A draft of a state audit is the latest problem for the Department of Business, Economic Development and Tourism, already beset by an investigation into alleged criminal misconduct and a legislative attempt to dismantle the agency.

The yet-to-be released audit blasts DBEDT and its leadership for funding $2.3 million worth of programs that were not sanctioned by the Legislature. It also says that 40 percent of the agency's procurement contracts awarded between July 1, 2004, and June 30, 2008, did not follow departmental policies and procedures.

The state Office of the Auditor classified the numerous procurement errors found during its investigation as “;not individually significant”; but said DBEDT's flawed interpretation of the procurement code had resulted in an “;apathetic environment.”;

“;The department's deficiencies in implementing the procurement code and its own procurement policies and procedures are the direct result of its lack of training, poor management oversight and a weak control climate,”; said the draft audit. If not corrected, the “;larger issue of lack of internal control”; could lead to abuse and even fraud, it said.

State Auditor Marion Higa's office declined comment because the audit has not been released. Drafts are not usually made public because audited agencies have not been given a chance to respond.

The audit comes on the heels of allegations that DBEDT Director Ted Liu committed a criminal misdemeanor by violating Hawaii's Public Procurement Code and Hawaii Administrative Rules in awarding an $8.7 million high-tech investment contract to the lowest-ranked bidder.

City Prosecutor Peter Carlisle said yesterday that his office began an investigation in November after a special Senate investigative committee found Liu's handling of a contract for a hydrogen energy investment fund questionable.

“;We anticipate reaching a conclusion before June of this year and hopefully sooner,”; said Carlisle.

The timing of the audit also coincides with a movement in the Legislature to dismantle or reorganize DBEDT through various bills including HB 1260 and SB 294, both of which have made it to the conference level.

Liu said yesterday that he disagrees with elements in the audit, which did not find evidence of illegal procurement activity or noncompliance.

“;It was a finding of errors,”; he said. “;There were some areas that we did not fully understand and have learned that they need to be changed.”;

For instance, Liu said when he made the bid selection for the hydrogen fund, he and the committee members who asked him to do it were operating under an erroneous understanding.

“;The rules changed, and unfortunately the staff did not keep up with the change,”; Liu said. “;We have taken steps to correct what needs to be changed.”;

However, the Senate committee that looked into the hydrogen fund concluded there was sufficient evidence to warrant an investigation, said state Sen. Donna Mercado Kim (D, Kalihi Valley).

“;This audit confirms the concerns that the Senate investigation had regarding DBEDT and procurement,”; Kim said. “;I think the hydrogen procurement was just the tip of the iceberg.”; Audits of DBEDT in 1997 and 2003 dealt with procurement issues, too, she said.

The department disagrees with the audit's finding that it misused its transfer authority on funding to get Gov. Linda Lingle to sign off on projects that were denied by the Legislature, Liu said.

Of the six examples cited, Liu said that half were within normal operating requirements of existing programs and that other expenses were unfunded by the Legislature due to budgetary constraints, not lack of support.

State Sen. Sam Slom (R, Hawaii Kai) said the issue is a “;wrestling match”; between the governor and lawmakers, adding the charge of violating legislative intent is new. “;I'm looking at about 150 audits, and I haven't seen that one before,”; he said.

But Kim said the department's behavior is noteworthy because it diverted funds from primary programs.

“;I would imagine that some of these practices have caused us to be in the kind of budget crisis that we are in,”; she said.