Most of SC’s mysterious $1.8 billion never existed, according to an independent auditor
Most of the nearly $2 billion that was listed in a flow-through account set up during an accounting system transition never existed, according to a new report from an independent auditor hired by the state.
The report, conducted by Washington, D.C.-based consulting firm AlixPartners, also says errors by the treasurer’s office over the years led to the $1.8 billion accounting mistake. The report found all but roughly $200 million of the money listed did not exist.
Both the treasure and comptroller knew about the issue, the report said. The outside auditor was able to trace each transaction.
Because of the restatements in the state’s books, the Securities and Exchange Commission is investigating those books. The state’s attorney general’s office has spent about $4 million defending the state in the investigation and has asked lawmakers for $5 million more.
Lawmakers set aside $3 million for the outside forensic auditor to come in and determine whether the $1.8 billion actually existed, where the money was supposed to go, and how it went unreported for years. The review included examining accounting entries for multiple state funds and accounts over the course of nearly a decade.
The money was in a flow-through account created when the state switched accounting systems. The existence of the $1.8 billion was also was included in the state’s annual comprehensive financial reports, which lists the state’s cash balances. Those reports are put together by the comptroller general’s office and are considered by credit ratings agencies.
Former Comptroller General Richard Eckstrom resigned in 2023 after he disclosed he inflated the state’s cash balances by $3.5 billion over the course of a decade.
Part of the issue included the comptroller general not having enough people on staff to carry out the office duties including the transition from one accounting system to another, an issue that was touched on when he was under investigation by a state Senate Finance panel in 2023.
Questions over the $1.8 billion was brought to the attention of lawmakers by current Comptroller-General Brian Gaines, who was appointed to replace Eckstrom. After the disclosure, tension grew between Gaines and Loftis.
State Sen. Larry Grooms, R-Berkeley, who led the Senate Finance Committee panel investigating the $1.8 billion last year, was critical of Loftis.
“It was clear that the books didn’t balance,” Grooms said. “What’s the question right now? And this is where we’re going to be looking. Was that an error? Was it negligence? Was it malfeasance, misfeasance? Was it fraud, or whether or whether there was a cover up?”
A day before the report was released Wednesday, Treasurer Curtis Loftis, who was blamed by a panel of senators for the questions surrounding the $1.8 billion, defended himself.
“To be very clear, there is no mystery bank account with $1.8 billion in it. It’s never existed. It never will exist. Every dollar, every dime that the State Treasurer’s Office has is in our books. You can find it anytime that you want to,” Loftis said to the Legislative Black Caucus.
In a statement after the release of the report, Loftis said, “The citizens of South Carolina can be confident that their money is safe. We, along with our state partners, look forward to reviewing the report in its entirety.”
Loftis’ relationships with some lawmakers is sour. He will probably continue to face questions about the money.
Loftis last year said the money had generated $250 million in investment earnings, a statement that can yield increased legal scrutiny on him.
“Clearly you can’t earn interest over money that doesn’t exist,” Grooms said. “So I’ll be curious to hear how he explains that.”
According to the report, the $1.8 billion represents a combination of journal entries that allowed the state treasurers office to reconcile the state’s books in the accounting system to the individual bank accounts over which it has custody.
“However, ... approximately $1.6 billion of the $1.8 Billion is the result of incorrect journal entries recorded during Phase 2 of the bank conversion process and the remaining approximately $200 million is already included in the reported bank balances of the state treasurer’s office,” the report said.
“In other words, the $1.6 billion is not actual cash,” the report said.
The additional $200 million belongs in the state’s general fund.
“We understand a former (state treasurer’s office) employee was more focused on ensuring SCEIS balanced to the bank accounts rather than understanding the reason for any imbalance,” the report said.
The report includes 25 recommendations.
One is to hire an independent third party to oversee compliance with this report, having the state auditor no longer report to the comptroller or treasurer, and having the treasurer’s office develop policies and procedures report and have independently confirmed cash and investments in its custody.
The comptroller general’s office has to provide additional training to the treasurer to explain where cash and investments show up in the annual financial report, establishing checklist on when the annual reports can be published, hire additional employees and implementing a procedure for tracking and documenting errors and correcting them.
Gov. Henry McMaster, while speaking to reporters, called the audit of the money in official state financial documents an unintended error or series of errors.
“There is no missing or stolen money. The funds do not exist,” McMaster said. “It also confirms that there were unintended accounting mistakes made by different parties involved in state government’s transition from an old accounting system to the new accounting system.”
McMaster wasn’t calling for Loftis to leave or be removed. Loftis has said he does not plan to run for reelection in 2026.
“I find no single person at fault. It may be the system,” McMaster said. “This is one of those situations where, if everybody is responsible, then nobody’s responsible. And so that’s, that’s what we’re dealing with.”
Grooms was less generous.
“I do think the honorable thing to do would be for our treasurer to resign to help in the SEC investigation as much as he can, so that our state and the taxpayers won’t be punished from a possible downgrade of our bond rating,” Grooms said.
This story was originally published January 15, 2025 at 6:22 PM with the headline "Most of SC’s mysterious $1.8 billion never existed, according to an independent auditor."
