The agency charged with regulating Colorado's medical marijuana industry has not adequately defined its mission, squandered money on capital projects and underreported tax revenues, state auditors said in a scathing report released on Tuesday.

The Medical Marijuana Enforcement Division, a division of Colorado's Department of Revenue, failed to follow the framework laid out by the state legislature when lawmakers approved the program in 2010, auditors said in the 96-page report.

"The division has not adequately defined the oversight activities it must perform or determined the resources it needs to implement the regulatory system envisioned by the General Assembly," the report said.

The Medical Marijuana Enforcement Division did not immediately respond to calls seeking comment on the report. But revenue department officials agreed with its recommendations, the report said.

The report noted that the agency experienced 19 straight months of net losses, including a $2.3 million loss in June 2011 because of "large capital purchases," including furniture, computers and a software program that failed to materialize.

Funding for the division has "fluctuated significantly," since it was established, auditors said, as revenues have declined by 56 percent from $8.6 million to $3.8 million. Expenditures during the same time have increased by 11 percent from $4.7 million to $5.2 million.

The drop in revenue was largely due to a moratorium on new dispensaries from mid-2010 through 2012, which meant the division collected fewer fees.

"Weaknesses in the division's fee-setting, strategic planning and expense controls contributed to its funding problems," the report said.

Colorado voters approved the use of medical marijuana in 2000, and last fall voted to legalize small amounts of pot for recreational use. State lawmakers are in the process of crafting a bill that would establish a regulatory framework for the use of recreational marijuana.

Staff layoffs at the revenue department contributed to the underreporting of about $760,000 due the state in tax revenues from 56 of Colorado's more than 1,400 medical marijuana dispensaries, auditors said.

Additionally, regulators spent $1.1 million in 2011 and 2012 on a marijuana plant tracking computer system that "not does currently exist" because the agency lacked the remaining $400,000 to pay the vendor to implement the system.

Michael Elliott, executive director of the Medical Marijuana Industry Group, blamed the legislature for the oversight problems identified in the report.

"Our members follow the law and expect state officials to give the Medical Marijuana Enforcement Division the budget it needs to ensure proper enforcement," Elliot said in a statement. "We want more inspectors and oversight of the industry."

Auditors recommended the revenue department streamline its licensing procedures, step up monitoring activities, and improve the way it seizes and disposes of unauthorized marijuana.

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The report also said the division should impose spending controls over expenses and the staff use of state-owned vehicles.

(Editing by Dan Whitcomb and Stacey Joyce)