Confidential report claims abuse of power, 'hostile workplace' in state Auditor's Office

Jessica Bies | The News Journal

Show Caption Hide Caption Report claims abuse of power in state Auditor's Office A report says Kathleen Davies violated financial standards and appears to have created a “hostile workplace environment” where employees felt threatened and unable to report violations for fear of retribution. 8/7/18

As state Auditor Tom Wagner missed work for medical procedures, his second-in-command took on more and more authority, signing documents in his name, accessing his email and awarding a $20,000 contract to a friend, according to a report obtained by The News Journal.

Kathleen Davies violated financial standards the state office is tasked with upholding and appears to have created a “hostile workplace environment” where employees felt threatened and unable to report violations for fear of retribution, said the report titled “Investigation into Actions of the Chief Administrative Auditor.”

Wagner, a Republican, commissioned the outside auditing firm, Grant Thornton, and directed the scope of the report after, in late 2015, employees in the Auditor of Accounts office lodged complaints with the state Office of Management and Budget about Davies, claiming she had violated office protocols and auditing standards.

Davies, a Democrat who is running for state auditor this fall, served for six years as Wagner’s chief administrative auditor before he fired her in December 2017. Wagner announced in February that he will not seek re-election due to serious health concerns.

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A Merit Employee Relations Board hearing – which began July 19 and is expected to resume Aug. 23 – will determine whether Davies was fired justifiably. It could take 30 to 90 days for the board to issue its ruling.

Wagner said in a statement that "because this issue is still before the (Merit Employee Relations Board) I am restricted from saying anything" about the report.

Davies, in a written response, told The News Journal that Wagner’s attorney, Kevin Slattery, has consistently failed to provide evidence — including a copy of the full Grant Thornton report — to support the allegations made against her, despite subpoenas and subsequent motions. She said Wagner has also testified, at a hearing regarding her unemployment benefits, that “he took no steps to address the allegations.”

Open government experts have expressed concern that the public may not learn the details surrounding Davies’ performance in the Auditor’s Office until after they cast their ballots in the Sept. 6 primary and Nov. 9 general election.

Davies faces Kathy McGuiness and Dennis E. Williams just days after the hearing is set to conclude, and if she wins that primary, Republican James Spadola in the general election.

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A News Journal request to open the hearing to the public was denied. Subsequently, the newspaper obtained a copy of the report, which Wagner hired the auditing firm Grant Thornton to perform after he put Davies on paid leave in July 2016.

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Part of the Grant Thornton report was used as evidence in Davies’ appeal about whether she was eligible for unemployment benefits. The Department of Labor ruled in May 2018 that Wagner did not have sufficient cause to fire Davies, though it noted it could not review the full Grant Thornton report because Wagner did not provide it.

Eight Auditor of Accounts employees interviewed by Grant Thornton described a “hostile workplace” environment in which they felt pressured to deviate from generally accepted auditing practices, the report said.

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“Several of the employees, as well as the state auditor, also said that (Davies’) extreme and disparaging behavior was a direct factor in multiple former employees leaving the office for employment elsewhere,” the report said. “It was clear to us that (Auditor of Accounts) employees feared that speaking out against (Davies) would cause retribution and worsen already tense office conditions.”

Employee allegations

The Auditor’s Office had not had any dealings with Grant Thornton before 2017 and in the last two years paid it $120,527, according to Delaware’s Open Checkbook.

The report said Davies, who oversaw auditing staff and other non-elected Auditor of Accounts positions, appeared to have:

Abused authority temporarily delegated to her by Wagner­

Refused to follow state travel expense requirements and purchase card policies

Disclosed confidential information to a legislator

Deliberately withheld information, and directed employees to withhold information, from the state auditor

Influenced contract awards to parties with whom she had personal relationships

Threatened staff by incorrectly telling them that no whistleblower protections existed for state employees

Created a hostile office environment and a culture of fear and intimidation

Intercepted Wagner’s email and postal mail

Each of the allegations is addressed and investigated separately in the report.

A source said it took several months to negotiate a contract with Grant Thornton and decide how the investigation would be split up between the contractor and Delaware’s Office of Management and Budget.

Grant Thornton was eventually retained to conduct the entire investigation after Davies’ attorney said the budget office was being audited by Davies, which could create a conflict.

‘Abuse of power’

According to the report, Wagner told Grant Thornton he has historically relied on the chief administrative auditor to maintain the day-to-day operations of the state Auditor’s Office.

“He informed us that, for this reason, he had allowed (Davies) to take on certain functions or operate with limited oversight,” the report said, which led to her “abuse of power.”

By the time Davies was put on leave, Wagner had come to believe Davies was abusing his trust, the report said.

In March 2011, Wagner signed a temporary delegation of authority order that granted Davies the power to act on the state auditor’s behalf in the event of his “temporary disability or absence from the office,” the report said.

At the time, Wagner had undergone several minor medical procedures causing him to miss work time, the report said.

A deputy attorney general reviewed the order and suggested revisions so Davies would only be able to exercise the authority in specific instances, according to the report.

But Davies frequently made administrative decisions, even when Wagner was in the office, the report said. She signed several documents that should have been signed by Wagner, the report said, and removed Wagner as the signatory on certain contracts and authorization forms.

After Davies was put on leave, Wagner recovered several stamps with his signature on them from Davies’ office, the report said.

Davies’ understanding of the delegation of authority differed, she told The News Journal.

“In January of 2011, the Deputy position became vacant and was never filled throughout my tenure,” she said. “Mr. Wagner himself testified under oath at the (unemployment insurance) hearing ‘I did not care what title you used.’ He formally delegated authority to me through signed documents and consistent and undisputed past practices.”

The Department of Labor’s unemployment division said in its final ruling that “no evidence was provided by (Wagner) that the Auditor’s Delegation of Authority was limited in scope or time or had been revoked.”

In April 2013, Davies stopped listing the state auditor as her supervisor on forms and began approving her own forms, the Grant Thornton report said.

“(Davies) informed us that authority to sign contracts was granted to her by the state auditor and that she would ‘keep things moving’ around the office unless the state auditor expressed issues or concerns,” the report said. “She also informed us that she kept the state auditor apprised of documents she signed on behalf of him and the (office).”

The state’s Division of Accounting questioned why Davies was signing documents, according to the Grant Thornton report. They emailed Wagner to ask if she had the authority to do so, but it was unclear whether he ever responded or even saw the message, the report said.

Earlier that year, Davies had pressured an employee to give her complete access to both Wagner’s email account and his Outlook calendar, the report said.

After Davies gained access, Wagner’s assistant noticed several appointments disappear from the auditor’s calendar, the report said.

Davies also instituted a new office policy requiring that all of Wagner’s mail be delivered to her first, the report said.

She opened the mail and logged it, before passing it on to Wagner. Wagner told Grant Thornton’s investigators that he thought it was odd that he was no longer getting invitations to certain state events, such as the annual Governor’s Prayer Breakfast, but didn’t inquire further about them, the report said.

Davies told The News Journal the policy regarding Wagner’s mail was “based upon the fact the office would receive extremely time-sensitive information and communications regarding licensing issues and lawsuits.”

She said Wagner received all his mail after it was logged.

“Further, during the (unemployment hearing) Mr. Wagner testified that he forwarded emails and calls directly to me for handling,” Davies said.

The Department of Labor’s unemployment benefits division also investigated allegations that Davies had inappropriately accessed Wagner’s email.

“The auditor testified that he forwarded all his calls to (Davies) and gave her access to his email account,” the Department of Labor ruling said. “The auditor’s testimony that he believed he was only giving (Davies) ‘read’ access to his email strains credibility in view of the Delegation of Authority to act in his absence.”

“It is undisputed that the auditor was frequently absent from the office.”

Circumventing state rules

Wagner said that at some point Davies started approving her own travel expenses and stopped submitting forms to him, the report said. It is unclear why Wagner didn’t question the change.

Davies failed to submit receipts for various expenses, and instead of using a state-issued credit card, improperly claimed a per diem, the report said.

State policy urges employees to use government-issued credit cards for those kinds of costs whenever possible. Software allows state department and division heads to easily track spending made on the cards, and they can get alerts about spikes or odd patterns.

Instead of routinely doing that, the report said, Davies frequently sought reimbursements for her out-of-pocket expenses.

Auditor’s office employees said Davies told them not to comply with state travel guidelines, either, and to use their personal credit cards while on business trips, the report said.

Wagner said the issue involving credit cards was brought to his attention, but he could not remember why he didn’t act on it, the report said.

Davies told The News Journal that she followed the state’s guidelines.

“All reimbursements processed over my tenure at (Auditor of Accounts) went through various approvals and sign-offs,” she said. “This included approvals required in the state accounting system. No one person at (Auditor of Accounts) can process an expenditure on their own, including travel. Further, I did not calculate or prepare my reimbursements, that was prepared by administrative/accounting staff.”

In a separate incident, employees said Davies asked them to circumvent state rules regarding purchase orders by telling them to transfer $10,000 in travel funds in increments of less than $5,000, the report said. Purchase orders are required for purchases over $5,000, individually or in aggregate.

Breach of confidentiality

Employees said Davies did not follow office policy when she performed audits, the report said.

In 2016, Davies sent a draft report of a unit count audit to state Rep. Kim Williams, D-Newport, the report said. The annual audit examines whether schools are reporting accurate enrollment numbers, which affects how much state funding they receive.

Following a rash of scandals where several charter school leaders were found to be using taxpayer money for personal purchases, Davies made appearances in the Legislature to testify in support of one of Williams’ bills. It would have given the state auditor authority to select the firms that audit charter schools, which unlike traditional schools, work out their own contracts.

While the Department of Labor’s unemployment benefits division determined she had the authority to send Williams the audit, the Grant Thornton report disagreed.

“The policy does not state that it is acceptable for the (chief administrative auditor) to release confidential client information, which was transmitted in the form of a draft report,” the report said. “Davies breached those provisions in providing the Unit Count Performance Audit draft report to Ms. Williams.”

Williams, the legislator, might have received other information from Davies, the report said.

Grant Thornton believes Davies also sent her a draft report regarding petty cash usage at charter schools, the report said. Later, Williams requested the report in a Freedom of Information Act Request, using its exact, working title, which she would not have known unless someone in the Auditor’s Office supplied her with it, the Grant Thornton report said.

Davies told Grant Thornton investigators during an interview that she had authorized the report’s release.

The report itself was never publicly released. Only eight people had access to it. Staff, in consultation with the state auditor, instead provided letters informing schools of proper policies and procedures, the report said.

Davies denied any wrongdoing in her communications with Williams.

“My actions were within my responsibilities, duties, consistent with past practices throughout my tenure, and in accordance with professional audit and investigations standards,” she told The News Journal. “Under Government Auditing Standards and (Auditor of Accounts) Policies and Procedures draft reports are not considered ‘confidential.’”

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Withholding information

The report said Davies selectively withheld information from Wagner regarding audits, security upgrades and office finances.

In one example, Davies had silent alarms and cameras installed without Wagner’s knowledge and approval, the report said. “He (Wagner) noted the only other office he is aware of that has silent alarms is the governor, and moreover, that the alarm trigger button was not even in his office, but rather in (Davies’) office.”

Davies purchased law-enforcement style badges for the office for $1,705, but verbally directed staff not to order one for Wagner or let him know she bought them, the report said.

In another example, Davies instructed staff not to tell him about a $90,000 balance in the office’s training fund because “he’ll want to spend it on a junket,” the report said.

“The state auditor stated that he is a strong proponent of training, and would have liked to use that money to help send his staff to educational and networking events,” the report said. “He intends to start using the funds in the account to do so.”

In an audio recording from May 12, 2016, Davies instructed staff not to provide updates to the state auditor on an open investigation, the report said.

“(Davies) stated, ‘Even when Tom comes up to you, the proper way to deal with that is to keep it light and generic. I’m not telling you to be rude to him or anything, but you could inadvertently tell him something and he doesn’t realize that it can’t be out for public … it will negatively impact the investigation and something he doesn’t always realize … that it is not public information,” the report said.

“We are not aware for any reason for the acting state auditor, present or future, to not have insight into the operation, projects or files of his/her own office,” the report continued. “Furthermore, the state auditor has been in the office for over two decades and is familiar with audit practices and necessary confidentiality standards.”

Davies told The News Journal she did not withhold any information from Wagner or direct other employees to do so.

“In fact, Mr. Wagner admitted during the (unemployment) hearing that ‘we would have discussions all the time,’” she said. “The auditor was routinely kept apprised of information and I answered any questions he needed to know.”

Objectivity in contracting

Grant Thornton investigated whether Davies awarded contracts to close acquaintances and friends.

In one instance, the office was deciding between two contractors, Santora CPA Group and Zelenkofske Axelrod LLC, the report said. A committee originally selected Santora, using a point system, but after Davies talked negatively about the company, staff felt pressured to change their scores, the report said.

Later, Zelenkofske Axelrod was also chosen to conduct a peer review over the National Association of State Auditors, Comptrollers and Treasurers. Wagner said Davies had personal conflicts with several members of the National Association of State Auditors, Comptrollers and Treasurers, including its executive director and review committee chairman, the report said.

Davies told The News Journal that the auditor’s office continued to contract with the firm after she was put on leave. The most recent contract listed on Delaware’s General Support Services site was awarded in June 2017 to audit the Department of Natural Resources and Environmental Control’s hazardous substance cleanup fund.

Another contract was awarded to Crystal Feliciano, who attended Davies’ wedding and worked with her in the New Jersey Comptroller’s Office, according to the Grant Thornton report. She was to train local volunteer fire departments how to use QuickBooks, on behalf of the auditor’s office.

Employees discovered Feliciano had recently been fired from that New Jersey position for misusing state time and resources while volunteering for a local political campaign, according to the report.

The contract was eventually canceled, but not until after the Auditor’s Office spent $10,908 buying laptops for the training Feliciano was hired to perform, the report said. Those computers are in the process of being sold to another state agency at a loss.

Davies told The News Journal that other Auditor of Accounts staff recommended hiring Feliciano for the QuickBooks training, and the office had also contracted with her for training in 2011 or 2012.

“Her second contract was canceled by me after considerable time had passed with no progress on the project,” Davies said. “She did not receive any payment for services.”

Whistleblower protections

Employees said Davies told them on multiple occasions that they were not eligible for whistleblower protection, according to the report.

In one audio recording that Grant Thornton reviewed, Davies said “If you want to whistle blow, you’re on your own or you go to the whistleblowing unit at the AG’s office, and there’s very select cases that they take for that…we have proven that there is no protection for anybody that even wants to say that something is illegal or inappropriately done in this state.”

In Delaware, employees cannot be fired for reporting violations of financial management and accounting standards laws. Employers are required under the Whistleblowers’ Protection Act to inform employees that they will not be retaliated against for whistleblowing.

Davies told The News Journal she talked to staff about whistleblower protections after a deputy attorney general informed the office that employees would have to provide their own defense at their own expense if involved in such a case.

“In (Auditor of Account)’s spring 2016 public training session, attended by staff, we had a deputy attorney general out to train staff on Delaware tremble (sic) damages and whistleblower act,” Davies said.

Treble damages refer to financial compensation awarded by a court to a prevailing plaintiff that are three times the actual or compensatory damages.

A hostile workplace

Employees said Davies created a hostile work environment and openly berated staff, the report said.

Various staff members were instructed not to speak to Wagner, or to certain other members of the staff, the report said. Wagner noticed that people stopped talking to him, but thought they were mad at him, the report said.

In May 2016, Davies accused Wagner of sexually harassing an employee, the report said. Davies said Wagner had touched a young, female staff member during a whistleblower training session, the report said.

An audit manager was instructed by Davies to talk to the young female staff member and document the incident, but the staff member had no complaint, the report said.

The young woman said Wagner had touched her shoulders, but not in a bothersome or offensive nature, she confirmed in an email later that month, according to the report.

Davies told The News Journal none of the staff filed grievances against her during her tenure in the office.

“I have been supportive and provided professional and educational opportunities for employees,” she said. “I personally paid for holiday events and various functions to support the morale of the staff. I worked to obtain promotions and a series of pay increases for the professional staff.

“I did require that staff work on behalf of the taxpayers when on the clock including political appointees who consistently insisted on doing campaign endeavors during work hours. There were, and still are staff that are good workers and are committed to doing the right things. This has been and continues to be my point during my campaign.”

Contact Jessica Bies at (302) 324-2881 or jbies@delawareonline.com. Follow her on Twitter @jessicajbies.