Otero County FY2025 Audit: Marred by Material Weaknesses and Federal Compliance Concerns

Alamogordo, NM – December 20, 2025 – Otero County’s independent audit for the fiscal year ended June 30, 2025, issued by Hinkle + Landers, PC, delivers an unqualified opinion on the county’s financial statements, affirming they fairly represent its financial position in accordance with generally accepted accounting principles (GAAP). However, the report highlights several material weaknesses in internal controls over financial reporting and compliance, along with instances of material non-compliance related to federal awards. These findings underscore ongoing challenges in asset management, cash handling, and grant oversight, potentially exposing the county to financial risks, grant funding disruptions, and increased scrutiny from state and federal regulators.

The audit, to be presented to the Board of County Commissioners March 12, 2026 and released publicly via the county’s agenda portal, emphasizes a restatement of beginning net position due to the adoption of GASB Statement 101 on compensated absences. While the overall financial health appears somewhat stable—with government-wide net position and fund balances detailed in the statements—the Schedule of Findings and Questioned Costs reveals six key issues, three of which are repeats or modifications from prior years. These negatives point to systemic gaps in processes, exacerbated by leadership transitions and reliance on external contractors, raising broader risks for fiscal accountability and operational efficiency.

Key Audit Findings and Their Implications

The report identifies the following findings, categorized by type and severity:

1. Capital Assets (2025-001, Repeated/Modified from 2023-004) – Classified as a material weakness in internal control over financial reporting. Auditors noted significant discrepancies in asset tracking, depreciation calculations, and construction-in-progress (CIP) reporting, requiring over $3.3 million in adjustments. Causes include inadequate reconciliation between systems and the general ledger, leading to risks of material misstatements. Management concurs and plans system enhancements, training, and external tracking by June 30, 2026.

2. Investments and Market Value Adjustments (2025-002, Repeated/Modified from 2024-004) – Another material weakness, stemming from commingled cash and investments without fund-level separation or fair value adjustments, necessitating auditor-led corrections. The new County Treasurer cited a lack of formalized procedures post-transition. This exposes the county to inaccurate financial reporting and potential investment losses if market fluctuations are not properly accounted for. Resolution is targeted for June 30, 2026.

3. Cash Reconciliations (2025-003) – A new material weakness, where June 2025 reconciliations mismatched bank statements by $1.37 million, requiring adjustments. Inadequate procedures and documentation during the Treasurer’s office transition heightened error risks. Management disputes the severity but agrees to implement written protocols by June 30, 2026, noting that updated reports were provided post-initial review.

4. Grant Financial Reporting and Accounting Controls (2025-004) – This material weakness and material non-compliance pertains to the Operation Stonegarden program (ALN 97.067, a major federal award from Homeland Security). Expenditures and revenues did not align with drawdowns or reports, with all seven tested financial reports submitted late and six mismatched to the ledger. Managed by contractor Broken Arrow Services, LLC, this led to a qualified opinion on the program. Risks include delayed reimbursements, grant forfeitures, or clawbacks. Management has addressed SEFA oversight and refers documentation to the contractor, claiming resolution by December 18, 2025.

5. Subrecipient Monitoring Processes and Controls (2025-005) – Similarly, a material weakness and material non-compliance for Operation Stonegarden, where only seven of 24 required subrecipient reports were provided, with inconsistent follow-up and documentation. This reliance on voluntary compliance increases the chance of unsupported or noncompliant subawards, potentially triggering federal audits or funding restrictions. Management concurs, pledging to track submissions and withhold reimbursements for non-compliance by June 30, 2026.

6. Undercollateralized Bank Account (2025-006, Repeated/Modified from 2024-007) – An instance of other non-compliance under state law (Section 12-6-5 NMSA 1978), where deposits at Southwest Heritage Bank exceeded pledged collateral by $1.5 million due to a banking transition. While resolved post-year-end (September 30, 2025), this violated state requirements and risked uninsured losses in case of bank failure.

Overall Risks and Negatives Highlighted

Despite the opinion on financial statements, the audit paints a concerning picture of internal controls, with material weaknesses indicating “a reasonable possibility that a material misstatement…will not be prevented or detected” timely. Repeated findings on capital assets and investments suggest persistent deficiencies, potentially stemming from staff turnover and inadequate training. Federal compliance issues, resulting in a qualified opinion on Operation Stonegarden, amplify risks: Otero County could face heightened grantor oversight, repayment demands, or ineligibility for future funding, especially critical amid budget strains from facility closures like the Otero County Processing Center.

Broader negatives include over-reliance on contractors for grant management, which dilutes accountability, and transition-related disruptions in the Treasurer’s office. These could erode public trust, complicate fiscal planning, and invite legal or regulatory penalties. The report also notes no significant deficiencies but stresses the need for robust policies to mitigate risks like financial misstatements, non-compliance fines, or operational inefficiencies.

Management’s Path Forward and Prior Progress

County officials, including Finance Director Julianne Hall and Treasurer Karl Melton, have outlined corrective actions with timelines ranging from immediate to June 2027. Several prior findings—such as prison revenues, financial close, payroll calculations, and conduit debt—were resolved, showing progress. However, the repetition of key issues underscores the urgency for sustained improvements.

Residents and stakeholders can access the full 163-page report on the Otero County agenda portal. The audit was discussed at an exit conference on December 18, 2025, with county leaders and auditors present. As Otero navigates economic challenges, including potential data center repurposing and regional partnerships, addressing these findings will be pivotal to ensuring fiscal resilience. - https://agendasuite.org/iip/otero/file/getfile/32739

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