Comptroller: $1.8 billion tied to conversion entries; office will reverse entries, move $245 million to general fund

Comptroller General Brian Gaines told the state Senate constitutional subcommittee on finance that the state's accounting conversion process mistakenly included "act for" business areas in the cash conversion, creating about $1.8 billion in unreconciled balances in Treasury fund 30350993 and related act-for business areas.

Gaines said Alex Partners validated the CGO's finding that the conversion team treated top-level act-for business-area adjustments as bank transactions, which "was the primary reason the conversion account did not net to 0" and produced the large unreconciled balance. "As it stands right now, within the state treasury, there still exist $1,800,000,000 in unreconciled differences," Gaines told the subcommittee.

Why it matters: the conversion error helped mask a larger set of accounting adjustments that led the state to restate its annual comprehensive financial report (ACFR). Gaines told senators the total 2022 restatement netted $3.5 billion after three components were combined, and that correcting the conversion entries is a prerequisite to reconciling cash positions and finalizing the financial statements.

Key findings and plan outlined to the panel

- Cause: Gaines described the error as the conversion team's inclusion of act-for business areas (top-level compilation accounts the Comptroller General uses to make statewide accrual adjustments) in the SCISS banking and investment conversion. Treating those act-for areas as cash transactions artificially inflated Treasury fund 30350993.

- Scale and proposed correction: the CGO identified roughly 54 conversion entries tied to the error. Gaines said about 51 of those can be reversed directly, while three require manual adjustments. "Once that has been accomplished, the $1,800,000,000 number would drop to $245,000,000," Gaines said. He explained the CGO's corrective steps: reverse the conversion entries attributable to act-for business areas, which will zero out the negative act-for balances and reduce fund 30350993 to about $245 million in banked cash; then reassign that balance to the general fund where it belongs.

- Effect on bank balances: Gaines emphasized that reversing the conversion entries will not change the total cash held in banks; it will reclassify balances so the accounting system and bank records match. "Those will have a net impact of 0 across, between the fund and the business areas," he said; after reversals, the cash in the bank would remain $245 million.

- Timeline and responsibilities: Alex Partners recommended the CGO make the correcting entries; Gaines said the CGO is prepared to do so once there is agreement among agencies. He also described the conversion process as managed and led by the State Treasurer's Office (STO) and said the conversion team included STO staff and outside consultants.

Background, prior notices and correspondence

Gaines described a sequence of communications and reviews: the CGO asked the STO to research cash entries in the triple-0 (act-for) agencies and fund 30350993 in a June 29 communication, followed by an Oct. 31 letter (referred to in testimony as the "Halloween letter") and additional correspondence including an STO letter dated Nov. 30 and a CGO letter dated Dec. 12, 2023. Gaines told the subcommittee that his office's Dec. 12 letter said he was "confident to a reasonable degree of certainty that the balance in fund 30350993 was part of the general fund balance" but that later review showed most of that fund balance related to negative cash in act-for business areas.

Other fiscal details discussed

- 2022 restatement: Gaines said the 2022 ACFR restatement reflected three components (double counting of appropriations that reduced cash by about $5.9 billion; the $1.8 billion increase tied to fund 30350993; and a roughly $516 million DOT-related adjustment), with a net $3.5 billion decrease in the state's cash position.

- Conversion entries: Gaines said the conversion account was the offsetting account where the entries that made up the $1.8 billion were recorded; correcting those entries is the core technical fix.

- Audit vendor and procurement: Acting State Auditor Sue Moss told the subcommittee the auditor's office supports Alex Partners' recommendations and that CliftonLarsonAllen's five-year contract is completing its cycle; the auditor's office plans to issue a request for proposals for audit services at the end of the month. "Where we are shooting for the end of the month for that to be issued final," Moss said.

Questions and outstanding items

Senators pressed for more detail about when the errors should have been detected (Gaines said the conversion team should have recognized the problem by 2017 when certain funds did not net to zero), who made the conversion decisions (Gaines said Alex Partners could not identify a single individual and that the conversion was managed by the STO), and why there was a multi-year gap before the issue resurfaced in 2022 (Gaines said he could not explain the gap). Gaines confirmed the CGO will reverse the identified entries and said Alex Partners validated that approach.

What the subcommittee directed next

The chair said the subcommittee had invited the state treasurer to testify and scheduled a follow-up meeting pending the treasurer's acceptance. The auditor's plan to issue an RFP for external auditors was announced to the committee; no formal vote occurred on the accounting corrections during this session.

Ending note

Gaines told the panel the conversion error and related unreconciled balances are a significant financial event that warranted notification to the General Assembly. He said the correcting entries will be tested and validated and that the CGO intends to complete them "accurately, and ... timely," contingent on agreement among the agencies involved.