For the past several months, Maine taxpayers have heard about the multi- million dollar accounting problems at the Department of Human Services. In May, state auditor Gail Chase blamed the problems on a “shortage of qualified people in the fiscal office at DHS.” As a firm that provides accounting services for many nonprofit agencies receiving state funding, we do not believe the problem lies in a shortage of employees, rather the problem lies in the state’s focus on insignificant accounting issues. Changes to simplify reporting requirements could help the state budget by refocusing efforts to important areas.

The reporting requirements placed on agencies receiving any amount of state funding are complicated, burdensome, costly, inefficient and inconsistent. There are numerous departments within the state, each with different reporting and settlement requirements. We believe that all state departments involved with human services, children, mental health- mental retardation and substance abuse should be folded into one department. In addition, all grant and other reporting requirements should be consolidated with a settlement process that is consistent for all agencies. Finally, no agency should be required to “pay back” grant funds, rather the state should review financial statements each year and adjust future grant awards accordingly.

A general increase in the level at which audits are required should be implemented. We believe agencies receiving grants of $500,000 or less should have a standard compilation, agencies receiving between $500,000 and $1 million should have a review, and only agencies receiving more than $1 million should require an audit. This would result in significant cost savings to those receiving awards.

The state has historically not utilized the regular financial statements provided by nonprofit organizations and their accounting firms. Instead complicated reports have been designed that are little understood and require numerous additional hours to prepare. Certain costs, such as interest and bad debts, are considered unallowable, even though they are normal costs of operating. It would be much less costly to the state and the agencies if the state relied more on the existing reports required under generally accepted accounting principles rather than reinventing the wheel. The financial reports as issued together with written reports on program accomplishments should form the basis for determining whether the funded programs are serving the needs of the population of the state.

The state’s view on materiality is another issue that should be addressed. It is a crucial concept for auditors because it allows us to focus on important matters rather than waste time on insignificant issues. The state has recently decided that there should be no level of materiality with respect to state grant reporting and implies that the current accounting scandals in the news result from not focusing on immaterial items. We are convinced the current problems are not related to materiality, but rather they are based on greed and a lack of ethics. In fact, eliminating or severely reducing materiality would probably increase accounting scandals because auditors would spend more time worrying about insignificant matters rather than concentrating on important issues.

Some time ago, we sent suggestions to the DHS Department of Audit and the Governor’s Office that we hoped would be considered. To date we have not received a reply. We believe the state has historically had a vision problem, focusing on the trees, rather than the forest. Gov. John Baldacci has taken steps to address this by combining the Department of Human Services with the Department of Behavioral and Developmental Services and most recently by deciding to have his office oversee the DHS financial department. Let us encourage him to continue this progress by simplifying their operations.

The simpler the state can make the reporting, the lower the cost of administration for both the state and nonprofit agencies, the lower the chance of accounting errors and problems, and the lower the accounting fees. Everyone wins, including the taxpayer.

Mark Chellis, CPA, Scott Edwards, CPA, and Susan Edwards, firm administrator, are members of the accounting firm Edwards, Faust and Smith in Bangor.