-tune corrections to accounting processes that began under his predecessor, Kalbert Young. The situation with the overdue CAFRs goes back two gubernatorial administrations, he said.
Machida's predecessor Young, who served under one-term Gov. Neil Abercrombie, was tasked with completing CAFRs started under Gov. Linda Lingle's administration. His department completed the
The recession and resulting work furloughs were cited during Lingle's administration, along with an antiquated accounting system, for the tardiness of the CAFRs.
Though the CAFRs were on track by the time Machida took over as finance director, there is still more to do, he said.
The decision to self-report to the SEC was made in 2014 during Young's tenure, Machida said. Machida was appointed by current Gov. David Ige, who took office on Dec. 1, 2014.
"It is our understanding that it is a five-year look back," Machida said.
The 71 settlements announced Aug. 24 were the first ones since the first MCDC action was announced against California's Kings Canyon Joint Unified School District in July 2014.
Since the fiscal years ending June 30, 2013, Hawaii's CAFRs have received the Governmental Finance Officers Association's Certificate of Achievement for Excellence in Financial Reporting, which among other things asks governments to submit their report within six months of the end of the fiscal year.
Though Hawaii has made improvements to its procedures that have enabled it to complete its CAFRs on time, Machida said there are still improvements needed to the accounting systems the state uses.
For instance, the state still uses software systems that use COBOL, an older coding language from which many users have moved away.
The accounting system was developed and implemented in the late 1960s and early 1970s, Machida said.
"That is really operating under a coding language that no longer exists – and it is hard to get coding language to support the system," he said.
State officials are working on a request for proposals to upgrade the antiquated accounting systems, Machida said.
The state has also agreed to make sure that finance workers undergo regular training on disclosure requirements and adhering to standard accounting practices, Machida said.
"It is important we keep up to date," Machida said. "We just want to make sure we are on top of everything."
The SEC order states that Hawaii violated the Securities Act by "materially misstating that it had materially complied with prior agreements to provide continuing disclosure."
Hawaii failed to comply in all material respects with its commitment to provide certain types of continuing disclosure within the timeframes set forth in the continuing disclosure agreements, according to the SEC report.
In the official statements for new municipal securities, Hawaii "made materially false and/or misleading statements about its prior compliance with its earlier continuing disclosure agreements, as follows," according to the SEC report.
