Texas State Auditor's Office Report On Emerging Technology Fund
Texas State Auditor's Office Report On Emerging Technology Fund
State Auditor
An Audit Report on
Overall Conclusion
Background Information
The Emerging Technology Fund (ETF) should make The Legislature established the Emerging
significant improvements to promote greater Technology Fund (ETF) in 2005 and initially
transparency and accountability. funded it with:
$100 million from the General Revenue
Issues in a number of areas impair the ability to Fund.
administer the ETF in the best interests of the $100 million from the Economic
Stabilization Fund (Rainy Day Fund).
State. It is important to hold recipients of funds As of August 31, 2010, a total of 153 grants
accountable. Auditors identified the following and awards totaling $342,336,567 had been
weaknesses: awarded to recipients.
Recipients can receive funds in three ways:
Decision making related to the ETF and Commercialization awards are
recipients of funds is not open to the public. investments that help companies take
ideas from concept to the marketplace.
The ETF conducts limited monitoring of Research matching grants create public-
private partnerships with higher
recipients’ performance and expenditures of education institutions, federal
funds. government grant programs, and
industry.
The Office of the Governor does not report the Research superiority grants are awarded
to higher education institutions to recruit
value of the State’s investments through the research talent.
ETF on its financial statements. The Governor, Lieutenant Governor, and
Speaker of the House of Representatives are
The ETF does not administer its contracts with the trustees for the ETF. After receiving
recommendations from an Advisory
the seven Regional Centers for Innovation and Committee, the trustees make the final
Commercialization (RCICs) and the Texas Life decision about which applicants will receive
Science Center for Innovation and funds.
Commercialization (Texas Life Science Center)
in a consistent manner. Both the RCICs and the
Texas Life Science Center evaluate and make recommendations to the ETF’s
Advisory Committee regarding applications for funds. The Advisory Committee
then makes its recommendations to the ETF’s trustees. Trustees make the final
approvals on ETF grants and awards.
The Office of the Governor, which administers the ETF, was cooperative and
provided all of the information the State Auditor’s Office requested during this
audit.
This audit was conducted in accordance with Texas Government Code, Section 321.0132.
For more information regarding this report, please contact John Young, Audit Manager, or John Keel, State Auditor, at (512) 936-9500.
An Audit Report on
The Emerging Technology Fund
SAO Report No. 11-029
Key Points
The RCICs and the Texas Life Science Center do not have consistent processes, and
their board members were not required to sign conflict of interest disclosure
statements until 2010.
The RCICs and the Texas Life Science Center do not consistently record board
meeting minutes, votes, and recusals.
Board members for RCICs and the Texas Life Science Center were not required to
sign conflict of interest disclosure statements until 2010. Members of application
review committees are not required to sign conflict of interest disclosure
statements; those members are the first individuals to review a commercialization
award application to determine its viability.
The Advisory Committee does not record meeting minutes, member votes on
applications, members’ recusals, or milestones that applicants must achieve.
Because the Advisory Committee does not maintain minutes of its meetings, it is
not possible to evaluate how the Advisory Committee addresses disclosures of
conflicts of interest. For example, one Advisory Committee member had
consulting contracts with two recipients of ETF awards at the time that those
recipients received additional disbursements of funds approved by the Advisory
Committee. It is unclear whether the Advisory Committee member who had the
consulting contracts voted to approve those additional disbursements of funds
because the Advisory Committee does not maintain meeting minutes or record
member votes.
ii
An Audit Report on
The Emerging Technology Fund
SAO Report No. 11-029
The Advisory Committee does not follow consistent processes for accepting,
evaluating, and recommending applications to receive funds from the ETF.
The code of ethics policy for the Advisory Committee should be strengthened.
The code of ethics policy for the Advisory Committee does not prohibit Advisory
Committee members from accepting compensation from or investing in ETF
recipients.
The ETF should improve its documentation related to research matching grants and
research superiority grants.
The grant agreement for the $50 million research matching grant provided to Texas
A&M University for the National Institute for Therapeutics Manufacturing specified
that $2 million in matching funds would be required. However, the application for
that grant specified that $125 million in matching funds would be required. There
is no documentation of the amount of matching funds included in the information
provided to the ETF trustees. In addition, the commitment letters that the trustees
send to recipients do not specify the total matching funds required.
The ETF did not ensure that ETF recipients consistently submitted required annual
reports.
ETF recipients did not submit the majority of the annual reports required in
calendar years 2007 through 2009. For a sample of 31 of those recipients, the ETF
had no evidence indicating that it followed up with the recipients regarding the
annual reports they did not submit in calendar years 2008 and 2009.
The Office of the Governor did not report the value of all investments held by the
ETF on its annual financial report or on its annual report to the Legislature; the
only investment it reported was from the one award from which the ETF has
profited.
From fiscal year 2006 through fiscal year 2010, the Office of the Governor
disbursed $135,652,349 in funds from the ETF for commercialization awards.
However, the Office of the Governor reported $1,712,728 in ETF investments on its
fiscal year 2010 annual financial report.
The $1,712,728 amount was from the one award from which the ETF has profited.
In this case, ETF provided a $1,350,000 commercialization award to a company,
iii
An Audit Report on
The Emerging Technology Fund
SAO Report No. 11-029
and that company was later purchased by a publicly traded company. According to
the ETF’s January 2011 report to the Legislature, the ETF received $2,277,792 in
cash compensation and 77,499 shares of stock in the publicly traded company; as
of August 31, 2010, that stock was valued at $1,712,728.
Determine whether the Office of the Governor disburses funds from the ETF in
accordance with Texas Government Code, Chapter 490.
Determine whether the Office of the Governor monitors ETF recipients to ensure
they comply with the terms of the grants and Texas Government Code, Chapter
490.
Determine whether the Office of the Governor and ETF recipients have controls
to ensure accountability for the use of funds from the ETF.
The scope of this audit covered June 14, 2005, through April 7, 2011.
iv
Contents
Detailed Results
Chapter 1
The Legislature and the ETF Should Improve
Transparency and Accountability at All Levels of the ETF
Grant and Award Processes .......................................... 1
Chapter 2
The ETF Should Improve Its Reviews of ETF Recipients,
RCICs, and the Texas Life Science Center to Ensure That
They Comply with Requirements and Spend Funds
Appropriately ........................................................ 18
Chapter 3
The Office of the Governor Should Ensure That It
Correctly Accounts for and Reports Financial
Information Related to the ETF ................................... 25
Chapter 4
The ETF Should Improve Its Administration of Contracts
with RCICs, the Texas Life Science Center, and ETF
Recipients ............................................................ 28
Chapter 5
Information Regarding Similar Programs in 10 Other
States ................................................................. 31
Chapter 6
Management’s Response............................................ 40
Appendices
Appendix 1
Objectives, Scope, and Methodology ............................. 61
Appendix 2
Location of Emerging Technology Fund RCICs ................... 65
Appendix 3
Conflict of Interest Policy for RCICs and the Texas Life
Science Center ....................................................... 66
Appendix 4
Advisory Committee Code of Ethics Policy ...................... 67
Detailed Results
Chapter 1
The Legislature and the ETF Should Improve Transparency and
Accountability at All Levels of the ETF Grant and Award Processes
Meeting minutes that are either not kept or are not available to the public.
This chapter makes recommendations to both the Legislature and the ETF to
address those issues.
Figure 1
Key Processes for Review and Approval of ETF Commercialization Award Applications
ETF Trustees
Texas Life Science Center (Governor, Lieutenant
Regional Centers for Innovation for Innovation and Governor, and Speaker
and Commercialization Commercialization of the House of
(RCIC) (TLC) Advisory Committee ETF Staff Representatives)
START
No
Advisory Conduct
Applicant Subcommittee Due Approve?
Review Diligence
Yes
Yes
Selection Advisory
Execute
Committee Committee
Contract
Review Review
No Yes
Recommend? Recommend?
Disburse Award
Yes
RCIC Board
Review
No
Recommend?
Yes
Note A: An RCIC can send an application to the TLC if the application involves a variety of technical areas, such as medicine, biotechnology, and
pharmaceuticals. If an RCIC sends an application to the TLC, the Advisory Committee can receive information from both the RCIC and the TLC.
Source: Prepared by auditors based on information from the ETF.
The ETF also did not require board members for the RCICs and the Texas
Life Science Center to sign conflict of interest disclosure statements until
2010. The ETF does not require the members of application review
committees that perform initial reviews of the applications for the RCICs to
sign conflict of interest disclosure statements. Those members are the first
individuals to review an application to determine its viability. In addition, the
ETF does not require staff at the RCICs and staff other than the executive
director at the Texas Life Science Center to sign conflict of interest disclosure
statements.
The ETF also has not developed substantive criteria for the RCICs and the
Texas Life Science Center to use when receiving and evaluating applications.
RCICs and the Texas Life Science Center do not consistently record board
meeting minutes, board members’ votes on applications, or board members’
recusals.
Because they are not public entities, six of the seven RCICs and the Texas
Life Science Center are not required to make their meeting minutes available
to the public. The exception is the West Texas RCIC, which considers itself a
public entity because of its affiliation with Texas Tech University.
The ETF did not require the RCICs and the Texas Life Science Center to comply with a
conflict of interest disclosure policy until 2010. However, the Texas Life Science
Center and four of the seven RCICs had their own internal conflict of interest
policies in fiscal years 2008 and 2009.
Required board members for the RCICs and the Texas Life Science Center
to sign conflict of interest disclosure statements. (Auditors confirmed that
all board members signed the required statements.)
Restricted board members for the RCICs and the Texas Life Science
Center from investing in or receiving compensation from ETF recipients.
Specifically, board members cannot make investments in or receive
compensation from ETF recipients until the earlier of (1) the 90th day
after the public announcement of an ETF award, (2) the closing of an ETF
recipient’s initial public offering, or (3) the closing of a qualifying
liquidation event. 1
1
According to the contract template for ETF commercialization awards, a qualifying liquidation event occurs when substantially
all of an ETF recipient’s assets are sold to external parties or when more than 50 percent of the voting power for the recipient is
transferred to external parties due to the sale of equity or merger with another entity.
Although it is not a requirement, staff members for six of the seven RCICs
signed the ETF’s conflict of interest disclosure statements; however, staff at
one RCIC did not. The Texas Life Science Center executive director
complied with a requirement to sign a conflict of interest disclosure statement
(see Chapter 4 for additional details).
RCICs and the Texas Life Science Center do not follow consistent processes for
evaluating and receiving applications. For example, the RCICs and the Texas
Life
Science Center do not have a scoring system for board members to use when
evaluating applications for commercialization awards. However, four RCICs
have developed guidance for the qualitative review process that their
volunteer application review committees follow. The processes that the
RCICs follow vary widely in areas such as the questions to ask an applicant,
grading an applicant, documenting why an applicant was recommended for an
award, and documenting an applicant’s perceived weaknesses.
In addition, the ETF has an informal process through which an applicant can
apply to RCICs outside the applicant’s home region, including applicants
An Audit Report on the Emerging Technology Fund
SAO Report No. 11-029
April 2011
Page 5
whose applications were not approved in their home regions (see Appendix 2
for a map showing the RCIC locations). However, when auditors asked
RCICs if they understood that an applicant could apply at another RCIC, three
RCICs responded yes, two RCICs responded no, and two RCICs responded
that they would not inform an applicant that it could apply outside the region.
On October 28, 2010, the ETF instituted a conflict of interest escalation and
resolution policy that advises ETF applicants of their options if they perceive
a conflict of interest related to an RCIC’s or the Texas Life Science Center’s
review of its application. However, the ETF did not publicly disseminate that
policy and does not provide that policy to applicants when they apply for
funds.
Recommendations
Establish a contractual requirement that the RCICs and the Texas Life
Science Center:
Clarify with RCICs and the Texas Life Science Center that the
contractually required conflict of interest disclosure policy applies to both
ETF applicants and recipients.
Contractually require RCIC staff, Texas Life Science Center staff, and
RCIC application review committee members to sign conflict of interest
disclosure statements.
Contractually require the RCICs and the Texas Life Science Center to
immediately report in writing to the ETF any disclosed conflicts of interest
and how those conflicts were resolved.
Develop substantive criteria for all RCICs and the Texas Life Science
Center to follow when evaluating applications and make those criteria
available to the public.
Chapter 1-B
The Legislature and the ETF Should Improve Transparency and
Accountability for the Advisory Committee
Meetings of the Advisory Committee for the ETF are not open to the public,
and the Advisory Committee does not formally document its
Advisory Committee decisions in meeting minutes. Although the ETF is required to
The Governor appoints the members of the
follow the Texas Public Information Act, under Texas
Advisory Committee, which comprises up to Government Code, Section 490.057, ETF application information
17 individuals who are industry leaders in is treated as confidential while an application is considered for an
Texas or nationally recognized researchers
from higher education institutions. award or a grant. Ten other states with similar programs that
The Advisory Committee reviews applications auditors surveyed allowed significantly more public access to
for commercialization awards, research
matching grants, and research superiority
meetings and documents related to the award of public funds (see
grants and makes recommendations to ETF Chapter 5 for additional information on other states’ programs).
trustees. The trustees are the Governor, the
Lieutenant Governor, and the Speaker of the
House of Representatives. Because the Advisory Committee does not maintain minutes of
ETF awards and grants have been approved its meetings or record how Advisory Committee members vote
through various funding rounds, which take on applications, it is not possible to evaluate how the Advisory
place approximately every three months. As
of February 2011, the Advisory Committee had Committee addresses potential conflicts of interest. In addition,
met for 20 funding rounds to consider the Advisory Committee has been inconsistent in terms of which
applications.
applications it will accept for review.
The 10 other states that auditors surveyed maintain board meeting minutes
that record board member attendance, motions considered, votes, and recusals.
Those states also require that meeting minutes be open to the public, with
exceptions allowed for proprietary information, trade secrets, and company
financial information. Five of those 10 states require that board meeting
minutes be posted on fund Web sites; the remainder make the minutes
available only through open records requests.
The Advisory Committee did not vote on a $50 million research matching
grant that the trustees approved for Texas A&M University (see Chapter
1-C for additional information on that grant).
In addition, Texas Government Code, Chapter 490, specifies that the Advisory
Committee will recommend proposals eligible for funding to the ETF trustees.
However, prior to funding round 17 held on October 29-30, 2009, the
Advisory Committee did not provide written documentation to the trustees
regarding which applications the Advisory Committee recommended for
funding. Prior to funding round 17, the Advisory Committee relied on ETF
staff to communicate to the trustees which proposals the Advisory Committee
recommended for funding.
In October 2010, the director of the ETF also began sending a letter to the
trustees to confirm the applications that the Advisory Committee had
approved for funding.
The code of ethics policy for the Advisory Committee should be strengthened.
In
October 2010, the ETF implemented a written code of ethics policy that
An Audit Report on the Emerging Technology Fund
SAO Report No. 11-029
April 2011
Page 9
requires Advisory Committee members to disclose conflicts of interest
involving an applicant (see Appendix 4 for that policy). There was no written
code of ethics policy for the Advisory Committee prior to that date. The code
of ethics policy addresses conflicts of interest and creates a conflict of interest
group to review potential conflicts of interest. However, the code of ethics
policy does not clearly prohibit activities such as Advisory Committee
members investing in or accepting compensation from ETF applicants or
recipients.
2
According to the Advisory Committee member’s statement of compliance with the code of ethics policy, both investments were
made before the Advisory Committee member joined the Advisory Committee. In addition, the Advisory Committee member
joined the board of directors of one of the ETF recipients after receiving approval from the ETF Office and the chairman of the
Advisory Committee. The Advisory Committee member asserted that he had recused himself from all deliberations and votes
pertaining to that ETF recipient
Required Training. The code of ethics policy does not outline specific
training requirements for the Advisory Committee members. TRS’s
policy requires trustees to obtain training on the Texas Government Code
before voting, obtain open government training within 90 days of
appointment, and obtain annual ethics training.
Recommendations
Chapter 1-C
Accountability Should Be Improved Within the ETF Office
The ETF Office has not developed comprehensive, documented policies and
procedures for the ETF (see text box for additional information about the ETF
Office). For example, there are no policies for the ETF application process.
This had led to uncertainty in areas such as the amount of matching funds that
the ETF trustees should require recipients to provide.
The ETF Office
The six full-time staff in the ETF Office: Other issues involving the ETF Office underscore the need to
Coordinate with the RCICs and the Texas Life strengthen that unit’s processes. Specifically:
Science Center.
Provide support to the ETF Advisory
Committee and trustees. The ETF Office’s due diligence reviews do not include a
Conduct due diligence on ETF applications. credit check or criminal history background check on
The ETF Office provides the trustees with a brief commercialization award applicants’ officers and
description of the applicants that the Advisory investors.
Committee has recommended should receive an
ETF grant or award.
The ETF Office also oversees the contract writing The ETF Office has announced 90 commercialization
and compliance functions with the help of other awards an average of 55 days after contracts were
staff within the Office of the Governor.
executed.
Auditors confirmed that amounts in 71 ETF contracts tested did not exceed
the amounts on the commitment letters that the trustees sent to ETF recipients.
The ETF Office has not developed comprehensive and documented policies and
procedures.
The ETF Office does not have a complete set of policies and procedures for
the ETF. The policies and procedures that have been developed are not all
signed and do not have effective dates. For example, neither the conflict of
interest escalation and resolution policy (which was not signed) nor the
qualified financial transaction extension request policy (which was signed by
the director of the ETF) has effective dates. In addition, there are no
Having documented, approved policies and procedures helps to ensure that all
processes are performed in a consistent manner.
The ETF Office should improve the documentation and approval of research matching
and research superiority grants. For two of the four research matching grants
auditors tested, there was no documentation of what information the ETF
Office sent to the trustees for their decision making. In addition, as discussed
in Chapter 1-B, because the Advisory Committee does not maintain meeting
minutes, there is a lack of documentation regarding which applications the
Advisory Committee recommended to the trustees.
The commitment letters the trustees send to recipients also do not specify the
total matching funds required. As a result:
The grant agreement for the $50 million research matching grant provided
to Texas A&M University for the National Institute for Therapeutics
Manufacturing specified that $2 million in matching funds would be
required from another source. However, the application, which was
included as an exhibit in the grant agreement, specified that $125 million
in matching funds would be required. Including conflicting matching
requirements in a grant agreement makes it difficult to require a recipient
to provide a specific amount of matching funds. As of December 31,
2010, Texas A&M University reported to the ETF that it had received $3
million in matching funds.
It is important to ensure that all employees sign and submit ethics and fraud
policy statements and outside employment forms when required to ensure that
the employees have read, understand, and agree to follow ethics and outside
employment policies.
Commitment letters were sent consistently, and contract amounts did not exceed
amounts in those letters. Auditors confirmed that the contracts for 71
commercialization awards, research matching grants, and research and
superiority grants tested had a corresponding commitment letter from the
trustees approving the grant or award and the amount. The amounts on the
contracts also did not exceed the amounts in the commitment letters.
However, as discussed above, for the research matching grants and research
superiority grants, the required amounts of matching funds were not
documented in the commitment letters.
Recommendations
Clarify the amount of matching funds recipients must provide in both (1)
trustee commitment letters and (2) contracts for research matching grants
and research superiority grants.
Ensure that all ETF staff sign a statement of compliance with the ethics
and fraud policy and complete outside employment forms when required.
The ETF has not ensured that ETF recipients comply with requirements to
submit reports. Contracts for commercialization awards, research matching
grants, and research superiority grants require the recipients to submit annual
compliance verification reports (annual reports). In addition, the contracts for
commercialization awards require recipients to submit interim reports when
they request additional funds.
ETF recipients did not submit the majority of the annual reports required in
calendar years 2007 through 2009. For a sample of 31 of those recipients, the
ETF had no evidence indicating that it followed up with the recipients
regarding the annual reports they did not submit in calendar years 2008 and
2009. Although the sample of 31 recipients submitted annual reports in
calendar year 2010, they submitted 81 percent of those reports after the due
date.
Three commercialization award recipients that either declared bankruptcy or
ceased operations in 2010 did not submit at least one annual report required
prior to 2010; a fourth commercialization award recipient ceased operations
before an annual report was due.
In addition, as of March 17, 2011, the ETF had not reviewed 25 (81 percent)
of a sample of 31 recipients’ annual reports that auditors tested. It also did not
consistently verify that recipients met required milestones before it disbursed
additional funds to recipients. Further, the ETF did not ensure that the RCICs
and the Texas Life Science Center submitted required reports.
The ETF did not ensure that recipients consistently submitted required annual
reports, and it did not review reports in a timely manner.
Recipients did not always submit annual reports, and they submitted some annual
reports late. Auditors reviewed whether recipients submitted annual reports
due in calendar years 2007 through 2009 for all commercialization awards,
research matching grants, and research superiority grants and identified the
following:
Recipients did not submit 9 (60 percent) of the 15 annual reports due in
calendar year 2007.
Recipients did not submit 31 (67 percent) of the 46 annual reports due in
calendar year 2008.
Recipients did not submit 47 (59 percent) of the 80 annual reports due in
calendar year 2009.
The 31 recipients in the sample submitted all of the required annual reports for
calendar year 2010, but they submitted 25 (81 percent) of those 31 reports
after the due date. The improvement in recipients’ compliance with annual
report submission requirements in calendar year 2010 was due to improved
communication and correspondence between the ETF and the recipients.
Commercialization awards recipients submitted 86 percent of the required interim
reports. Contracts for commercialization awards also require recipients to
submit an interim report on the earlier of (1) six months after the contract
effective date or (2) the date on which a recipient requests additional funds.
Recipients submitted 97 (86 percent) of the 113 reports required under those
contract terms in calendar years 2007 through 2010.
The ETF does not always review recipients’ annual reports in a timely manner. Only
one individual conducts all monitoring activities for the ETF.
As of March 9, 2011, the ETF had not completed reviewing all of the annual
reports that recipients of commercialization awards, research matching grants,
and research superiority grants had submitted. For example:
The ETF had not completed its review of 19 (83 percent) of a sample of
23 annual reports that recipients of commercialization awards submitted
for calendar year 2010. For the four reports the ETF did review, one of
the recipients did not submit supporting documentation showing that it
achieved the required milestones in its contract.
The ETF had not completed its review of 2 (50 percent) of a sample of 4
annual reports that recipients of research matching grants submitted in
calendar year 2010.
The ETF had not completed its review of any of the 4 sampled annual
reports that recipients of research superiority grants submitted in calendar
year 2010.
Although ETF contracts with recipients allows the ETF to access recipients’
financial information, the ETF does not require recipients to submit (1)
financial information in their annual reports or (2) supporting documentation
for expenditures of funds. Therefore, it cannot consistently verify whether
recipients make expenditures only for authorized purposes. The ETF also
does not routinely conduct on-site visits at recipients.
The ETF does not consistently verify that recipients meet required milestones before it
disburses funds. Recipients must achieve certain milestones before they can
receive their subsequent disbursements of funds from the ETF. However,
auditors were unable to verify that 4 (17 percent) of 23 commercialization
award recipients tested met required milestones before receiving their
subsequent disbursement of funds because information was insufficient or
incomplete. In addition, for 1 (25 percent) of those 4 commercialization
award recipients, the ETF did not complete its compliance verification
worksheet—which it uses to verify a recipient’s achievement of required
milestones—before it disbursed funds to the recipient. The ETF approved and
made the subsequent disbursements to the 23 commercialization award
recipients tested.
Auditors verified that all six recipients of research matching grants and
research superiority grants tested submitted the required reports before the
ETF disbursed additional funds to them. However, the ETF did not review
one of those six reports before approving the additional disbursement. The
ETF maintained internal routing and approval documentation for all of those
six disbursements.
Ensuring that these two recipients had submitted their required annual reports,
or following up with those recipients when they did not submit their required
annual reports, could have enabled the ETF to recognize early warning signs
that these recipients were in financial distress. Table 1 summarizes events
involving those two recipients.
Table 1
StarVision $750,000 October 30, 2007 Not Not Not October 4, 2010 November 4, 2010
Technologies, Submitted Submitted Submitted
Inc.
ThromboVision, $1, 500,000 July 5, 2007 Not Not Not September 2, 2010 October 5, 2010
Inc. Submitted Submitted Submitted
Bauhaus $500,000 July 5, 2006 Submitted Submitted Not Submitted Not Submitted September 2, 2010
Software,
Inc.
Nanocoolers, $3,000,000 March 5, 2007 No Report Due No Report Due No Report Due No Report Due December 10, 2007
Inc.
Source: Prepared by auditors from documentation from the ETF.
Although three of the four recipients discussed above did not submit all of the
required annual reports, all four recipients submitted other reports required in
order to receive funds after the first disbursement. However, auditors were
unable to verify from three of the four other reports whether the recipients had
met the milestones required for receiving these disbursements because the
information in those reports was incomplete or unavailable. The ETF asserted
it had verified that those recipients met the milestones.
The ETF did not ensure that RCICs and the Texas Life Science Center
consistently submitted required reports.
RCICs and the Texas Life Science Center did not submit all reports required
by their ETF contracts. Specifically:
In fiscal year 2008, the RCICs and the Texas Life Science Center were
required to submit four reports each, but none of the RCICs submitted all
four reports. One RCIC submitted its report for fiscal year 2008 more
than one year after the contract expiration date.
In fiscal year 2009, the RCICs and the Texas Life Science Center were not
required to submit any reports, but each entity submitted a report.
In fiscal year 2010, the RCICs were required to submit two reports each.
RCICs submitted all of the 14 reports required. However, they submitted
10 of those 14 reports after the due date.
The ETF also did not review the majority of the reports that the RCICs and
the Texas Life Science Center submitted for fiscal years 2008 and 2009.
Specifically, it reviewed only the reports they submitted prior to the ETF
making the second disbursement of funds to the RCICs and the Texas Life
Science Center. The ETF did not review within 30 days of receipt 11 (79
percent) of the 14 biannual reports that the RCICs had submitted for fiscal
year 2010.
Auditors verified that the RCICs and the Texas Life Science Center met the
fund matching requirements before the ETF made the second disbursement of
funds to the RCICs and the Texas Life Science Center. In addition, the ETF
paid less than the contracted amount to one RCIC for the time period from
March 30, 2010, to August 31, 2010, because that RCIC did not have a full-
time executive director as required.
Recommendations
Track when recipients’ reports are due and received so that it can promptly
follow up on reports not submitted and review in a timely manner the
reports that are submitted.
Ensure that RCICs and the Texas Life Science Center submit reports
required by their contracts in a timely manner.
The Office of the Governor did not report the value of ETF investments on its
annual Report to the Texas State Legislature on the Texas Emerging
Technology Fund dated January 2011. It also did not accurately report the
value of those investments on its annual financial report for fiscal year 2010.
In addition, the Office of the Governor understated encumbrances by at least
$6 million on its annual financial report for fiscal year 2010, and it did not
transfer appropriated funds into a dedicated account for the ETF as required
by statute and the General Appropriations Act.
The Office of the Governor did not report the value of investments held by the ETF in its
report to the Legislature. In its January 2011 report to the Legislature, the Office
of the Governor reported that it had awarded $170,047,349 in ETF
commercialization awards, as of August 31, 2010. Although the
Commercialization Awards and Office of the Governor listed the shares of stock for which it had
Investments
taken ownership, with one exception discussed in more detail
In the ETF contracts with companies that
receive commercialization awards, the ETF
below, the Office of the Governor did not list the value of
has historically received the rights to investments associated with commercialization awards in its report
purchase stock in those companies. Those
rights allow the ETF to purchase stock issued
to the Legislature. (As discussed below, the Office of the
by the companies in an amount that is Governor used a similar accounting practice in its annual financial
proportionate to the amount of the
commercialization award and at a time and
report for fiscal year 2010.) It is important for the Legislature to be
price specified in the contract. aware of the value of those investments so that it can readily view
In recent years, the ETF also has included in the value of the State’s investments (see text box for additional
commercialization award contracts a
promissory note (a written promise to pay a information about investments related to commercialization
specified sum of money to a designated awards).
party) that is equal to the amount of the
award and that is payable by the company
under certain conditions defined in the If it does not determine the value of its investments, the Office of
contract. the Governor lacks a basis for measuring the performance of the
ETF.
The Office of the Governor did not comply with applicable accounting guidance when
reporting the value of investments held by the ETF on its annual financial report. From
fiscal year 2006 through fiscal year 2010, the Office of the Governor
disbursed $135,652,349 in funds from the ETF for commercialization awards.
However, the Office of the Governor reported $1,712,728 in ETF investments
on its fiscal year 2010 annual financial report. That amount was from the one
award from which the ETF has profited. In this case, ETF provided a
$1,350,000 commercialization award to a company, and that company was
later purchased by a publicly traded company. According to the ETF’s
January 2011 report to the Legislature, the ETF received $2,277,792 in cash
compensation and 77,499 shares of stock in the publicly traded company; as
of August 31, 2010, that stock was valued at $1,712,728.
Recommendations
The ETF did not have contracts with the RCICs prior to fiscal year 2008.
In addition, the ETF did not have contracts with 6 of the 7 RCICs for
various time periods during fiscal years 2008, 2009, and 2010; the time
periods during which there were no contracts ranged from 3 weeks to
almost 13 months. The ETF paid the Texas Life Science Center $110,000
for expenditures that organization incurred during a time period when it
did not have a contract with the ETF. In addition, the ETF paid one RCIC
$47,000 for expenditures that the RCIC may have incurred during a time
period when it did not have a contract with the ETF.
Requirements in the contracts between the ETF and the RCICs and the
Texas Life Science Center were not consistent. For example, the contracts
for fiscal year 2009 required the RCICs to conduct some type of
monitoring of recipients and submit quarterly reports to the ETF “to the
extent that information is available” to the RCICs. The contracts with the
RCICs for fiscal year 2010 did not include that requirement; however, the
contract with the Texas Life Science Center included that requirement. In
addition, the fiscal year 2010 contract with the Texas Life Science Center
required that organization’s executive director to sign a conflict of interest
statement, but the fiscal year 2010 contracts with the RCICs did not
include a similar requirement for RCIC executive directors.
The contracts between the ETF and the RCICs prohibit the use of contract
funds for the repayment of debt, but they do not contain any other
restrictions on RCICs’ expenditures of funds. One RCIC reported to the
ETF that it spent $59,731 on “Meals and Entertainment” in fiscal year
2010. In addition, the contracts with the RCICs do not require the RCICs
to segregate funds received from the ETF in a separate account, which
makes it difficult to determine how RCICs spend funds they receive from
the ETF.
The ETF did not consistently enforce the requirements in its contracts with the RCICs
and the Texas Life Science Center. For example, two RCICs and the Texas Life
Science Center follow internal record retention policies that conflict with the
The ETF also did not enforce contract requirements that (1) RCICs must
submit a request for the first disbursement of funds within three months of the
effective date of the contract and (2) RCICs must submit a request for the
second disbursement of funds within nine months of the effective date of the
contract. If it had enforced those contract requirements, this could have
resulted in the cancellation of an RCIC contract and no disbursal of funds to
an RCIC. Enforcing those contract requirements also could have reduced the
amount disbursed to an RCIC to only the amount of the first disbursement.
Auditors identified weaknesses in the ETF’s administration of its contracts with ETF
recipients. Specifically, the ETF has signed contracts with ETF recipients after
the contract effective date. Auditors identified 62 instances in which contracts
were signed after the effective date specified in the contract:
By signing contracts after the effective date, the ETF cannot ensure that
contract requirements are in effect throughout the entire time frame of the
contract.
Recommendations
Obtain signatures on its contracts with RCICs and Texas Life Science
Center in a timely manner.
Pay RCICs and the Texas Life Science Center only for expenditures they
incur during the contract period.
Clarify and enforce the record retention requirements in its contracts with
RCICs and the Texas Life Science Center.
Clearly define allowable expenditures in its contracts with RCICs and the
Texas Life Science Center.
Require RCICs and the Texas Life Science Center to have separate
accounts for expenditures related to the ETF.
Sign contracts with ETF recipients on or before the contract effective date.
New York – The New York State Foundation for Science, Technology and
Innovation.
Oklahoma State agency Board of directors Governor, House, Yes Yes Yes
and Senate make
appointments
Ohio State agency Commission and Governor with Yes Yes Yes
advisory board consent of the
Senate; Senate and
House leaders also
make
appointments
Pennsylvania State agency Board of directors Governor; four Information not Information not Yes
members are available available
appointed by
legislative
members; several
cabinet members
are appointed
through statute
Washington Independent Board of trustees Governor with Yes Yes Yes
instrumentality consent of the
and agency of the Senate; Senate and
state House leaders also
make
appointments
a
Members are required by statute to file a financial interest disclosure.
Sources: Information from the ETF and auditors’ survey of other states.
Responsible Entity.The ETF Office within the Office of the Governor, a state
agency, is the entity responsible for the ETF. For the 10 other states surveyed:
Four states’ programs have boards that are appointed by the governor with
the advice and consent of the Senate. The Senate president and Speaker of
the House also appoint members.
Three states’ programs have boards that are appointed by the governor and
include other members who are appointed by state legislatures or other
members who are the heads of certain state agencies or higher education
institutions.
Florida Yes, upon request Yes Yes, with exceptions Yes, with exceptions
Indiana Yes, upon request Yes Yes, with exceptions Yes, with exceptions
Kansas Yes, online Yes Yes, with exceptions Yes, with exceptions
Maine Yes, upon request Yes Yes, with exceptions Yes, with exceptions
Michigan Yes, online Yes Yes, with exceptions Yes, with exceptions
New York Yes, online Yes Yes, with exceptions Yes, with exceptions
Oklahoma Yes, upon request Yes Yes, with exceptions Yes, with exceptions
Ohio Yes, upon request Yes Yes, with exceptions Yes, with exceptions
Pennsylvania Yes, online Yes Yes, with exceptions Yes, with exceptions
Washington Yes, online Yes Yes, with exceptions Yes, with exceptions
a
Not applicable because the Advisory Committee does not record meeting minutes.
Sources: Information from the ETF and auditors’ survey or other states.
Five states’ programs make board meeting minutes available to the public
and publish the minutes on the program Web site.
Five states’ programs make board meeting minutes available only through
open records requests.
The five states whose programs post minutes on a Web site record votes as
follows:
One state’s program listed the vote counts for ayes, nays, recusals, and
absences (one set of minutes listed the members’ names, but that was
not recorded consistently).
Programs in all 10 states surveyed are required to follow open records laws,
with exceptions or restrictions for items such as proprietary information, trade
secrets, and company financial information. However, portions of an
application are kept confidential unless an applicant consents to disclosure of
the information. For the 10 states surveyed:
Five states’ programs publish parts of the application, but not all
application information is publicly available. Generally, those states’
programs post the abstract and a title page but keep other information
confidential.
Sources: Information from the ETF and auditors’ survey of other states.
Three states’ programs require the chief executive officer and the secretary
of state to approve or require the executive director to approve contracts or
grant agreements.
One state’s program requires the chief financial officer and the director of
administration to approve the award of funds.
Nine states’ programs require matching funds for at least one program.
Two states’ programs require repayment if the recipient moves out of the
state within a certain time frame.
Objectives
The objectives of this audit were to:
Determine whether the Office of the Governor disburses funds from the
Emerging Technology Fund (ETF) in accordance with Texas Government
Code, Chapter 490.
Determine whether the Office of the Governor and ETF recipients have
controls to ensure accountability for the use of funds from the ETF.
Scope
The scope of this audit covered June 14, 2005, through April 7, 2011.
Methodology
The audit methodology included collecting information and documentation;
conducting interviews with ETF staff; analyzing and evaluating the results of
testing; observing processes; and reviewing policies, procedures, and statutes.
This audit did not include a review of information technology systems.
Contracts between the ETF and the Regional Centers for Innovation and
Commercialization (RCICs) and the Texas Life Science Center for
Innovation and Commercialization (Texas Life Science Center).
Compliance reports and other information the RCICs, the Texas Life
Science Center, and recipients prepared.
Signed conflict of interest statements for the RCICs and the Texas Life
Science Center for fiscal year 2010.
RCIC and Texas Life Science Center conflict of interest policies for fiscal
years 2008 and 2009.
Application scoring and evaluation documents from the RCICs, the Texas
Life Science Center, and the Advisory Committee.
Reviewed RCICs’, the Texas Life Science Center’s, and recipients’ grant
and award amounts contained in commitment letters and contracts.
Compared the dates on which the ETF announced grants and awards to
contract execution dates and fund disbursement dates.
Reviewed ETF contracts with the RCICs and the Texas Life Science
Center.
Reviewed the RCICs’ and the Texas Life Science Center’s compliance
with contractual record retention periods.
Reviewed the RCICs’ and the Texas Life Science Center’s contracts for
requirements related to reviews of applicants’ intellectual property.
Reviewed compliance reports that the RCICs, the Texas Life Science
Center, and recipients prepared.
The Office of the Governor’s contracts with the RCICs and the Texas Life
Science Center.
Project Information
Audit fieldwork was conducted from February 2011 through April 2011. We
conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
The following members of the State Auditor’s staff performed the audit:
Ben Carter
Jennifer R. Logston
Kimberly Teague, MS
Figure 2 shows the locations of the Regional Centers for Innovation and
Commercialization (RCICs) for the Emerging Technology Fund.
Figure 2
Locations of RCICs
Below is the code of ethics policy that the Office of the Governor developed
for the Emerging Technology Fund Advisory Committee in October 2010.
In compliance with the Americans with Disabilities Act, this document may also be requested
in alternative formats. To do so, contact our report request line at (512) 936-9500 (Voice),
(512) 936-9400 (FAX), 1-800-RELAY-TX (TDD), or visit the Robert E. Johnson Building, 1501
North Congress Avenue, Suite 4.224, Austin, Texas 78701.
The State Auditor’s Office is an equal opportunity employer and does not discriminate on the
basis of race, color, religion, sex, national origin, age, or disability in employment or in the
provision of services, programs, or activities.
To report waste, fraud, or abuse in state government call the SAO Hotline: 1-800-TX-AUDIT.