State regulators charged with watching over Colorado’s medical marijuana industry have fallen short on everything from tracking inventory and managing their budget to keeping potential bad actors out of the business, a state audit released Tuesday found.

Often lauded as a national model, Colorado’s so-called seed-to-sale system of regulating medical marijuana does not exist, auditors found.

The findings are a blow to the state Medical Marijuana Enforcement Division as it prepares to take on the additional task of regulating recreational marijuana legalized by Amendment 64.

The division, part of the Department of Revenue, has agreed to several steps to improve oversight of Colorado’s 1,440 dispensaries, grow centers and marijuana infused-product businesses.

The enforcement division has been beleaguered by budget problems since revenue from business applications did not come in as anticipated, but the audit found problems that run deeper than that.

Auditors say the division has not adequately identified its proper role or done a sufficient job managing its programs and finances.

“We agree there are some lessons learned with the implementation of medical marijuana enforcement,” Department of Revenue executive director Barbara Brohl said at a Legislative Audit Committee hearing. “We understand there are some concerns, but we can’t move forward unless we have a baseline. We have a baseline now.”

Under Colorado law, medical marijuana business owners must clear many hurdles, including undergoing background checks to root out felons, opening their financial books, installing expensive surveillance cameras and accounting for their product.

The state isn’t holding up its part of the bargain, auditors found.

For instance, a Florida company was paid $1.1 million to develop a seed-to-sale inventory tracking system, but the division was unable to come up with another $400,000 to put it in place. Auditors also noted that the division doesn’t review a dozen separate tracking forms it requires businesses to submit, including travel manifests showing when medical marijuana plants or products are transported.

“It seems to me we have a dysfunctional system of tracking the marijuana,” said state Sen. Steve King, R- Grand Junction.

Tracking is “critical”

Auditors suggested such a “micro-level” approach to tracking pot may not be necessary now that any adult can grow and possess it under Amendment 64.

But Ron Kammerzell, the division’s acting senior enforcement director, said the division is working to put the tracking system in place by year’s end at little or no additional cost. He called inventory tracking “critical” to preventing medical marijuana from being diverted out of the system, including out of state.

Meanwhile, more than 40 percent of businesses who met a deadline to file license applications in the summer of 2010 have yet to be fully processed. Those businesses were grandfathered in — allowed to stay open even though the division has yet to license them.

And auditors questioned why some licenses were approved.

In 13 of 35 new business applications reviewed by auditors, evidence was found “of potentially disqualifying information.” Auditors flagged five files for concerns about past felony arrests, possible financial assistance coming from a “potentially unsuitable person” from out of state, and involvement in drug- or alcohol-treatment classes.

Ten applications in that pool received licensing, and auditors questioned whether four of them deserved it.

Auditors also found evidence of businesses located within 1,000 feet of schools, which is barred by state law.

Worker-licensing flawed

A program to license employees at medical marijuana businesses is flawed, as well, auditors found. Although applicants must be of “good moral character,” a review of 25 randomly chosen applications found a license was issued for 22 before the division had received the results of a fingerprint-based criminal-history check.

Seven of the applications included documentation of past arrests, including one case in which the person had been arrested for felony aggravated robbery and felony menacing with a deadly weapon.

The auditor’s office suggested dropping the occupational licensing requirement and, instead, require businesses to subject their employees to criminal background checks. Division director Laura Harris, however, said law enforcement strongly supports the licensing.

The audit also found:

• Seizures of marijuana from businesses that are not fully explained and “weak controls” over its destruction, including insufficient documentation and a storage facility that features weaker security features than those required of medical marijuana businesses.

• Questionable spending, including purchases for furniture, BlackBerry phones and a fleet of vehicles. The division racked up 19 straight months of net losses, including a loss of about $2.3 million in June 2011 because of large capital purchases.

• A failure to identify all medical marijuana businesses in the sales tax system, underreporting sales tax revenue generated by 56 dispensaries by about $760,000 in fiscal years 2011 and 2012.

The division agreed to a number of recommendations, including steps to improve the application process, monitoring, expense controls, and seizure and destruction policies.

Michael Elliott, executive director of the Medical Marijuana Industry Group, said the state’s regulation works but needs funding. Although the state might lack oversight, he said, “the vast majority of business owners are staying in strict compliance with state law.”

The enforcement division says it had to stretch one year of operating expenses over two because of a moratorium on new business applications, a key source of its funding.

Last year, it closed three satellite offices and trimmed its staff from 37 to 15.

The legislative committee will meet again Wednesday to complete its review of the audit.

Eric Gorski: 303-954-1971, egorski@denverpost.com or twitter.com/egorski