The reports, compiled by the New York State Unified Court System's Internal Audit Services and obtained by Law360 via a Freedom of Information request, reveal inaccurate, and at times nonexistent, reporting and accounting of legal filing fees over nearly three years in the lower civil courts in Manhattan, the Bronx, Brooklyn and Queens.
No disciplinary action was taken against any court employees, according to a person with knowledge of personnel decisions.
Those with oversight of the judiciary, including lawmakers and the state's financial watchdog, were never informed of the problems by court officials and only learned about the issue when contacted by Law360.
A spokesperson for the New York State Senate Judiciary Committee told Law360 that "court officials did not raise these issues or share these reports … they also did not bring this up during budget talks or any other meetings" with the chair.
"Senator [Brad] Hoylman-Sigal is concerned about the accounting issues and potential violations of state law raised in these reports and certainly feels it is worth a larger inquiry by the Judiciary Committee," according to a statement from the chair's office.
State courts spokesperson Al Baker said the money has since been returned to state coffers and is now "properly accounted for" with "a dedicated analyst overseeing court revenue in New York City to ensure the integrity of monthly account balances."
"The Unified Court System has issued corrective plans to address these issues and is providing court personnel with increased training in the proper and timely distribution of revenues," Baker added, attributing errors to "the strains presented by the pandemic."
Court officials did not directly respond to a question about whether other courts were being audited to see if these errors were more widespread in the state court system, including in higher-level courts where more money is collected. An official noted that all revenue-producing courts are audited on a rotating basis.
Users of the New York State Courts Electronic Filing system, or NYSCEF, pay fees to submit a complaint, motion or other civil filing in courts across the state. Online fee collection began during the pandemic for some courts.
But from June 2020 to January 2023, lower New York City courts — including those hearing civil claims up to $50,000, housing disputes, and small claims — failed to properly account for that money or send it to state tax officials at the end of every month, as finance regulations and state judiciary law requires.
After those New York City Civil Courts took in over $17 million in legal fees through e-filing, they held onto more than half of that money — a total of $9.5 million — until auditors came knocking. Manhattan failed to remit more than 99% of its $2.2 million in collections, sending the state a mere $17,000.
Due to financial reporting errors, court officials also dramatically misstated revenues.
The Bronx Civil Court vastly inflated how much money it received, initially reporting it took in $14 million, while bank records showed $4 million in deposits. Auditors, who dedicated a separate report to that court's failings, said the overstatement was due to a variety of mistakes, such as double-counting, poor programming and adding in credit card processing fees.
A key issue was that the NYSCEF accounting data was wrong.
"The NYSCEF reports did not accurately represent transaction activity requested during a given period. Therefore, the courts could not rely on the NYSCEF reports to accurately account for collections and to reconcile their bank accounts," one report said.
The official in charge of training clerks on the NYSCEF system was aware of the problem and told auditors "it had been an ongoing issue for the past two years."
The audit reports showed clear failures, according to an outside expert consulted by Law360. Benito Ybarra, head of global standards for the Institute of Internal Auditors, said he was unconvinced that the errors were entirely caused by the rollout of the electronic payment system during the pandemic, as court officials suggest.
"It seems the failures were human failures," Ybarra said, noting that court officials apparently did not check their bank accounts to see if transfers were happening. "Somebody should have been able to tell on both sides."
"In terms of what the taxpayer should expect, this does not meet expectations," Ybarra told Law360. "There are processes in place that should have prevented this from happening — and those processes aren't working."
Ybarra, who served as chief auditor of the Texas Department of Transportation for a decade, said he would task an audit team to see whether this is only a $9.5 million problem or something larger or more pervasive. But ultimately, the state court system's top judges will decide a course of action, if any.
"If that doesn't raise a red flag," Ybarra said, pausing. "That's a question for them."
The internal reports were not shared outside the court system before Law360 obtained them, court officials said, and the state's independent auditor was unaware of the reports' findings.
"We were not involved and can't comment further," a spokesperson for State Comptroller Thomas DiNapoli told Law360.
New York does not require state agencies to share internal audit reports with its financial watchdog, as they do elsewhere. In Texas, the law requires such periodic internal audit reports to be shared with the governor and state's chief auditor, Ybarra noted, calling it "a very progressive state when it comes to accountability and auditing."
--Editing by Robert Rudinger.
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