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The Long Trail

The government's tallying of Indian trust money may well be the most ambitious accounting project in U.S. history. It's also the most controversial.
John Goff, CFO Magazine
October 1, 2007

Deep underneath an industrial park in Lenexa, Kansas — not far from Shawnee Mission Lake and Arapaho Park — the work goes on. In a vast underground warehouse, historians and archivists carefully unpack endless rows of boxes. The cartons, sent from far-flung federal warehouses and obscure outposts on Indian reservations, contain financial records collected over the years by government agencies.

Some of the items date to the late 19th century, back to the days of Indian chiefs Looking Glass, Red Cloud, and Gall. Once indexed, the documents — mostly leases and bills — are coded and entered into a government computer system. To date, workers in Lenexa have gone through some 160,000 boxes, processing nearly 40 million coded pages.

Those pages, sometimes little more than bits of paper, are pieces of a puzzle — a puzzle that the Department of the Interior (DoI) dubs The Historical Accounting Project for Individual Indian Money (IIM) Accounts. The purpose of the massive project is to reconcile, for the first time, individual trust accounts managed for decades and decades by the federal government on behalf of Native Americans.

By the time the project is completed in 2011, the accounting will have consumed $274 million over eight years. That dwarfs audits of large publicly traded companies, which tend to cost about $10 million. It is, noted former Secretary of the Interior Gale Norton, "an accounting project of unprecedented proportions."

It is also wildly controversial. Elouise Cobell, a former treasurer of the Blackfeet Nation who has sued the DoI to force this historical reckoning of the individual Indian trusts (Cobell v. Kempthorne), claims that more than $100 billion may be missing from the individual accounts. But Ross Swimmer, who heads up the Interior Department agency overseeing the project (as special trustee at the Office of the Special Trustee for American Indians, or OST), believes the amount owed to individual Indians is far less — more likely in the millions than billions.

The assertion has not gone over well in Indian country. Some tribal leaders claim the Historical Accounting Project has nothing to do with history or accounting. By their lights, the Interior Department is gaming the system, intent on producing a low figure — one that will cow litigants into settling on the cheap. "This accounting was intended to give trustees a chance to assess their claims," says Keith Harper, class counsel for the Cobell litigants. "It's not supposed to be for limiting liability."

Things turned ugly in March. That's when the White House offered to pay $7 billion over 10 years to settle individual and tribal claims. The money would also help pay for a DoI computer-security upgrade, extinguish the Cobell class-action suit and 108 tribal suits, and prohibit any future trust-fund litigation. "The offer was seen by all tribes as an insult," notes Michael Marchand, chairman of the business council of the Confederated Tribes of the Colville (Washington) Reservation. "It was a clear signal that the Administration has no interest in settling anything."

Takeover Strategy
Native Americans have seen this movie before. Administration after Administration has pledged to resolve the trust issue — with few tangible results. The difficulty in settling the ledger lies in the peculiar nature of the accounts themselves.

Typically, those 320,000 or so accounts (from 1938 to 2000) contain payments from oil companies or ranching concerns — businesses that must negotiate with the government to gain access to the 10 million acres of individually owned Indian allotments. (Tribes hold 46 million acres.) Some documents related to the accounts go back to the 1887 law that empowered the federal government to seize Indian lands and then act as trustee for individual Native Americans (see "Divide and Conquer" at the end of this article). "There is nothing comparable in U.S. history, where one sovereign took complete control of the assets of another group," says Melody McCoy, an attorney at the Native American Rights Fund. "This isn't a pension fund. Tribes didn't voluntarily contribute to it."

In 1989, at the prodding of the U.S. Congress, the government hired Arthur Andersen to perform a full historical accounting of both individual Indian and tribal trust-fund accounts. Five years and $21 million later, the firm reported that, due to missing records and the lack of an audit trail in the Bureau of Indian Affairs (BIA) systems, it could reconcile only tribal accounts — and even then, only those opened after 1972.

The Andersen report did not exactly stun longtime BIA watchers. The agency, part of Interior, has long been criticized for its handling of Native American trusts. The Government Accountability Office has repeatedly slammed the bureau's reporting systems. In 1991, Interior itself characterized the entire BIA as a material internal-control weakness.

In 1994, Congress passed the American Indian Trust Fund Management Reform Act, mandating a tallying of the tribal and individual accounts. But it took a federal court order six years later to jump-start the project, and the judge on that case has since been removed at the behest of the Justice Department.


Meanwhile, pressure is mounting on Indian litigants to settle. Tribal leaders say if the Cobell lawsuit drags on much longer, many elderly beneficiaries will die before seeing any money. The board of the United Southern and Eastern Tribes also claims that the DoI is offsetting some of the costs arising from the Cobell litigation by diverting funds earmarked for basic services on Indian reservations. Sen. John McCain (R–Ariz.) introduced a bill that would settle all individual accounts for $8 billion (with no ban on future suits). The legislation, supported by many tribes, was suddenly withdrawn from committee consideration in August, after Interior indicated it wanted to help craft legislation that would be acceptable to Indian litigants. But as John Dossett, general counsel for the National Congress of American Indians, points out, it's hard for Native Americans to agree to an amount if they're not sure what they're owed. "How do you know if you're getting a good deal or a bad one?" he asks.

Accountants have issued qualified opinions on audits of the Indian trust funds every year since 1996, citing, among other things, weaknesses in controls and processes. And while lax internal controls are not unheard of at federal agencies, few departments have been skewered like the BIA — and fewer serve as trustees. Even Swimmer, a former principal chief of the Cherokee Nation of Oklahoma, acknowledges that previous systems "were not appropriate for the work that needed to be done for the majority of the time of the trusts."

Nevertheless, officials at the DoI say the historical accounting is uncovering few mistakes. They claim that less than one percent of all transactions reconciled to date have been in error. Swimmer says he's not surprised by the results. "It was a manual system," he notes, "but it worked." He adds that the weak link in the old system was the agency's reliance on BIA field offices to handle lease proceeds flowing into the system. "Accountants found risk," he grants, "but not losses."

Critics contend that the department hasn't found losses because it isn't looking for them. The Office of the Special Trustee, for example, has yet to tackle most transactions dating from the agency's "paper era" — that is, before Interior moved to an electronic ledger system in 1985. The agency also appears to be stacking the deck in its favor when calculating error rates. It notes that the absence of sufficient supporting documentation for a transaction does not imply an error — and "it does not plan to include such occurrences in the calculated national error rates."

Fractured Nation
Classifying uncorroborated transactions as accurate does little to mollify critics. In addition, the OST's initial work zeroed in on the types of trust accounts that are easiest to reconcile. These large, often lump-sum payments (such as court awards) are made to native nations and later distributed to individual tribal members. "They are the simplest [transactions], the least likely to be subject to error or fraud," claims Cobell. In short, "the low-hanging fruit."

Reconciling land-based leases — for logging rights and the like — could prove even thornier. Payments into those accounts, which currently make up more than 75 percent of the individual Indian accounts, often show up sporadically and in varying amounts. And thanks to the handing down of land allotments to heirs, the accounts often have a lot of beneficiaries (a process called fractionation). Currently, beneficial ownership of the more than 320,000 individual accounts is divided among 4 million interests, with some allotments boasting a thousand beneficiaries or more. Deposits into these accounts sometimes amount to just 3 or 4 cents.

The OST had planned to perform a broader transaction-by-transaction reconciliation of individual Indian accounts, including the badly fractionated land-based accounts. But, facing time and funding constraints, the OST has scaled back the scope of the Historical Accounting Project. Under the latest scheme, the agency ended up performing statistical sampling on land-based transactions valued at under $100,000. With sampling, the OST takes a small number of transactions and applies the error rate to all accounts within specified "strata." Those accounts are then categorized as reconciled.

It's hard to assess the accuracy of the approach. The consultants performing the sampling work, a University of Chicago offshoot called NORC, declined to be interviewed for this article. Neal Hitzig, a professor of accounting at Queens College (New York), says statistical sampling is "the way to go when the target population is so large you can't audit all the transactions." Certainly, a blow-by-blow corroboration of every IIM transaction would be prohibitively expensive. Most estimates peg the cost of such a full-on reckoning at $13 billion — equal to all the money that has gone into the accounts since 1910.

But sampling has drawn heavy fire from various quarters. Some question whether the sample population is truly random or whether it has been skewed to limit the government's liability. Others say a commercial trustee would never rely on sampling to verify the accuracy of account balances. In a report given on behalf of the Cobell plaintiffs, Richard Fairchild, a former director of trust policy at the OST, claimed that statistical sampling has "no place in a fiduciary accounting." Indeed, some in Indian country think the substitution of sampling for transaction verification borders on racism. Says Harper, who heads law firm Kilpatrick Stockton's Native American rights practice: "The Interior Department is saying that Indian beneficiaries don't deserve the same kind of accounting that any fiduciary would provide to any trustee."


This Is Not Attest
Then again, accounting engagements rarely examine 120 years of activity, involve 320,000 accounts, and cover 100 million transactions. What's more, an industry standard for fiduciary accounting doesn't exist. Auditors and trust managers tend to follow the Uniform Principal and Income Act of 1997. But that code was developed by the insurance industry and has not been adopted by every state. Says Ira Herman, director of the estate and trust practice at J.H. Cohn: "There is no such thing as GAAP for fiduciary accounting."

Even critics of the OST's approach acknowledge the unusual circumstances surrounding the Historical Accounting Project. "This is obviously not a traditional audit," says Geoffrey Rempel, a former Price Waterhouse CPA working for the Cobell litigants. But, Rempel asserts, "you can still take the principles in GAS [governmental accounting standards] and GAAP and apply them here."

In truth, it's tough to tell what accounting standards the OST is applying. The DoI touts the phalanx of consulting firms working on the project, including five accounting firms. (All declined to be interviewed for this story.) But the firms are not performing an audit. Instead, the Historical Accounting Project more closely resembles an "agreed-upon-procedures" engagement. Indeed, internal DoI documents show that the agency has instructed the accounting firms to refrain from using the word audit or even attestation when discussing their roles in the project.

Mostly, the firms are adhering to something called the Accounting Standards Manual. That lengthy, oft-revised book is extremely detailed. It is also the OST's handiwork. Thus, the accounting firms are following OST guidelines — and are not offering conclusions about their findings. As Grant Thornton noted in a letter regarding its role as quality-control agent: "[the firm's] assessment of the quality of work performed by...accounting teams performing the historical accounting is based primarily on [the] Accounting Standards Manual.... This assessment is not an audit and, accordingly, we do not express an opinion."

The OST does note that the quality-control firm "tests for compliance with the American Institute of Certified Public Accountants standards." Those guidelines, however, address the professional conduct of consultants, and not audit standards.

Location, Location, Location
Still, the absence of a GAAP audit does not mean that the numbers produced by the Historical Accounting Project are off. Nor does it mean that lease money intended for Native Americans found its way into the wrong pockets. "When I started working with Cherokee Nation in 1972," recalls Swimmer, "I met a lot of BIA people. They took a lot of pride in what they did. And they weren't out to try and cheat anybody."

Without a good paper trail, it's hard to say for sure if Native Americans have received all monies due them. DoI officials say the effort in Lenexa is providing the necessary documentation to corroborate transactions. In a recent court filing, the Interior Department noted that "[w]ith few exceptions, the Indian trust records needed for the historical accounting exist, are being located with success, and are being used to reconcile IIM account transactions."

Critics charge that the standards used by the OST to confirm transactions fall far below what you'd find in the private sector. DoI memos do reveal that the department advised accountants working on the project to use "alternative procedures," as well as their own judgment, to verify transactions in the absence of moresolid documentation. "When you peel off the veneer," insists Rempel, "the procedures they're using could validate anything."

A canceled check, for instance, is apparently not required to prove that a payment was made by a lessee. This surprises J.H. Cohn's Herman: "As a fiduciary, you have the absolute responsibility of knowing every single receipt and every single disbursement, and you want to know every document that's associated with it."

The OST could have difficulty finding every document. Some records-warehouses on reservations were little more than glorified sheds. In 1999, Treasury reported that 162 boxes relating to the Indian trust-fund litigation had been accidentally destroyed. Apparently, the boxes contained government forms reflecting disbursements made by federal agencies from 1900 to 1958.

The revelation did not exactly calm fears in Indian country about the veracity of the Historical Accounting Project. "If the normal bar for trust accounting is 100, this project started out at 50," claims Harper. "Now it's at 2. Ultimately, it will be down to 0." He pauses. "This whole thing is an exercise in nothing."

On September 10, the DoI said it would not comply with a federal judge's order to turn over electronic trust data to the Cobell plaintiffs.

In Lenexa, the trucks keep rolling in. The work continues.

John Goff is a senior editor at CFO.



Divide and Conquer

While the federal government has been managing tribal lands since the 1820s, it didn't take over as trustee for individual Indians until 1887. That's when the U.S. Congress passed the General Allotment Act, aka the Dawes Act. That legislation, ostensibly an attempt to assimilate Native Americans, gave each member of a recognized tribe up to 160 acres of land, to be held in trust by the government. The government then sold off the surplus acreage. By the time the allotment period was halted in 1934, Washington had auctioned off roughly 90 million surplus acres — nearly two-thirds of Indian country — to non-Indians.

The remaining 56 million acres (10 million for individual Indians and 46 million for tribes) still make up one of the largest land trusts in the world. Oil leases and grazing rights, among other things, generated about $800 million in proceeds in fiscal 2006. The money went to 250 tribes and roughly 4 million individual Indians.

Not surprisingly, the Administration would like to get out of the Indian-trust business, handing that responsibility back to tribes. Some tribes, such as the Confederated Salish and Kootenai Tribe in Montana, already manage their leases.

But not all tribes want to see the government abandon its role as trustee. They point out that on the Great Plains, for instance, leases come mostly from grazing rights. Negotiating a single lease with dozens of lessors can get extremely complicated. Says John Dossett, general counsel for the National Congress of American Indians: "The allotment holders rely on the Bureau of Indian Affairs to pull together a whole lot of allotments into a single grazing range."

What's more, some tribal members believe poorer tribes — which is to say most of them — do not currently have the resources or trust expertise to manage the leases. They believe the United States still has an obligation to look out for the interests of those tribes, many of which gave up their land at gunpoint. "Millions of acres of land were transferred to the U.S. for settlement, and in return the U.S. promised to provide health care, education, and economic development," says Michael Marchand, chairman of the Business Council of the Confederated Tribes of the Colville (Washington) Reservation. "This is what established the trust relationship. Now the U.S. wants to [renege] on these agreements." — J.G.





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