Ka Wai Ola - Office of Hawaiian Affairs, Volume 22, Number 7, 1 July 2005 — Auditor's report: OHA needs an independent consultant to watch over money managers [ARTICLE+ILLUSTRATION]

Auditor's report: OHA needs an independent consultant to watch over money managers

£ A no'ai kakou. On Jan. /\ 16, 2003, the Board of A. A.Trustees voted to hire two investment companies, Goldman Sachs and Frank Russell, to handle all of OHA's investment decisions. I abstained from the vote because I felt that it would be dangerous for the Board of Trustees to give up their direct oversight over the Native Hawaiian Trust Fund. I had further doubts after I read the contracts OHA's administration signed with Goldman & Russell. Our past contracts specifically stated that OHA, its trustees and employees would be protected from all actions, suits, claims, damages and expenses that arise out of a contractor's errors, omissions or acts. As you may recall, I wrote in my August 2003 article that since the contracts OHA signed with Goldman and Russell had no such language, OHA trustees are liahle for any mistakes that they make, even though we don't have any direct control over investment decisions. In March of 2003, OHA hired R.V. Khuns & Associates Ine. to eome up

with recommendations for OHA's investment policy. One of their recommendations was that the board should hire a separate and independent consultant to monitor both Goldman and Russell. I strongly fought for this when it was discussed at the board table. Unfortunately, the budget committee rejected the idea. While the budget committee may have disagreed with R.V. Khuns & Associates' recommendation, State Auditor Marion Higa supported the idea of an independent consultant in her April 2005 audit of OHA. Here are a few of her findings: (1) OHA has failed to create an independent function to oversee investment advisors. According to the auditor, basic things such as performance reporting, ensuring eomplianee with guidelines and risk management were not being done because OHA doesn't know how. The auditor wrote that OHA doesn't have enough knowledge, experience and expertise when it comes to overseeing investments. She stressed that OHA needs to hire someone (either in-house or an out-

side consultant) with experience in institutional investment oversight to make up for this deficiency. (2) OHA's laek of a standard report format has resulted in ineonsistent reporting by the advisors. The auditor wrote that OHA did not create a standard format for Goldman and Russell to report how they were investing our money. The auditor said that this was because OHA did not know what information it needed to properly evaluate them. The auditor also pointed out that it was fundamentally flawed to depend on Goldman and Russell to decide what should be reported. Goldman and Russell are just as liahle as OHA trustees for any losses that eome from not following OHA's investment policy, so why would they report any violations to OHA? To solve this problem, the auditor recommended that OHA consider hiring outside experts to design the performance reports. (3) Investment advisor eomplianee with certain guidelines cannot be verified. According to the auditor, OHA ean barely make sure that

Goldman and Russell are following OHA's investment policy because we aren't getting enough information from them. OHA doesn't even have the computer software needed to screen important information. The auditor recommended that, for OHA's protection, both Goldman and Russell should be required to sign a disclosure statement on a regular basis saying that they are following OHA's investment policy. I believe her recommendation is added confirmation that the eontracts our administration signed with Goldman and Russell did not contain proper safeguards for OHA. I hope this proves, onee and for all, that OHA needs an independent consultant to watch over our two investment managers. I mua Hawai'i nei... You ean see the full version of the 2005 OHA Aud.it on the State Auditor's website at www.statedii.us/ auditor/Years/2005report s.htm. For more information on this article, please eall Trustee Akana at 5940204.

Rowena Akana Trustee, At-large