Why it matters that Estancia will not have a clean opinion from its auditor for FY2025

As noted in the previous article, Estancia Mayor Runnel Riley remarked that he believes Estancia will not receive a "clean opinion" from its auditor for the FY2025 Audit. One could consider this to be a sign of financial trouble for the town. However, for those not versed in accounting matters, it may be hard to understand why Estancia's lack of a clean audit opinion matters. This article breaks down the topic, explaining the significance of these audits and Estancia’s apparent failure to meet financial management standards not just last year, but over the last decade.

If Estancia cannot obtain a clean audit opinion...

Estancia will not be in compliance with state law.

Under the New Mexico Audit Act (NMSA 1978 § 12-6-1 through § 12-6-14), every municipality in the state is required to submit an annual financial audit report that meets certain minimum standards to the Office of the State Auditor. The audit is conducted by an independent, outside accountant, not by the town itself. It evaluates whether the town's financial statements accurately represent its revenues, expenditures, liabilities, and fund balances.

Under the New Mexico Audit Act, this is not something a town can hand off to a bookkeeper, a financial consultant, or a fraud examiner; the audit must be done by a CPA or CPA firm that has been vetted and approved by the Office of the State Auditor. The audit must also be conducted in accordance with the Generally Accepted Government Auditing Standards (GAGAS, also known as “the Yellow Book”), a federal standard issued by the US Government Accountability Office (GAO).

If a town cannot produce adequate records during an audit, an auditor may issue a "qualified" or "adverse" opinion, or in the worst case, a "disclaimer" - meaning the auditor will not even form an opinion on whether the town’s financial books are accurate. Towns that submit adequate financial records for the fiscal year receive a "clean" audit opinion. Towns that fail to submit audits or repeatedly receive poor audit opinions (such as qualified audit opinions, adverse audit opinions, or an auditor's disclaimer of opinion) are in violation of the New Mexico Audit Act and can face increased state oversight, restrictions on their ability to receive state funding, referral to the State Auditor's special investigations division, and - in serious cases - criminal charges for a town’s leadership. In extreme cases, the state can take over management of a town.

Estancia will be at greater risk of fraud.

A clean audit does not just confirm that the math adds up; it confirms that money went where it was supposed to go. The audit process tests whether expenditures were properly authorized, whether revenues were deposited and recorded correctly, and whether internal controls (like requiring two signatures on checks or separating the person who approves payments from the person who writes them) are in place and functioning. Without a reliable audit, there's no independent verification that public funds were not misused, misallocated, or stolen.

Small municipalities are particularly vulnerable to misappropriation of funds because they often have very few staff handling finances, which means the same person might be receiving money, recording transactions, and writing checks - a situation auditors call a lack of "separation of duties." The audit is essentially the public's assurance that their tax dollars are being handled honestly. The audit is a municipal employee’s assurance that their retirement benefits will be available upon retirement. The audit is also an assurance to town leadership that no employees are “skimming a little off the top,” so to speak.

Estancia will not be able to show responsible financial management.

Beyond legal compliance and fraud detection, the audit process compels a town to maintain the bookkeeping discipline needed to manage public money responsibly. That means tracking what the town owns (assets like buildings, equipment, cash on hand, and receivables), what it owes (liabilities like outstanding loans, unpaid vendor invoices, and pension obligations), and whether its various funds - general fund, water fund, capital projects fund, and so on - are solvent.

When bookkeeping breaks down, a municipality is essentially flying blind. They cannot accurately answer basic questions like:

• Can we afford to hire someone?
• How much do we owe on that loan?
• Will the loss of a source of income - such as from CoreCivic - make the town insolvent?
• Are we collecting enough in water fees to cover the cost of operating the water system - and eventually replacing it when the water system is obsolete or no longer serviceable?

This is the position in which Estancia finds itself.

A clean audit means the town has reliable numbers on which the Board of Trustees can base their decisions. Without it, every budget vote and spending decision is built on guesswork.

Under Generally Accepted Government Auditing Standards, Estancia’s clerk vacancy explains a staffing gap. It does not excuse (in the eyes of an auditor) a systemic breakdown in financial controls.

If the town's entire bookkeeping apparatus collapses because one person leaves, that is a problem in itself. It means that financial controls were not institutionally established. They were instead dependent on a single individual, which is exactly the kind of structural weakness that creates opportunities for errors, mismanagement, or worse: fraud.

The Sunland Park Scandal

When a municipality cannot get a certified audit opinion, it is often evidence of something dramatically wrong. Such was the case in Sunland Park. In May 2012, Sunland Park became the first city in New Mexico's history to have its financial operations taken over by the state.

Hector Balderas, at the time the New Mexico State Auditor (later the Attorney General of New Mexico), conducted a special audit of Sunland Park and found that his auditors could not even account for the basic finances used for the city's operation. Sunland Park could not get a clean audit opinion. Sunland Park had no inventory of its assets, including vehicles, computers, and equipment. There were also incomplete payroll and personnel records, insufficient detail regarding purchase orders and contracts, and missing supporting documents for travel reimbursements and water utility operations. Sunland Park’s lack of financial information hid evidence of serious crimes that later led to the arrest and conviction of mayor-elect Daniel Salinas, town manager Jaime Aguilera, and police chief Luis Monarez, as well as five other municipal employees.

Under state law, the Department of Finance and Administration can suspend local officials and assume their duties if an audit finds fraudulent misuse of public funds, embezzlement, or violations of state financial regulations. According to then-DFA Secretary Tom Clifford, the state had never used that authority to assume part of a city's operations until the Sunland Park scandal.

To be clear, there are no indicators that Estancia is anywhere near the Sunland Park scandal, which involved extortion. The Sunland Park scandal was an extreme case involving alleged criminal corruption at every level. But the Sunland Park example illustrates the endpoint of the spectrum: what can happen when a municipality's financial controls completely break down, and the state determines there's no governance structure capable of managing public funds. Sunland Park is the cautionary tale that makes the case for why even a small town like Estancia needs to take its bookkeeping, audit compliance, and internal controls seriously, even during periods of staffing disruption.

Estancia Has Been In Trouble For Their Audits Before.

Pattillo, Brown & Hill, LLP, Estancia's auditor for FY2024, stated that it could not obtain from the town the financial records needed to verify the town's financial statements, the value of the town's proprietary funds, or the accuracy of the town's bookkeeping. For that reason, the accounting firm submitted a disclaimer of opinion for the FY2024 audit.

In the FY2016 At-Risk List released by former State Auditor (and current Albuquerque mayor) Tim Keller in February 2017, the Town of Estancia was the sole entity in New Mexico identified as having an audit opinion indicating "significant problems with its financial statements."

As an aside, Torrance County was also on that same At-Risk List. It was one of four counties that had failed to even submit an audit report.

While the upcoming audit report relates to FY2025, the town's audits dating back 10 years demonstrate long-term, systemic financial mismanagement. For example, Estancia's FY2024 audit was not its only audit in which the auditors issued a disclaimer of opinion because the town could not provide accurate and complete financial records. This also occurred in 2020, 2019, 2018, 2017, and 2016.

In 2015, the Office of the State Auditor itself conducted a special audit of Estancia due to financial mismanagement, in which State Auditor Tim Keller stated that,

“[The] OSA identified shortcomings with respect to eighteen different written policies and procedures, cash management, bank reconciliation, state law compliance, utility billing, general ledger entries, the anti-donation clause, records retention, and budgetary compliance. The report highlights various internal control, policy, and general oversight deficiencies which make the Town susceptible to fraud, waste[,] and abuse, if left unaddressed."

For residents who want to track whether Estancia's financial management is improving, there are specific indicators to watch.

First, the CPA engagement: The Board of Trustees approved hiring John Jennings, CPA, LLC, to establish a verified cash balance for the start of FY2026. Whether Jennings is able to do so, and what his investigation will reveal about the town's current financial position, will be an early signal of whether the new administration is building on solid ground or inheriting a deeper problem than anticipated.

Second, the FY2025 audit: Mayor Riley has already indicated the town is unlikely to receive a clean opinion. When that audit is submitted to the Office of the State Auditor, the type of opinion issued - qualified, adverse, or disclaimer - will indicate whether Estancia's recordkeeping has improved at all from the FY2024 disclaimer, or whether the pattern of the last decade is continuing.

Third, the State Auditor's Risk Advisories: Estancia has appeared on the OSA At-Risk list before, but, unfortunately, the OSA no longer produces that list each year. Instead, it publishes ad hoc Risk Advisory Reports and Risk Reviews regarding financial mismanagement. Entities that remain noncompliant with the Audit Act are barred from receiving capital outlay funds under Executive Order 2013. Given that the town is actively pursuing state and federal grant funding for infrastructure projects, continued noncompliance could directly undermine those efforts.

Fourth, and most fundamentally, whether the town establishes written financial policies and procedures that function independently of any single employee: The 2015 special audit identified this as a core vulnerability. Ten years later, the town's financial recordkeeping still collapsed following a single personnel departure. Until Estancia's financial controls are embedded in institutional procedures rather than dependent on whoever happens to be sitting in the clerk's chair, the town will remain one resignation away from the same crisis.

All audit reports for New Mexico municipalities are public records and can be accessed through the Office of the State Auditor's audit report search at osa.nm.gov.

For the town of Estancia, there is a clear pattern of financial mismanagement leading to accountants submitting disclaimers of opinion to the Office of the State Auditor. Over the past decade, Estancia has repeatedly failed to produce the financial records necessary for its auditors to verify the town's finances. This is not a single bad year attributable to a staffing shortage. It is a chronic, structural failure of financial governance that predates the current administration, the previous administration, and the one before that.

When an auditor issues a disclaimer of opinion, it means the town's records were so incomplete that a trained, independent financial professional, frequently one trained in forensic accounting, could not determine whether public funds were handled properly. Estancia has received that designation in six of the last nine fiscal years for which audits are available. The 2015 special audit by the Office of the State Auditor identified deficiencies across nearly every category of municipal financial management - and warned explicitly that the town was susceptible to fraud, waste, and abuse if those deficiencies were left unaddressed.

They went unaddressed for 10 years.

Currently, according to the public record, there is no guarantee that Estancia’s funding is going to where it should. That is not an accusation of wrongdoing. It is a statement of fact: without a clean audit, no one - not the Board of Trustees, not the mayor, not the residents - can say with confidence where the money went.