Gov. Linda Lingle is standing by Ted Liu, her state business director, as the legislative auditor insists Lingle should consider firing him for “;numerous and egregious acts.”;

The Lingle administration is mounting a defense of Liu in the face of the 138-page draft investigation that has yet to be released by Auditor Marion Higa. “;The legislative auditor continues to infer impropriety that did not occur,”; said Lingle, who added she will “;continue to work closely with Ted.”;

In a draft of the audit obtained by the Star-Bulletin, Higa notes that a previous investigation of the Department of Business, Economic Development and Tourism found a “;culture of ambivalence within the department which willfully ignored laws, rules and requirements of the Hawaii Public Procurement Code.”;

The procurement code sets the rules for which state purchases must be made through public bid.

Higa described the department as having “;an apathetic procurement environment and numerous accounting and contract administration errors.”;

Her report said, “;A lack of effective internal controls has enabled the department's overseas office to spend money with little accountability and created opportunities for fraud and abuse.”;

Liu, who met with reporters yesterday to discuss the draft audit, said Higa did not understand the federal laws the state was using to continue a trade mission to China.

Higa said she could not comment because her report has not been officially released.

Liu noted that preparations for releasing the report come within days of Lingle's return from a second China trip that resulted in improved relations for tourism, new partnerships on energy research and improved business dealings.

Liu and Lingle said Higa misinterprets federal guidelines to come to the conclusion that he violated federal laws. “;Aside from being completely wrong, this faulty determination is used to undermine DBEDT's accomplishments, the significance of their work and the importance of our overseas offices,”; Lingle said in a written statement.

Liu noted in his own statement that the fact that the Higa report “;is timed for release shortly after another successful ... business mission to China only points to its political nature.”;

But Higa said in her draft report: “;Our investigation found a variety of troubling actions by the DBEDT in certain international activities.

“;Documents and interviews with key stakeholders reveal noncompliance with federal regulations and state laws and procedures regarding the department's out-of-state offices on multiple occasions,”; Higa said. “;The department was thus able to operate outside the rules and the regulations of the procurement code ... spending funds with little or no legislative oversight.”;

At issue is a federal program housed in the U.S. Commerce Department called the federal Market Development Cooperator program. The state applied for a grant with the program.

Higa said that by supplementing general funds with federal money, the department “;essentially padded its budget through the misuse of federal funds.”;

“;The funds provided the means for the department to keep the overseas office operating even as its budget was cut by the Legislature.

“;Documents show the department's decision to use federal funds on its overseas office was motivated by the desire to offset state budget cuts and avert the prospect of having to close an overseas office,”; the report said.

Liu said the program provides the federal funds in advance to a state agency. But the Hawaii programs fell under a different reimbursement program, with Hawaii spending the money and getting reimbursed by the federal government. Liu said when the federal government reimbursed Hawaii, he used the money to continue to operate Hawaii's overseas trade mission in China.

Liu added that Brad Hess, federal coordinator for the program, said Hawaii was following the law. In a written copy of an e-mail sent to the state, Hess said federal officials had reviewed the Hawaii program several times and found it to be operating properly.

“;Nor did we ever suspect misuse of federal funds related to the project,”; Hess said in his e-mail.