The state auditor’s highly critical report of financial accounting at the Nebraska State Historical Society has already prompted changes, the society’s top official said Monday.

But Michael Smith, executive director of the society, disagreed that his agency has failed to be a trustworthy steward of public funds. The audit found no missing funds beyond the nearly $73,000 revealed stolen in September.

“I don’t see anything systemically wrong with the agency,” Smith said. “I will say forever we give the people of the state, who we work for, a good return on their dollar.

“We have some things to shape up and we’re going to do that.”

State Auditor Mike Foley, who released the report Monday morning, used harsher terms to describe the society’s financial practices. He called the situation a “textbook example of how waste, fraud and abuse can infect a government agency.”

The audit lists multiple instances of sloppy accounting, poor records keeping and a lack of oversight in the management of public funds. The examples range from employees overbilling the agency for travel expenses and meals to cases in which the agency obtained federal grant money for work that wasn’t documented.

Also troubling is a 20-year lease between the society and the City of Lincoln for storage space inside the Lincoln Children’s Museum. The lease, at more than $100,000 per year, was entered into without first gaining the permission of appropriate state authorities, Foley said.

“The problems here are beyond anything I have witnessed in Nebraska state government,” said Foley, who became auditor in January after six years as a state senator.

The audit stemmed from the September arrest of Tony Schmitz, the society’s chief operations officer and second-in-command. Schmitz faces a felony charge for allegedly embezzling $73,000 from the agency over a three-year period.

The money is missing from several cash accounts the society referred to as “private funds,” which means they were kept separate from funding that was reported to the state treasurer. State law allowed the society to keep gift shop profits and annual membership dues in the private accounts. They were audited annually by an outside certified public accountant.

The private accounts had a balance of about $120,000 as of June 30, but the society made about $572,000 in payments from the private accounts during the past fiscal year. Some funds that should have been turned over to the state treasury were funneled through the account, Foley said.

Since the arrest of Schmitz, the state attorney general has said the private funds are in fact public and should be subject to state oversight from now on.

The society has agreed to change its practices so the accounts are now audited by the state, Smith said.

The audit covered three years of the private funds and one year of other accounts.

Many problems occurred because Schmitz had control over most business transactions and was not monitored by the director or the society’s board of trustees, the report stated. Schmitz also supervised the society’s four accounting staff members.

In response, Smith said the society board does monitor the financial activity of the agency, but they were falsely assured by the private audits.

Smith, who became the agency director in early 2006, said he did not provide much oversight on financial matters. But he does now.

He has already started making some of the changes in accounting practices and record keeping recommended by the auditor, Smith said. Employees who received improper expense reimbursements have been asked to return the money.

In a prepared statement, Peter Bleed, president of the society’s board of trustees, said he remains confident in Smith and the society staff.

“The history of the Cornhusker State remains in good hands,” he said.

But in the state auditor’s opinion, the troubles at the society can’t simply be blamed on one rogue employee. The society’s problems number far more than those seen in audits of other state agencies, Foley said.

“I look to the board for needing to take more ownership and responsibility,” he said, adding that he has asked to present the report to the board at its Oct. 26 meeting.

In addition to the stolen money and Children’s Museum lease, Foley said, he was most troubled by poor record keeping for grant money obtained from the federal government.

For example, the society requested about $618,000 in grant expenditures from the U.S. Department of the Interior. Auditors couldn’t verify the accuracy of the expenditures, saying the differences between what was claimed and what was documented ran into the tens of thousands of dollars.

Such federal grants are crucial to the state, Foley said, and he hopes they are not now at risk.

Some of the differences in dollar amounts can be explained by an overlap of the federal and state fiscal years, Smith said. Some grant money has already be refunded to the federal government.

Reach Joe Duggan at 473-7239 or jduggan@journalstar.com.