SALT LAKE CITY — The state's liquor control agency has been "incompetently managed," and a former director may have committed a felony, legislative auditors charged in a report released Tuesday.
Auditors cited "years of bid-rigging, falsifying financial documentation and artificially splitting invoices in violation of state statue," as well as "inappropriate and potentially illegal" business dealings.
"We believe (Department of Alcoholic Beverage Control) management has exhibited a pattern of incompetence and questionable practices," audit supervisor Brian Dean told the Legislature's Audit Subcommittee on Tuesday afternoon.
The audit recommended the Utah Attorney General's Office consider investigating whether charges should be brought against Dennis Kellen, the former DABC director.
Spokesman Paul Murphy said the office will review the audit and its recommendations "and figure out what course of action to take."
The report was ordered by lawmakers to further examine the relationship between Kellen and Flexpak, a company owned by his son.
Kellen, who worked for the department since 1975, was pressured to resign in August amid allegations of what Gov. Gary Herbert called "serious violations" of state procurement law.
Since 2003, the report states, the agency has spent hundreds of thousands of dollars with Flexpak, "paying a premium to work with a member of the executive director's family," a possible violation of the Employee Ethics Act.
The act prohibits public employees from using their official position to "secure special privileges or exemptions" for themselves or others. Because the compensation exceeded $1,000, the reports states the alleged violation could be a second-degree felony.
A routine practice at the DABC, according to the report, was to make purchases without obtaining competitive bids, then contact other vendors to obtain higher prices and postdate the bid to "give the appearance of validity to the purchase."
Known as bid-rigging, the report states the practice could be fraudulent if there is collusion between the buyer and the seller. Invoices were also split in violation of state law to avoid purchasing requirements, the report found.
An unnamed accounting manager told auditors that the DABC had been documenting higher bids after purchases for more than 20 years. She didn't report it because she feared losing her job.
"Employees did not feel comfortable questioning management," Dean said.
Employees knew of the relationship between Kellen and Flexpak, creating a "perception of special treatment," the report said, but members of the DABC Commission did not.
Also noted in the report were other inappropriate and questionable management practices, including executive perks such as custom furniture, expensive computers and iPads and a Jeep Liberty that cost more than $20,000.
"These are things we will not tolerate in this state," said Sen. John Valentine, R-Orem, who requested the audit.
Valentine also noted that the financial improprieties took place during lean budget years, when the state was dealing with cutbacks, layoffs and considering closing state liquor stores.
"I'm disappointed in the culture at DABC that allowed these kinds of things to happen," he said.
Valentine said he's confident Francine Giani, acting executive director of the DABC, will do what's necessary to change that culture.
"It can't stay the same," he said.
The audit also cited DABC's failure to adequately address alternatives to closing stores to make needed budget cuts. Already, the report states, more than $1.1 million in savings have been identified through eliminating some administrative and warehouse jobs and turning over maintenance responsibilities to another state agency.
Weak management is the primary cause of the ongoing problems at the agency, the report concluded, but those are made worse by the DABC Commission's "tenuous oversight."
Auditors recommended the Legislature examine whether the current oversight structure at the DABC is sufficient, suggesting lawmakers consider making the current five-member, part-time commission full time.
DABC Commission Chairman Richard Sperry said in an email that the audit "is a shocking failure of government oversight." Sperry said the $300 million a year business "should not be deeply embedded within state government" but subject to an independent audit annually.
Sperry said he was not advocating for complete privatization of liquor sales but said the scandal showed "alcohol and politics are also a toxic mixture," similar to the mix of alcohol and the profit motive.
"Surely there must be a middle ground that provides for control where necessary and still allows for alcohol wholesale and retail operations to function as sound business with ethical practices," he said.
Giani said the misconduct uncovered was "appalling" and much of it could have been avoided. She listed a number of steps she has taken "to stop the most egregious examples of the DABC's mismanagement," including ending agency purchases from Flexpak pending the completion of the audit.
Giani said she is "honestly optimistic" about the agency's future.
"I am committed to doing everything I can to ensure this audit marks the beginning of a new chapter in the DABC operations," she said.
Gov. Herbert said the audit "demonstrates the need for a cultural overhaul at the DABC."
"The agency's independence has perpetuated a pattern of administrative misconduct, and it's time to implement controls that increase oversight and accountability," he said in a statement. "My administration is going to make sure that happens."
Appointing Giani as acting executive director "was just he first step," Herbert said.
"We will also explore legislative options that protect the state's interest and ensure appropriate attention is paid to process integrity," he said.