FINANCIAL AUDIT OF THE DEPARTMENT OF BUSINESS, ECONOMIC DEVELOPMENT AND TOURISM STATE OF HAWAII Fiscal Year Ended June 30, 2009 _part1 docx

FINANCIAL AUDIT
OF
THE
DEPARTMENT OF BUSINESS, ECONOMIC
DEVELOPMENT AND TOURISM
STATE
OF
HAWAII
Fiscal Year Ended June
30,
2009
Submitted
by
The
Auditor
State
of
Hawaii
~
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N&KCPAs, Inc.
AC
COUNTANTSlc
ONSULTANl
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AMERICAN
SAVINGS
BANK
TOWER
1001
BISHOP

STREET.
SUITE
1700
HONOLULU,
HAWAII
96813-3696
r
(808)
524-2255
(80S)
523-2090
nkcpa.com
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IIl1
~
N&K
(PAs,
Inc.
ACCOUNTANTS
I
CONSULTANTS
March 19,2010
AMERICAN
SAVINGS
BANK
TOWER
1001
BISHOP
STREET,

SUITE
1700
HONOLULU,
HAWAII
96813-3696
T (808)
524~2255
F (808) 523-2090
Ms.
Marion Higa
Office of the Auditor
State of Hawaii
Dear
Ms.
Hi9a:
This
is
our report
on
the financial audit of the Department of Business, Economic
Development
and
Tourism, State of Hawaii (DBEDT),
as
of
and
for the fiscal year
ended June
30,
2009. Our audit was performed

in
accordance with the terms of our
contract with the Office of the Auditor, State of Hawaii
and
with the requirements of the
Office of Management
and
Budget (OMB) Circular A-133, Audits
of
States, Local
Governments, and Non-Profit Organizations,
and
the Compliance Supplement for
Single Audits
of
State and Local Governments.
OBJECTIVES OF THE AUDIT
The primary purpose of our audit was
to
form
an
opinion
on
the fairness of
the
presentation of the DBEDT's basic financial statements
as
of
and
for the fiscal year

ended June
30,
2009, and to comply with the requirements of
OMB
Circular A-133,
which establishes audit requirements for state and local governments that receive
federal financial assistance. More specifically, the objectives of the audit were as
follows:
1.
To provide a basis for
an
opinion
on
the fairness of the
DB
EDT's basic
financial statements
and
the schedule of expenditures of federal awards
as of and for the fiscal year ended June
30,
2009,
in
accordance with
accounting principles generally accepted
in
the United States of America.
2.
To consider the DBEDT's internal control over financial reporting
in

order
to
determine
our
auditing procedures
for
the purpose of expressing
our
opinions
on
the basic financial statements.
3.
To perform tests of the DBEDT's compliance with laws, regulations,
contracts,
and
grants, including applicable provisions of the Hawaii Public
Procurement Code (Chapter 103D, Hawaii Revised Statutes), that could
have a direct and material effect
on
the determination of financial
statement amounts.
4.
To consider the DBEDT's internal control over compliance with
requirements that
could
have a direct
and
material effect
on
a major

federal program
in
order to determine our auditing procedures for the
purpose of expressing our opinion
on
compliance and
to
test
and
report
on
internal
control
over
compliance.
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N&K (PAs,
Inc.
ACCOUNTANTS
I
CONSULTANTS
5.
To provide
an
opinion on the DBEDT's compliance with applicable laws,
regulations, contracts, and grants that could have a direct and material
effect on each major program.
SCOPE OF THE AUDIT

Our audit was performed
in
accordance with auditing standards generally accepted
in
the United States of America as prescribed
by
the American Institute of Certified Public
Accountants;
Government Auditing Standards, issued
by
the Comptroller General of the
United States; and the provisions of OMB Circular A-133. The scope of our audit
included an examination of the transactions and accounting records of the DBEDT for
the fiscal year ended June
30,
2009.
ORGANIZATION
OF
THE REPORT
This report
is
presented
in
five parts
as
follows:
• Part I
• Part
II
• Part

III
•
PartlV
• Part V
The basic financial statements
and
related notes of the DBEDT
as
of
and
for the fiscal year ended June
30,
2009,
and
our
opinion on the basic financial statements
and
supplementary
information.
Our report
on
internal control over financial reporting
and
on
compliance
and
other
matters.
Our report
on

compliance with requirements applicable
to
each
major
program
and
on
internal
control
over
compliance.
The schedule offindings
and
questioned costs.
The summary schedule of prior audit findings.
We
wish
to
express
our
sincere
appreciation
for
the
excellent
cooperation
and
assistance
extended
by

the officers
and
staff of the DBEDT.
Sincerely,
N&K CPAs,
Inc.
~.9.>I¥
Ron
T.
Shiigi
Principal
3
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PART I
DEPARTMENT OF BUSINESS, ECONOMIC DEVELOPMENT AND TOURISM
STATE OF HAWAII
TABLE OF CONTENTS
Page
FINANCIAL SECTION
Independent Auditors' Report
Management's Discussion and Analysis
Basic Financial Statements
Government-wide Financial Statements
Statement
of
Net Assets
Statement
of
Activities

Fund Financial Statements
7-8
9 - 16
17
18
Balance Sheet - Governmental Funds 19
Reconciliation of the Governmental Funds Balance Sheet to
the Statement
of
Net Assets
20
Statement
of
Revenues, Expenditures, and Changes
in
Fund Balances - Governmental Funds
21
Reconciliation
of
the Change
in
Fund Balances
of
Governmental Funds to the Statement of Activities
22
Statement
of
Revenues and Expenditures - Budget and
Actual - General Fund and Economic Development Special
Revenue Funds

23
Statement
of
Assets and Liabilities - Agency Funds 24
Notes to the Basic Financial Statements
25
- 42
4
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DEPARTMENT OF BUSINESS, ECONOMIC DEVELOPMENT AND TOURISM
STATE OF HAWAII
TABLE OF CONTENTS
Page
PART I
FINANCIAL SECTION (Continued)
Supplementary Information
PART
II
Schedule
of
Expenditures
of
Federal Awards
Notes to Schedule
of
Expenditures
of
Federal Awards
AUDITORS" REPORT ON INTERNAL CONTROL OVER

FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER
MATTERS
44-45
46
PART III
Independent Auditors' Report on Internal Control over Financial
Reporting and on Compliance and Other Matters Based on an
Audit
of
the Basic Financial Statements Performed
in
Accordance
with Government Auditing Standards 48 - 49
AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS
APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL
CONTROL OVER COMPLIANCE
Independent Auditors' Report on Compliance with Requirements
Applicable to Each Major Program and
on
Internal Control over
Compliance
in
Accordance with OMB Circular A-133
51
-
52
PART IV
PART V
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS

Status Report
5
54
56
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PART I
FINANCIAL SECTION
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N&K
(PAs,
Inc.
ACCOUNTAN[SICONSULT~
To the Auditor
Office of the Auditor
State
of
Hawaii
INDEPENDENT AUDITORS' REPORT
AMERICAN
SAVINGS
BANK
TOWER
1001
8ISHOPSTREET,
SUITE
1700

HONOLULU,
HAWAII
96813-3696
T (808) 524·2255 F (808) 523-2090
We have audited the accompanying financial statements of the governmental activities
and
each major fund of the Department of Business, Economic Development
and
Tourism of the State of Hawaii (DBEDT), as of
and
for the fiscal year
ended
June
30,
2009, which collectively comprise the DBEDTs basic financial statements
as
listed
in
the foregoing table of contents. These financial statements are
the
responsibility
of
the DBEDTs management. Our responsibility
is
to express
an
opinion
on
these
basic

financial
statements
based
on
our
audit.
We
conducted our audit
in
accordance
with
auditing standards generally accepted
in
the United States of America
and
the standards applicable
to
financial audits contained
in
Government Auditing Standards, issued by the Comptroller General of the United
States. Those standards require that we plan
and
perform the audit
to
obtain
reasonable assurance about whether the financial statements are free of material
misstatement.
An
audit includes examining,
on

a test basis, evidence supporting
the
amounts
and
disclosures
in
the basic financial statements.
An
audit also
includes
assessing the accounting principles used
and
significant estimates made
by
management,
as
well
as
evaluating
the
overall financial statement presentation.
We
believe that
our
audit
provides
a reasonable
basis
for
our

opinion.
As
discussed
in
Note
A,
the financial statements of the DBEDT are intended to present
the financial position
and
the changes
in
financial position, where applicable, of only
that portion
of
the governmental activities,
and
each major fund of the State of Hawaii
that
is
attributable to the transactions
of
the DBEDT. They
do
not purport
to,
and
do
not,
present fairly the financial position of the State of Hawaii
as

of June
30,
2009,
and
the
changes
in
its
financial position, where applicable, for the fiscal year then ended
in
conformity with accounting principles generally accepted
in
the United States of
America.
In
our opinion, based
on
our audit, the financial statements referred
to
above present
fairly,
in
all material respects, the respective financial position of the governmental
activities
and
each major fund of the DBEDT,
as
of June
30,
2009,

and
the respective
changes
in
financial position, where applicable, thereof
and
the respective budgetary
comparison for the general and economic development special revenue funds for the
fiscal year then ended
in
conformity with accounting principles generally accepted
in
the
United States of America.
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ACCOONTANTS
I
CONSULTANTS
In
accordance with Government Auditing Standards, we have also issued our report
dated March
15,
2010,
on
our consideration of the DBEDT's internal control over
financial

reporting
and
on
our
tests
of
its
compliance
with
certain
provisions
of
laws,
regulations, contracts
and
grant agreements and other matters. The purpose of that
report
is
to describe the scope of our testing of internal control over financial reporting
and
compliance
and
the results of that testing,
and
not to provide
an
opinion
on
the
internal

control
over
financial
reporting
or
on
compliance.
That
report
is
an
integral
part
of
an
audit performed
in
accordance with Government Auditing Standards
and
should
be
considered
in
assessing
the
results
of
our
audit.
The management's

discussion
and
analysis
is
not
a
required
part
of
the
basic
financial
statements but
is
supplementary information required by the Governmental Accounting
Standards Board. We have applied certain limited procedures, which consisted
principally of inquiries of management regarding the methods of measurement
and
presentation of the supplementary information. However, we did not audit
the
information
and
express
no
opinion
on
it.
OUf
audit
was

conducted
for
the
purpose
of
forming
an
opinion
on
the
financial
statements that collectively comprise the DBEDT's basic financial statements. The
accompanying schedule of expenditures
of
federal awards
is
presented for purposes of
additional analysis as required
by
U.S. Office of Management
and
Budget Circular
A-133, Audits
of
States, Local Governments,
and
Non-Profit Organizations,
and
is
not a

required part of the basic financial statements. Such information has been subjected
to
the aUditing procedures applied
in
the audit of the basic financial statements
and,
in
our
opinion,
is
fairly stated
in
all material respects
in
relation to the basic financial
statements
taken
as
a
whole.
Honolulu,
Hawaii
March 15,2010
8
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Department
of
Business,
Economic

Development and
Tourism
State
of
Hawaii
MANAGEMENT'S DISCUSSION AND ANALYSIS
Fiscal Year Ended
June
30, 2009
As
management of the Department of Business, Economic Development
and
Tourism, State of
Hawaii
(DBEDT),
we
offer readers of the DBEDT's basic financial statements this narrative overview
and
analysis of the financial activities of the DBEDT for the fiscal year ended June
30,
2009.
FINANCIAL HIGHLIGHTS
• The assets of the DBEDT exceeded its liabilities
at
June
30,
2009 by $81.0
million (net assets).
•
Of

the total net assets, the amount of $30.8 million or 38.0% was unrestricted
and may
be
used by the DBEDT for its operations and activities
in
achieving its
goal of sustainable growth of Hawaii's economy.
• The DBEDT's liabilities reported
in
the statement of net assets increased during
the current fiscal year to $16.2 million,
an
increase of $0.8 million or 5.0% from
the prior fiscal year.
• At June
30,
2009, the DBEDT reported combined ending fund balances of $34.6
million.
Of
this amount, $5.8 million or 16.8% of the total fund balances
is
available for spending at the DBEDT's discretion (unreserved fund balance)
and
the remaining $28.8 million represents amounts reserved for specific purposes.
OVERVIEW OF THE BASIC FINANCIAL STATEMENTS
This discussion and analysis
is
intended to serve as an introduction to the DBEDT's basic
financial statements. The DBEDT's basic financial statements are comprised of three
components: (1) government-wide financial statements, (2) fund financial statements, and

(3)
notes to the basic financial statements. This report also contains other supplementary
information
in
addition to the basic financial statements themselves.
Government-wide
Financial Statements
The government-wide financial statements are designed
to
provide readers with a broad
overview of the DBEDT's finances,
in
a manner similar to a private sector business.
The statement of net assets presents information on all of the
DB
EDT's assets and liabilities,
with the difference between the two reported
as
net assets. Over time, increases or decreases
in
net assets may serve
as
a useful indicator of whether the financial position of the DBEDT
is
improving or deteriorating.
The statement of activities presents information showing how the DBEDT's net assets changed
during the most recent fiscal year. All changes
in
net assets are "reported
as

soon
as
the
underlying event giving rise to the change occurs, regardless of the timing of related cash flows.
Thus, revenues and expenses are reported
in
this statement for some items that will only result
in
cash flows
in
future fiscal periods (e.g., unused vacation leave).
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Department
of
Business,
Economic
Development and Tourism
State
of
Hawaii
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Fiscal Year Ended
June
30, 2009
Fund Financial Statements
A fund
is
a grouping of related accounts that

is
used to maintain control over resources that
have been segregated for specific activities or objectives. The DBEDT uses fund accounting
to
ensure and demonstrate compliance with finance-related legal requirements. The funds of the
DBEDT can
be
divided into two categories, Governmental Funds and Fiduciary Funds.
Governmental Funds
Governmental Funds are used
to
account for essentially the same functions reported
as
governmental activities
in
the government-wide financial statements. However, unlike the
government-wide financial statements, Governmental Funds financial statements focus
on
near-term inflows and outflows of spendable resources,
as
well
as
on
the balances of
spendable resources available at the end of the fiscal year. Such information may
be
useful
in
evaluating the DBEDT's near-term financing requirements.
Because the focus of Governmental Funds

is
narrower than that of the government-wide
financial statements, it
is
useful to compare the information presented for Governmental
Funds with similar information presented for governmental activities
in
the government-wide
financial statements.
By
doing
so,
readers may better understand the long-term impact of
the DBEDT's near-term financing decisions. Both the Governmental Funds balance sheet
and the Governmental Funds statement of revenues, expenditures, and changes
in
fund
balances provide a reconciliation to facilitate this comparison between Governmental Funds
and governmental activities
in
the government-wide financial statements.
Information
is
presented separately
in
the Governmental Funds balance sheet and
in
the
Governmental Funds statement of revenues, expenditures, and changes
in

fund balances
for the general fund, economic development special revenue fund, and capital projects fund.
The DBEDT adopts
an
annual appropriated budget for its general fund
and
economic
development special revenue fund. A budgetary comparison statement has been provided
for these funds to demonstrate compliance with this budget. The budgetary comparison
statement for the general fund and the economic development special revenue fund
is
located
in
the basic financial statements.
Fiduciary
Funds
Fiduciary Funds are used to account for resources held for by the DBEDT
in
an
agency
capacity.
Notes
to
the
Basic
Financial Statements
The notes to the basic financial statements provide additional information that
is
essential to a full understanding of the data provided
in

the government-wide
and
fund financial statements.
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Department
of
Business,
Economic
Development and Tourism
State
of
Hawaii
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Fiscal Year Ended
June
30,
2009
GOVERNMENT-WIDE FINANCIAL ANALYSIS
The following
is
a financial analysis
on
the governmental activities of the DBEDT. Net assets
are a useful indicator of a government's financial position. For the DBEDT, total assets
exceeded liabilities
by
$81.0 million, and decreased $10.2 million or 11.2% over the course of
this fiscal year's operations.

The following table was derived from the government-wide statement of net assets:
Net
Assets
June
30, 2009 and 2008
(Amounts
in thousands)
2009
2008
Assets
Current and other assets $
46,996 $ 53,330
Capital assets, net
50,195 53,268
Total assets $
97,191 $ 106,598
Liabilities
Long-term liabilities, net of current portion $ 1,615 $
1,653
Other liabilities
14,580 13,770
Total liabilities
16,195
15,423
Net assets
Invested
in
capital assets, net
50,195 53,268
Unrestricted

30,801
37,907
Total net assets
80,996 91,175
Total liabilities and net assets
$
97,191
$ 106,598
Analysis
of
Net Assets
By
far the largest portion of the DBEDT's net assets ($50.2 million or 62.0%) reflects its
investment
in
capital assets (e.g., land, buildings, and equipment), less any related debt used
to
acquire those assets that is still outstanding. The DBEDT uses these capital assets to provide
governmental services to the public and businesses; consequently, these assets are not
available for future spending.
The remaining balance of unrestricted net assets of $30.8 million or 38.0% of the total net
assets may be used to meet the DBEDT's ongoing obligations for its operations relating to
business and economic development.
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Department
of
Business, Economic Development and Tourism
State

of
Hawaii
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Fiscal Year Ended June
30,
2009
Current
and
other assets decreased
by
$6.3 million or 11.9% from the prior fiscal year, due
primarily to decrease
in
program revenues
and
funds appropriated for new capital
improvement projects.
During the current fiscal year, capital assets decreased
by
$3.1
million or
5.8%,
due primarily
to the recording of current year depreciation expense, which
was
offset
by
current year
additions for capital improvement projects of the Natural Energy Laboratory of Hawaii
Authority

and
the Aloha Tower Development Corporation's Harbors Modernization Program.
Total liabilities increased
by
$0.8 million or 5.0% from the prior fiscal
year,
due primarily to a
$0.2 million decrease
in
the amount of vouchers payable, $0.6 million decrease
in
the
amount of deferred revenues,
and
a $1.55 million increase
in
accrued claims payable

Changes in Net Assets
The following financial information
was
derived from the government-wide statement of
activities
and
reflects how the DBEDT's net assets changed during the fiscal
year.
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