The problem persisted in recent years despite other audit warnings, and in the case of the alleged fraud, the state Attorney General’s Office is now investigating.

Labor Commissioner Laura Fortman, who oversees the bureau as part of her department, said the three employees involved in the alleged misconduct are no longer working for the state.

The audit, which was released last week, was done by the Office of Program Evaluation and Government Accountability (OPEGA) and covers three fiscal years ending June of 2006. It focused on $26.5 million paid out by the Bureau of Rehabilitation Services for goods and service to eligible people with disabilities, who were looking for help to become employed. Those services range from postsecondary education to car repair or home office equipment.

Direct payments to clients raised particular red flags because there was not always the required paperwork or receipts or even visual check to make sure the intended goods were purchased with the money.

Another problem cited was that counselors working for the bureau could approve purchases without oversight by management.

“In one extreme case, a consumer directly received $17,150 in a single payment to purchase equipment and services to start a new business,” the OPEGA audit said. “One month later, another $343 was provided.”

“The case file included a hand-written list of equipment and other projected costs (insurance, advertising), but no other documentation supporting those projections. Case notes indicate the counselor’s intention to inspect the business and goods purchased, but there was no evidence a visit was actually made. The consumer did not provide DVR (Division of Vocational Rehabilitation) with receipts for any of the purchases,” according to the audit.

In another instance cited in the report, a client received $2,558 to pay for transmission repair on his vehicle and $399 for work clothes, but then broke contact with the division without ever providing receipts.

Fortman said she welcomed the audit because it helps her department address a problem it knew existed and was trying to fix.

“We’re actually very grateful to OPEGA. The audit allows us to continue a process that was already started,” she said.

The State Auditor’s office tagged problems with internal controls at the bureau as early as 2003 and Fortman hired an outside consultant in 2004, who recommended changes to internal controls, including having two people sign off on client purchases.

The department’s focus at the time, however, was on upper-level budget issues, such as making sure federal grants were appropriately allocated and cutting down on the waiting time for serving people, which was as long as 14 months.

“The two top priorities for me were to make sure we had adequate controls to manage our federal grant and to the cut the waiting time,” Fortman said.

The Bureau of Rehabilitation Services, like most Department of Labor functions, is funded 80 percent with federal money and the rest with state. The federal grant for the bureau is $36 million a year. The money OPEGA was reviewing was the $8 million to $10 million spent annually on goods and services for clients.

Beth Ashcroft, director of OPEGA, said the controls her office is suggesting to monitor purchases are meant to protect taxpayer dollars and are being taken seriously by the department.

“It’s always a very hard sell for an auditor to tell a manager, ‘look you’ve got to put these kind of controls in place,’ because they want to trust everyone,” she said. “Once they saw for themselves what we were seeing, they really did take all of this seriously. I give them a lot of credit.”