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Audit of the Massachusetts Life Sciences Center Objectives, Scope and Methodology

An explanation of what this audit examined and how it was conducted.

Table of Contents

Overview

In accordance with Section 12 of Chapter 11 of the Massachusetts General Laws, the Office of the State Auditor has conducted a performance audit of certain activities of the Massachusetts Life Sciences Center (MLSC) for the period July 1, 2013 through June 30, 2017.

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 reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Below is a list of our audit objectives, indicating each question we intended our audit to answer and the conclusion we reached regarding each objective.

Objective

Conclusion

  1. Did MLSC properly administer its Capital and Investment Fund Programs?

 Yes

  1. Did MLSC properly administer its Life Sciences Tax Incentive Program?

 Yes

 

To achieve our audit objectives, we gained an understanding of the internal controls we determined to be relevant to our audit objectives and tested the controls’ operating effectiveness over the awarding, payment, and monitoring of MLSC grants and loans, as well as the awarding and monitoring of MLSC tax incentives. We conducted further audit testing as described below.

Grants and Loans

To gain an understanding of MLSC’s practices regarding the awarding and payment of grants and loans, we reviewed pertinent MLSC policies and interviewed management and staff members involved in these functions.

Organizations seeking grant funds must submit an application, which MLSC’s staff reviews for completeness. Because of the technical nature of the subject matter, most proposals are reviewed by MLSC’s Scientific Advisory Board (SAB), which consists of 20 professionals, including PhD-level scientists, medical doctors, and life science company executives.2 Some grants are also subject to peer review3 and review by the board of directors’ investment committee. The SAB makes recommendations to the board of directors, which approves or rejects the proposal. Subsequently, an agreement is signed by the president of MLSC or another designated MLSC official and by the president or chief executive of the recipient entity. Payments are not issued until an agreement is executed. When a grant or loan awardee submits a payment request, the manager of the grant or loan program sends a check request to the finance team for review and processing. Only the president, chief financial officer (CFO), and general counsel are authorized to sign checks, and all checks equal to or greater than $10,000 must be signed by two of those three people. Supporting documentation, such as invoices, must be provided for each check and available for review at the time of signing. Additionally, awardees are required by the grant agreements to submit quarterly and annual reports to MLSC to remain in good standing. The process is similar for the Life Sciences Accelerator Loan Program.

To determine whether MLSC followed Section 6 of Chapter 23I of the General Laws as well as its own policies regarding the awarding of grants, we selected a nonstatistical judgmental sample of 20 grants from a population of 119 (representing $44,622,978 of $141,828,899 awarded during the audit period). We reviewed the selected awards to verify staff review of application information; peer and/or SAB review, if necessary; approval by the board of directors; and award agreements signed by MLSC’s CEO, as well as to determine whether the purpose of each award was consistent with MLSC’s mission.

We tested all seven (100%) of the loans made during the audit period, totaling $6,249,696, to determine whether they were reviewed by the SAB, peer reviewers, and the board of directors’ investment committee and approved by the board of directors. We also verified that each loan resulted in an executed loan agreement signed by the CEO, or another designated officer of MLSC, and that the purpose of each loan was consistent with MLSC’s loan solicitation4 and mission.

To determine whether grant and loan payments were adequately reviewed and were consistent with MLSC practices and applicable contract agreements, we used Audit Command Language (ACL) audit software to develop a stratified statistical random sample (95% confidence level) of 62 payments, totaling $103,411,457, from a population of 2,005 payments, totaling $246,303,043, made during the audit period. We tested each payment to determine whether there was supporting documentation (e.g., invoices), a completed check request, a check signed in accordance with MLSC requirements, CFO approval, and an annual (or quarterly, if no annual report was due yet) report from each awardee receiving payments.

Tax Incentives

To gain an understanding of MLSC’s practices regarding the awarding and monitoring of tax incentives, we reviewed pertinent laws and MLSC policies, and we interviewed management and staff members involved in these operations.

The Life Sciences Tax Incentive Program was established as part of MLSC’s enabling legislation (Section 5d of Chapter 23I of the General Laws). Under the program, MLSC, in consultation with the Department of Revenue (DOR), awards tax incentives of no more than $25,000,000 annually. Tax incentives proposed by MLSC must be reviewed and approved by the Commissioner of Revenue with regard to the tax cost of extending them. They must then be approved by the Secretary of Administration and Finance. Awardees must provide annual and quarterly reports detailing their numbers of full-time employees (headcounts), and tax incentives are subject to revocation if recipients do not meet the headcounts stipulated in their agreements. Most awardees that do not meet 70% of their minimum agreed-upon headcounts are subject to investigation and possible termination of their agreements; awardees that meet less than 40% must have their agreements terminated. Upon termination, MLSC notifies DOR, which, as of the termination’s effective date, disallows any future tax benefits allowed under the agreement and recaptures (claws back) the value of any such benefits already provided.

To determine whether MLSC awarded tax incentives in accordance with the General Laws and its own requirements, we tested a nonstatistical judgmental sample of 20 (totaling $29,634,245) of 95 (totaling $84,781,596) tax incentives awarded during the audit period to determine whether (1) MLSC verified that each applicant was in good standing with the Secretary of State and DOR and, for awards after fiscal year 2013, had obtained approval from the Department of Unemployment Assistance; (2) the Commissioner of Revenue and the Secretary of Administration and Finance approved the tax incentive proposed by MLSC; (3) the MLSC board of directors approved the tax incentive; and (4) the tax incentive, if accepted, was documented in a signed agreement.

To determine whether MLSC monitored tax incentive awards to ensure that awardee companies met the terms of their award agreements (e.g., adding the number of jobs specified in the agreements) and took appropriate action when they did not, we reviewed a nonstatistical judgmental sample of 24 (totaling $50,086,937) of 98 (totaling $88,698,679) tax incentive awards that were subject to monitoring during the audit period.We tested each tax incentive to determine whether MLSC (1) received and reviewed certified reports specifying the awardee’s headcount and (2) took appropriate action, including termination of the agreement, if the awardee did not meet the agreement terms (e.g., did not add the number of jobs committed to). Except where noted, we used nonstatistical sampling to help us achieve our audit objectives and therefore did not project our results to the various populations.

Data Reliability

We relied primarily on physical documentation such as contracts, agreements, annual and quarterly reports from awardees receiving funding or tax relief, resolutions by the board of directors, minutes from the board’s meetings, advisory board reviews and recommendations, check requests, checks, invoices, and supporting documentation. To ensure the accuracy of payment data from the automated accounting system, we selected a sample of grant account and investment account payments from the general ledger and reconciled the payment data to source documentation (invoices and canceled checks). We used ACL to perform additional validity and integrity tests on the general ledger data, including (1) scanning for duplicate entries; (2) testing for missing data; (3) testing for grant, activity, and transactional codes other than those associated with the Capital and Investment Fund Programs; and (4) determining whether all document dates and effective dates were within the audit period.

MLSC gave us a list of tax incentives awarded since its inception. Each year, MLSC consults with DOR on tax incentives and develops a group of proposed incentives, which must be approved in writing by DOR and the Secretary of Admiration and Finance. We traced a sample of tax incentives awarded by MLSC to the proposed tax incentive amounts certified by DOR to verify that they were consistent.

We determined that the data were sufficiently reliable for the purposes of this audit.

2. Some grants, such as the internship program, legislative earmarks, education grants, and chief executive officer (CEO) discretionary awards, do not require SAB review. (For the internship program, the board authorizes the amount of funds to be spent in a particular year but does not select the individual grantees. Additionally, in 2013, the board of directors voted to allow the CEO to make awards, at his/her discretion, up to a total of $350,000 per year without prior board approval. The CEO reports annually to the board the awards s/he has approved.)

3. Peer reviewers are life sciences business and scientific experts selected by the SAB. Peer reviewers perform their review before any SAB review to eliminate projects that have questionable scientific merit or chance of payback.

4. MLSC issues proposals, referred to as solicitations, to provide loan financing to early-stage life science companies in Massachusetts. Companies must submit applications and other information that meet the requirements in the proposal. The process is competitive, and applicants are not guaranteed to receive loans.

5. Tax incentive awards can only be claimed in years after the award year and therefore are only subject to monitoring after the award year.

Date published: February 14, 2018

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