State auditor candidate pushes back against allegations

DOVER — The former No. 2 employee of the Delaware Office of the Auditor of Accounts, who is now running for auditor, misused her position to hide details from her boss, transfer money without budget officials finding out and award contracts to friends, according to a report prepared by an outside firm.

Findings from accounting consultant Grant Thornton indicate Kathleen Davies assumed many of the duties normally held by the state auditor and created a hostile work environment before being suspended in mid-2016 and then terminated last year.

Ms. Davies, a Democrat, disputes the findings, claiming they are part of an effort to retaliate against her for reporting an act of alleged sexual harassment and for enforcing office policies. The report, she said Wednesday, contains myriad falsehoods that may have been inserted by members of the auditor’s office seeking to smear her reputation.

Documents reviewed by the State News appear to substantiate some of the conclusions in the report and contradict Ms. Davies’ claims that she did not receive the Grant Thornton findings, that the report could have been edited by the auditor and that she did not seek to hide money transfers from budget officials.

The saga involving Ms. Davies, who was hired by the auditor’s office in January 2010, dates back to May 2016, when she was placed on paid administrative leave from her position as chief administrative auditor. She remained on leave, which she characterized as being in limbo, until she was terminated in December 2017.

No longer employed by the office, she is now campaigning full-time ahead of Sept. 6’s primary election, in which she will take on two other Democrats.

Kathleen Davies

In August 2016, according to a copy of the contract provided by Ms. Davies, the auditor’s office entered into an agreement with Grant Thornton to investigate Ms. Davies’ alleged abuse of power and other potential work-related issues. The report, a copy of which was obtained by the State News, is dated August 2017.

According to state data, the office paid about $121,000 for the work. It is the only time the state has engaged Grant Thornton over the past five years.

The 33-page report lays out numerous claims against Ms. Davies, whom it refers to by title as the CAA. The conclusions were drawn based on interviews with Ms. Davies, Auditor Tom Wagner and eight employees of the office and on analysis of documents and audio recordings.

A spokesman for Mr. Wagner declined comment Wednesday, citing policy for personnel matters. Mr. Wagner, a Republican, is not seeking reelection after 29 years in the post.

Details of the report

The findings depict her as overstepping the bounds of temporary authority granted to her by Mr. Wagner, who was sometimes out of work for periods of time and underwent several medical procedures during her employment. Mr. Wagner, the report notes, typically allowed the chief administrative auditor to assume some of the day-to-day duties of the office and signed an order giving Ms. Davies extra authority if he was incapacitated or out of the office.

“Based on information available to us, neither the Deputy Attorney General nor the State Auditor had the intent of approving an Order that provided the CAA with ongoing delegated authority under normal circumstances,” the report says. “However, based on the documentation available to us, this is how the CAA treated the temporary delegation of authority.”

Ms. Davies approved contracts despite not having the authority to do so, and her name replaced Mr. Wagner’s on several forms, according to the report.

The Division of Accounting questioned Ms. Davies’ actions multiple times, only for Ms. Davies to insist she had authority to act in Mr. Wagner’s stead, the findings state.

“Grant Thornton reviewed an email chain showing the CAA claimed authority to act on behalf of the AOA, and specifically the State Auditor, more than four years after the Order was signed. We found nothing to warrant the temporary delegation of authority to the CAA at that time,” the report says.

However, a referee who ruled in Ms. Davies’ favor in regard to unemployment benefits wrote in her order the auditor’s office did not provide evidence the delegation “was limited in scope or time or had been revoked.”

The office has appealed the ruling to the Division of Unemployment Insurance.

According to the report, Ms. Davies directed changes to the Continuity of Operations Plans to give herself greater power, excluding Mr. Wagner and several individuals appointed by him.

In an interview, Ms. Davies pushed back strongly against the information laid out in the report, saying she was “brought here as second in command” and did not make decisions without consulting Mr. Wagner.

“I think I overinformed him at times,” she said.

The responsibilities she held were normally given to the chief administrative auditor, Ms. Davies said.

The report offers a different accounting of events.

After Ms. Davies requested and received access to Mr. Wagner’s state email, the auditor’s assistant noticed appointments began disappearing from Mr. Wagner’s electronic calendar, it says. Ms. Davies also, it alleges, intercepted his mail and did not provide him with certain things.

“The State Auditor said that at some previous point the process had been that mail was delivered directly to him,” the findings say.

“While he was aware that his mail started going to the CAA, he was not aware that she was filtering and withholding his correspondence. He did state that he stopped receiving invitations to some functions he had typically attended in the past, for example, the annual Governor’s Prayer Breakfast. He told us during our interview that he thought it was odd that he was no longer getting certain invitations, but he didn’t inquire about them.

“The CAA informed us that she wanted to keep guard over the State Auditor’s mail in order to protect personally identifiable information … and chain of custody when applicable, since the State Auditor’s office was open to anyone on the first floor of the building.”

Ms. Davies said no one with the office raised the issue of the vanishing appointments to her.

According to the findings, she was responsible for installing silent alarms and cameras in the office without Mr. Wagner’s knowledge and had the trigger for the alarms placed in her office. Some employees, according to the information compiled by Grant Thornton, felt the cameras “seemed to be in place more to watch the staff in their workplaces instead of the entrances/exits to the office.”

The report says Ms. Davies instructed staff to not inform Mr. Wagner about funds in a training account or about the status of an ongoing investigation.

She also, it alleges, kept several of Mr. Wagner’s ink stamps in her office and “deliberately withheld information and communications from the State Auditor to maintain more control of the office.”

The findings also present a narrative of Ms. Davies using her influence to award contracts to friends. Ms. Davies disputed the claim, saying she knew some of the vendors given state contracts but was not friends with them and did not, contrary to the what the findings indicate, pressure coworkers to give higher scores to certain companies seeking contracts.

Employees of the office brought concerns over one specific contract to the Office of Management and Budget and the Department of Justice, according to the report. The recipient, the report says, was a former coworker of Ms. Davies who had attended her wedding and was terminated from her job with the state of New Jersey for misuse of state time and resources owing to her involvement in several political campaigns.

That contract was eventually canceled without any payments made or work performed.

According to the report, Ms. Davies misused taxpayer dollars by spending about $1,700 on 25 “law-enforcement style” badges for audit managers — not including Mr. Wagner — and $10,900 on 10 computers. The report says employees in the auditor’s office felt the badges were unnecessary and Mr. Wagner “cannot fathom he would have authorized purchasing ten computers for purposes of training an outside agency or group.”

Ms. Davies said audit managers requested the badges.

In another instance, the report alleges, she instructed an employee to move around $10,000 in travel funds in several smaller increments to avoid getting the attention of the Office of Management and Budget. Ms. Davies denied doing so.

The report says she “failed to submit receipts for meal expenses incurred while on AOA-related travel, improperly claimed a per diem, and failed to use the state purchasing card.” It goes on to state she instructed employees not to follow reimbursement guidelines and to charge certain items to their personal credit cards instead.

In May 2016, she reported Mr. Wagner for sexual harassment, alleging he massaged an employee’s shoulders. The employee later said she was not bothered by the action, and Mr. Wagner disputed Ms. Davies’ version of events, according to the findings.

Ms. Davies was placed on paid leave days later.

“The steps I took to follow-up with the employee were entirely appropriate and I had a statutory duty to do so,” she said in a statement issued earlier this week. “Being in the profession for so long, I was not unfamiliar with retaliation; but, I was shocked to realize that Mr. Wagner found my actions, in fulfilling my duty as second-in-command at AOA, a betrayal of trust.”

The Grant Thornton product says she provided incorrect information on whistleblower protections and notes her instructions may have been issued “to increase control of the group by reducing the possibility that an AOA employee would complain about her actions.”

Asked about whistleblowing, Ms. Davies said she only sought to emphasize that employees would have to hire their own counsel and could not rely on the state to defend them if they were terminated.

According to the report, Ms. Davies created a hostile work environment and harshly criticized coworkers in front of others. The findings declare that employees complained Ms. Davies approved overtime “only to those employees with whom she was getting along at the time,” although the report notes investigators could not find documentation to prove this.

Several people left the office because of Ms. Davies’ treatment of them, the report says.

“It was clear to us that AOA employees feared that speaking out against the CAA would cause retribution and worsen already tense office conditions,” it concludes.

Criticism and judgment

Ms. Davies has been criticized by her Democratic primary opponents, Dennis E. Williams and Kathy McGuiness, over her suspension and termination. At a debate in July, Mr. Williams questioned why Ms. Davies has not made information relating to her case public, saying, “You’re asking all of us as voters to trust you but you’re not trusting us with the information.”

Ms. Davies responded that she was going through the process and could not legally release any documents.

After the News Journal published an article on the report earlier this month, two Democratic lawmakers supporting Ms. Davies asked the Delaware Department of Justice to thoroughly investigate the release of the report and potentially bring charges against those involved.

“The release of a confidential report by any government employee and/or agency is a startling and alarming incident of a breach of the public’s trust,” Rep. John Kowalko, a Newark Democrat who has advocated for open government, wrote in an email. “When the report is additionally bound by confidential guarantees pertaining to individual personnel rights it becomes even more onerous when that confidentially is breached.”

The validity of Ms. Davies’ grievance will be determined by the Merit Employee Relations Board. She has already won unemployment benefits, although she said she is no longer receiving benefits while she campaigns.

In June, Ms. Davies filed a motion with the Merit Employee Relations Board requesting from her former employer dozens of documents relating to her case. The auditor’s office responded by seeking to quash her motion for about half of the items.

After a hearing, the board granted some of the office’s requests and ordered it to turn over other information. A second hearing has been postponed multiple times.

The referee in the unemployment judgment wrote Mr. Wagner provided confusing and sometimes contradictory testimony and did not warn Ms. Davies “her performance was deficient in certain areas” before placing her on paid leave.

“This Tribunal finds that the Employer has not met its burden to provide willful and wanton misconduct on the part of Claimant in this case. Accordingly, Employer has not demonstrated that it had sufficient just cause to discharge the Claimant from her employment to disqualify her from unemployment benefits,” Kathryn M. Gantz wrote.

The Grant Thornton report was not entered as evidence in the unemployment hearing.


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