With a checkered history and a woeful lack of internal oversight, a state Department of Health refund and recycling program has completed its latest two-year external audit.

In a biennial report covering the fiscal year that ended June 30, 2022, the Office of the State Auditor, after conducting a financial and program examination of DOH’s Deposit Beverage Container Program, found no reported deficiencies over its financial reporting or any noncompliance under accepted government accounting procedures, but did find that past instances of fraud it once experienced were less likely to occur.

Prior instances of fraud involved over- or underreporting the returns of recyclable beverage containers to designated recycling companies or third-party centers, which led to misrepresentations of deposits and fees the program actually took in.

In response to this audit, DOH staff met with the auditor on two separate days in June to discuss the report’s findings. However, the Health Department would later decline any formal comment on the auditor’s findings.

“DOH subsequently informed us it would not be submitting a written response to the draft report,” the audit released June 15 states.

Although the refund and recycling program’s issues involving fraud have reportedly waned, the audit did find what it called a “significant deficiency” in internal controls to curb the problem of fraud as well as the ongoing reliance on third-party certifications remained — meaning an increased risk of fraud is still of concern.

Under this program, distributors pay a 5-cent container fee and a 1-cent handling fee per beverage into the fund, generally passing those costs on to consumers, the report states. Consumers are reimbursed 5 cents per container at redemption centers, which in turn receive payment from the program based on the number of containers they report as redeemed.

“Over-reliance on the self-reporting by distributors and redemption centers may result in underpayments on deposits and the related container fees received by the department to administer the program, overpayments of deposit refunds and handling fees to redemption centers, and an overstated redemption rate,” the report states.

The audit further notes that “an overstated redemption rate could result in a misstatement in the department’s financial statements, as well as higher container fees for consumers to support the program.”

Since 2005 the Deposit Beverage Container program — funded for $63.15 million as of June 2022 — has assisted residents in gaining monetary refunds while recycling over 10 billion containers, actions that reduce the waste stream and litter in the environment.

To keep the program going, the Health Department certifies independent recycling companies to operate certified redemption centers, or CRCs, statewide that provide consumers with the 5-cent refunds.

But the program’s reliance on self-reported information remains an ongoing issue, whereby bad actors have appeared.

Among them, Whole Foods Market Inc., while acting as a beverage distributor, “substantially underpaid the program for more than six years — depositing $0.06 for each case of beverages instead of $0.06 for each individual container,” the state report says.

Moreover, the program could not collect underpayments from Whole Foods for the full six-year period, but recovered $46,198 for underpayments made from July 2012 through December 2014, the state report says. Similarly, the state identified instances of actual fraud at a redemption center.

In 2002 the state Legislature passed Act 176, which established the program in order to increase participation in deposit programs, increase recycling rates for specified beverage containers and reduce litter, among other actions.

Ten years later, after issues of fraud arose around the program, the Legislature passed Act 12, meant to compel the Department of Health “to develop and implement procedures to verify the accuracy and completeness of data reported by beverage distributors and redemption centers as recommended in the Office of the Auditor’s biennial reports,” the state says.

By August, to address lingering issues with the program, DOH reported it was actively recruiting an inspector to fill out its enforcement section, as well as filling other vacancies. DOH anticipated full staffing would enable the department to increase the frequency of redemption center inspections from quarterly to every other month, the report states.

Likewise, DOH revised its redemption center certification application for new applicants and those renewing certification.

Since 2021, applicants are now required to provide operational plans that incorporate fraud prevention procedures to ensure the collected beverage containers are secured and that receipts given to customers correlate with the deposit containers collected, the report states.

In addition, DOH sought amendments to administrative rules for such things as requiring beverage distributors to conduct independent third-party audits to verify the accuracy of their deposits and reports directly to the state. DOH has also reported plans to convene an advisory committee to assist in developing any new administrative rules related to the program as well as help update the state’s Integrated Solid Waste Management Plan, the audit indicates.

Still, the state’s auditor admits its own report is just a starting point.

“Given the short period of time elapsed since the issuance of our last review in December 2021 and the enactment of Act 12, we believe it is unrealistic to expect DOH to already have significant and meaningful improvements in place that we can audit,” the report states. “Instead, we asked DOH to provide us with an update on the steps it has taken to improve the program and implement the 2021 audit recommendations.”

And the auditor further notes the steps taken by the DOH program toward improving itself were not immediately assessed.

“We will perform a more detailed review in the future,” the auditor’s report concludes.