Ethics: Who's in Charge?
An anonymous tip to a hotline within the State Auditor’s office in 2007 led to a lively legislative battle during the 2008 session over whether alleged violations of ethics laws by public officials should be handled by the Auditor, the State Ethics Commission, or both.
In accordance with the State Ethics Act, North Carolina public officials are required to submit a “Statement of Economic Interest” (SEI) to disclose any potential financial conflicts of interests that might affect their service to the state. In response to the query, “Are you aware of any other economic or financial information necessary to fully disclose any actual or potential conflicts of interest you may have had during the preceding year or have currently?”, Sen. Martin Nesbitt, an Asheville Democrat, failed to report his financial interest in a stock car racing enterprise owned by his adult son, eliciting the tip to the hotline.
State Auditor Les Merritt, a statewide elected official, heads the North Carolina Office of State Audit (OSA). The office maintains a “fraud, waste and abuse” hotline that can be accessed by North Carolina citizens who wish to report possible misdeeds by state officials and other state employees. The OSA’s investigative division moved forward with the Nesbitt complaint, beginning with an investigation in October 2007. As a normal part of establishing an audit trail, the legislator’s Statement of Economic Interest (SEI) was obtained from the State Ethics Commission, which normally receives the reports.
After reviewing Nesbitt’s SEI and assessing his “demeanor and conduct,” the Auditor’s Office concluded it had reason to question his statements to audit investigators. In an effort to confirm the veracity of certain statements, the investigators contacted the Ethics Commission to obtain information about a reported request from Nesbitt for an advisory opinion from the Commission on the accuracy of the statements made in the SEI. To the frustration of the State Auditor, the Commission said that it would not provide the information requested.
The Auditor, proceeding without the help of the Ethics Commission, completed his investigation and drafted a report, and the battle was on.
The Auditor concluded that Senator Nesbitt had a “direct financial interest” in Nesbitt Racing Enterprises, Inc., his son’s business, and that he had not reported this on his SEI. The Auditor based this conclusion on the fact that a garage co-owned by Nesbitt Ventures, Inc. (Senator Nesbitt’s business) was used as collateral for a $150,000 line of credit extended to Racing Enterprises. The Auditor further contended that because Blue Cross Blue Shield of North Carolina (BCBSNC) was one of sponsors of Racing Enterprises, Senator Nesbitt had a potential conflict of interest that should have been reported on the SEI.
Based on the issues raised by the Auditor, Nesbitt asked for an informal advisory opinion of the Ethics Commission. In a letter to Senator Nesbitt dated May 7, 2008, Kathleen S. Edwards, Assistant Director and Compliance Officer of the State Ethics Commission, disagreed with the Auditor about the relationship between Nesbitt Racing Enterprises, Inc. and Nesbitt Ventures, Inc. and the relationship between Nesbitt Racing and BCBSNC.
According to Ms. Edwards, the state ethics statures do not prohibit the kind of relationship involving providing collateral to the business of an adult family member not residing in the household. Furthermore, Edwards contended a situation where the sponsor or customer of a business entity whose loan was secured by another entity (co-owned by a legislator) do does not present a conflict of interest, or even a potential conflict of interest, on the part of the legislator.
Not only did the Ethics Commission disagree with the Auditor’s conclusion with respect to the potential conflict of Senator Nesbitt, it also denied that the Auditor even had jurisdiction over enforcing the State Government Ethics Act. The Ethics Commission argued that it is solely responsibility for implementing and enforcing the ethics statutes. As Kathleen Edwards put it, “… the (Ethics) Act places responsibility for its interpretation with the bipartisan State Ethics Commission” and the statutory provisions “were designed to enhance equitable ethics enforcement and minimize, to the extent possible, political influence over the process. These principles are threatened by a partisan elected official’s efforts to interpret and investigate violations of Act.” The “partisan elected official,” of course, was a reference to State Auditor Les Merritt’s Republican affiliation.
On May 27, 2008, Merritt publicly released his own findings on the Nesbitt affair. In his report, the Auditor notes that Nesbitt Ventures is in the business of owning and leasing real estate, “but its sole property is being used to provide financial backing to Nesbitt Racing. Therefore, if Nesbitt Racing fails, which could happen if a major financial sponsor backed out, Nesbitt Ventures and its owners are left holding the debt.”
Meanwhile, legislators down the street were entering the fray. The Ethics Commission, which was created only two years ago in response to scandals in state government involving officials reaching as high as the Speaker of the House, was about to have its mettle tested. Nesbitt said that he felt the SEI question was too vague, and legislation was drafted to re-word the question. But the bigger conflict involved the jurisdictional issue. Whose job is it to police the State’s ethics laws?
Auditor Merritt believes conflict of interest can exist even outside the Ethics Commission’s interpretation of the ethics legislation, and that the State Auditor has a role to pay as an ethics watchdog, independent of the legislature, noting that the Ethics Commission does not have true independence from the legislature. “Two watchdogs, the State Auditor and the Ethics Commission, are better than one when it comes to uncovering abuses in State government,” he wrote.
But over in the Democratically-controlled legislature, Senate Bill 1825, an act “to clarify Auditor hotline authority” was being drafted. As Merritt interpreted the measure, it would prohibit the Auditor from investigating ethics violations, placing those issues solely under the control of the State Ethics Commission.
Proponents of placing full investigative powers with the State Ethics Commission were anxious to avoid an embarrassing repeat of the Nesbitt scenario, where two conflicting advisory opinions may be handed down – one by the State Auditor and another by the Ethics Commission.
But a cry of “partisanship politics” arose among some opponents, who were quick to point out that in addition to the fact that Merritt is a Republican, members to the Ethics Commission are appointed by a Democratically-controlled government (the governor and legislative leaders).
The Ethics Commission must also answer to the Legislative Ethics Committee, which ultimately has the power to review, modify, or overrule advisory opinions issued to legislators by the Commission. In other words, if the Committee issues an advisory opinion, then the Commission must adopt that opinion as if it were their own. Further, the Legislative Ethics Committee can meet and hold hearings in secret on matters of legislator ethical violations, and has no obligation to release its’ findings to the public – giving the Committee an extraordinary amount of power.
Many believed that the bill was simply unnecessary. Despite the enactment of new legislation, the Auditor would still have the right to maintain the hotline and follow-up on tips (the bill requires that the Auditor report suspected violations of ethics laws to the Ethics Commission, violations of elections laws to the State Board of Elections, and possible criminal violations to the district attorney or the State Bureau of Investigation. Issues involving fraud, waste of government resources, and mismanagement will still fall under the Auditor’s jurisdiction).
Though arguments on all sides of the issue have merit, lawmakers who truly want to put the recent scandals behind them and regain the public trust should think twice about stripping a statewide elected Auditor of any authority in implementing state ethics laws. In a recent editorial regarding the ruckus, the Charlotte Observer noted that the whole episode could have been avoided had Nesbitt simply disclosed his interest. “While there are good arguments on both sides of this issue,” said the Observer, “the spirit of the ethics law is best described in an old but valuable piece of advice about public disclosure. When it doubt, get it out.”
Read more about this story in the Asheville Citizen-Times, including the Advisory Opinion of the Ethics Commission, the Auditor’s statement on possible changes in the ethics law, Sen. Nesbitt’s SEI report, the press release on the Auditor’s final report, and other related news articles.
Read an exchange of letters between Auditor Merritt and Sen. Nesbitt.
July 18, 2008
