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HEADNOTE: Gebhardt & Smith, LLP v. Maryland Port Administration, No. 1326, September Term, 2008.
CONTRACTS; CONDITION PRECEDENT; IMPLIED TERMS; WAIVER OF RIGHT TO JUDICIAL REVIEW OF THIRD PARTY DETERMINATION.

The parties entered into a Lease providing that the tenants would pay operating expenses "as determined by Lessor's certified public accountant," and that the statement of operating expenses "shall constitute a final determination" between the parties. The Lease did not contain clear language providing that the determination of the operating expenses by "Lessor's certified public accountant" was a condition precedent to Gebhardt & Smith's obligation to pay these expenses. When a contract provides that a determination rendered by a designated person is "final," that determination is binding on the parties and cannot be contested in court in the absence of fraud or bad faith.

REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND

No. 1326

September Term, 2008

GEBHARDT & SMITH LLP

v.

MARYLAND PORT ADMINISTRATION

Salmon, Zarnoch, Graeff, JJ.

Opinion by Graeff, J.

Filed: October 29, 2009

This appeal arises from a dispute between Gebhardt & Smith LLP ("Gebhardt & Smith"), appellant, and the Maryland Port Administration ("MPA"), appellee, over a lease ("Lease") for office space in the Baltimore World Trade Center ("WTC"). The Lease required that the tenant, Gebhardt & Smith, pay to the landlord, the MPA, base rent plus a proportional share of the building's operating expenses. In 2003, a dispute arose regarding the charges for operating expenses. Gebhardt & Smith continued to pay its base rent, but it did not pay the invoices for operating expenses. Suit was instituted in the Circuit Court for Baltimore City. Following a bench trial, the circuit court found that Gebhardt & Smith breached the Lease, and it entered a judgment in favor of the MPA for $328,186.88, plus interest. Gebhardt & Smith appealed, and it presents two questions for our review, which we have rephrased: 1. Did the Lease contain a condition precedent to Gebhardt & Smith's obligation to pay its share of operating expenses, and if so, was this condition satisfied? Where the Lease provided that the determination of operating expenses by "Lessor's certified public accountant" "shall constitute a final determination," was Gebhardt & Smith precluded from challenging the operating expenses in court?

2.

For the reasons set forth below, we shall affirm the judgment of the circuit court. FACTUAL AND PROCEDURAL BACKGROUND Gebhardt & Smith, a law firm, leased office space from 1977 until 2006 in the WTC, an office building operated by the MPA and located in Baltimore, Maryland. In 1992, the parties executed the Lease at issue, with Gebhardt & Smith renting 30,161 square feet of

office space on three floors of the WTC. Gebhardt & Smith agreed to pay $49,011.63 per month in base rent, plus its proportional share of "additional rent," which was comprised of "real estate taxes" and "operating expenses."1 Article 4 of the Lease defined "operating expenses" as follows: The term "operating expenses shall mean any and all costs and expenses (except real estate taxes) paid, incurred, or charged by Lessor in connection with the operation, servicing and maintenance of the building, including, but not limited to, the following: 1) Wages and salaries and costs of employee benefits of employees or independent contractors engaged in the operation and maintenance of the building, including Lessor's Social Security Taxes and any other governmental taxes which may be levied on such wages and salaries; All charges and rates connected with water supplied to the building and related sewer use charges; All charges connected with heat and air conditioning supplied to the building; The cost of labor and material for cleaning the building, surrounding areaways and windows in the building; The cost of all electric current supplied to the building; The cost of fire; casualty, liability and such other insurance customarily provided in connection with an office building.

2) 3) 4) 5) 6)

The term "operating expenses" shall include only reasonable and bonafide expenses actually incurred by Lessor and shall not include any of the following: depreciation, administrative overhead expenses, leasing

The parties amended the Lease on three occasions. On September 28, 1995, the parties executed a first amendment to the Lease, which made two changes: (1) it extended its termination date to September 30, 2000; and (2) the base rent was decreased to $44,211 per month. On March 23, 2000, the parties executed a second amendment to the Lease, which made similar changes: (1) it extended its termination date to September 30, 2007; and (2) the base rent was increased to $51,902.05 per month. On May 19, 2005, the parties executed a third amendment to the Lease, which changed the termination date of the Lease to September 30, 2006. -2-

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commissions, management or rental agents fees, capital expenditures (which shall include, without limitation, the cost of renovating, decorating or otherwise preparing space in the building for tenants), or any other expenses relating to the ownership and management, as distinguished from the operation, of the building. Article 4(c) of the Lease, which was included in an addendum, identified how operating expenses would be billed to Gebhardt & Smith: In the event that the operating expenses incurred by Lessor during any fiscal year following the base year shall exceed the operating expenses incurred by Lessor during the base year Lessee shall pay to Lessor as additional rent for such fiscal year an amount equal to The Percentage[2] of the excess. In the month of June in the base year and each fiscal year thereafter, Lessor shall furnish to Lessee a statement of the estimated operating expenses for the forthcoming fiscal year compared with the base year and shall compute Lessee's estimated additional rent for such fiscal year as provided herein. If the estimated operating expenses for said fiscal year exceed the operating expenses during the base year Lessee shall pay each month in addition to the base year specified in Article 2 hereof an amount equal to one-twelfth (1/12) of the Percentage of the excess. When the statements of the actual operating expenses for such fiscal year are issued by the State Legislative Auditor's Office or Lessor's certified public accountants, if the estimated additional rent paid by Lessee exceeds Lessee's Percentage of the excess operating expenses, Lessor shall promptly either refund the overpayment to Lessee or credit the amount thereof against subsequent payments of additional rent under this paragraph c. If the estimated additional rent paid by Lessee is less than Lessee's Percentage of the excess operating expenses[,] Lessee shall pay the additional rent due within ten (10) days after receipt of a statement therefor from Lessor. Article 4(d) of the Lease is the provision central to this appeal. It provided that the statements of operating expenses to be furnished by Lessor "shall be as determined by

The Lease defined "The Percentage," as 11.0149 percent, which constituted the ratio of "the gross rentable area of the Leased Premises [] to the total gross rentable area of the building." -3-

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Lessor's certified public accountant" and that the statements furnished "shall constitute a final determination" of the amount of operating expenses owed by Gebhardt & Smith to the MPA. This provision provided as follows: The Statements of the real estate taxes and operating expenses to be furnished by Lessor as provided in subdivisions (b) [referring to Real Estate Taxes] and (c) [referring to operating expenses] above shall be as determined by Lessor's certified public accountant xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxx. The statements thus furnished to Lessee shall constitute a final determination as between Lessor and Lessee of the real estate taxes and operating expenses for the periods represented thereby.[3] (Emphasis added). In a letter dated November 8, 2002, the WTC Building Manager advised Gebhardt & Smith that, for the fiscal years ending in 2000 or 2001, there was no increase in the operating expenses: We have received the final Auditor's report for the actual operating expenses for the World Trade Center for Fiscal Years ending June 30, 2000 and June 30, 2001. These expenses for Fiscal Years 2000 and 2001 were audited and certified by an independent public accountant. By this letter, we will adjust the estimated operating expenses per Article 4c of your Lease for the Fiscal Year ending June 30, 2003. . . . The letter advised, however, that the estimated operating expenses for fiscal year 2003 increased, and Gebhardt & Smith was obligated to pay its proportional share of that increase,

The xs appear in the Lease. James Smith, Managing Partner with Gebhardt & Smith, testified that the part x'd out of the Lease "was a reference to generally accepted accounting principles." He testified that the Lease did not contain a specific accounting standard that MPA was required to follow. -4-

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$17,871.12.4 Mark Gaspar, Administrative Partner with Gebhardt & Smith, testified that the firm paid this bill without protest or request for additional information because "it was a small amount" and "the letter represented . . . that the expenses had been audited and certified by an independent public accountant." In September 2003, Hurricane Isabel flooded the WTC and the building was closed from September 19, 2003, until November 10, 2003. During this time, Gebhardt & Smith vacated its offices, moved its files and computers out of the building, and occupied temporary office space to continue operating its law practice. While Gebhardt & Smith was displaced from the WTC, it received a letter and an invoice for actual operating expenses for fiscal year 2002 and estimated operating expenses for 2004. The letter again indicated that the MPA had received "the Auditor's report for the actual operating expenses" and, similar to the previous year, stated that the expenses "for fiscal year 2002 have been audited and certified by an independent public accountant."5 The letter informed Gebhardt & Smith that, for fiscal year 2002, it owed an additional $22,854.38 for actual operating expenses over what Gebhardt & Smith had paid for estimated operating expenses. In addition, Gebhardt & Smith owed $33,512.28 for estimated operating expenses for fiscal year 2004. An invoice indicated that Gebhardt & Smith owed MPA a total of $56,366.66.

4

Gebhardt & Smith had a credit of $12,989.04.

This letter, although unsigned and not on letterhead, was admitted into evidence without objection. -5-

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Upon receipt of the invoice, Mr. Gaspar testified that he was "shocked" because "rent was supposedly being abated at that point," as a result of the firm's displacement from the WTC due to Hurricane Isabel, and "the invoice was requesting payment of $56,000 right away." Mr. Gaspar took the bill to Jim Smith and Larry Gebhardt, two of the firm's partners.6 In a letter dated December 29, 2003, Gebhardt & Smith responded to the WTC's building manager regarding the bill it received for actual and estimated operating expenses: We have received your letter of December 22, 2003 relating to the World Trade Center's operating expenses for fiscal 2002 and its estimated operating expenses for fiscal 2003. Your letter, together with its attachment, expresses the Maryland Port Administration's contention as to Gebhardt & Smith['s] responsibility for a percentage of these actual and estimated operating expenses under the terms of the Lease. Gebhardt & Smith, however, has significant concerns - and potentially substantial disagreements - with the Maryland Port Administration's computation of the amounts claimed due as actual operating expenses for fiscal 2002 and the estimated operating expenses for fiscal 2003. *** Tenants are responsible solely for operating expenses incurred in connection with "the operation, servicing, and maintenance of the building." Tenants are not responsible for expenses in connection with the management and ownership of the building. For this reason, Gebhardt & Smith requests a detailed and comprehensive breakdown of all of the items comprising the categories of purported operating expenses set forth in the Ernst & Young Schedule of Actual Operating Expenses for the fiscal year ending June 30, 2002. Gebhardt & Smith wishes to verify and satisfy itself that the operating expenses aggregated in the schedule are authorized operating expenses under the terms of the Lease, as contrasted to expense of ownership and management. . . . A subsequent letter from the WTC Building Manager advised that Gebhardt & Smith was assessed "a credit of $4,840.66 related to the period of rent abatement." -66

*** Gebhardt & Smith has substantial concerns about whether the Maryland Port Administration has made an accurate, good faith estimate of the operating expenses which it legally, under the terms of the Lease, is entitled to pass on to the tenants as additional rent. In a letter dated January 30, 2004, the WTC's building manager responded to Gebhardt & Smith's letter and provided Gebhardt & Smith with documentation regarding the actual and estimated operating expenses. WTC's building manager attached two reports prepared by Ernst & Young, LLP ("Ernst & Young"), an accounting firm, for the fiscal years ending June 30, 2001, and June 30, 2002. The first report, which covered the fiscal year that ended on June 30, 2001, stated that Ernst & Young "audited, in accordance with auditing standards generally accepted in the United States, the general purpose financial statements of the Maryland Department of Transportation as of and for the year ended June 30, 2001." The report explained that its "audit was made for the purpose of forming an opinion on the general purpose financial statements of the Maryland Department of Transportation taken as a whole" and "to meet the reporting requirements of the World Trade Center standard lease agreement . . . ." The report then identified the following operating expenses: (1) utilities costing $1,064,288; (2) maintenance costing $752,104; (3) janitorial costing $447,172; (4) security costing $280,490; (5) insurance costing $59,718; and administration costing $73,983. The second report, which covered the fiscal year that ended on June 30, 2002, stated that Ernst & Young "audited, in accordance with auditing standards generally accepted in the

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United States, the basic financial statements of the Maryland Department of Transportation as of and for the year ended June 30, 2002." The report continued: The information set forth in the accompanying Schedule, which is the responsibility of the Maryland Department of Transportation's management, is presented for purposes of additional analysis and to meet the reporting requirements of the World Trade Center standard lease agreement and is not a required part of the basic financial statements of the Maryland Department of Transportation. As described in Note 1, the Schedule referred to above has been prepared in accordance with the basis of accounting as defined by Article 4 of the Standard World Trade Center Lease Agreement, which Agreement requires reporting expenses at amounts that vary materially from those which would be reported if presented in conformity with accounting principles generally accepted in the United States.[7] The Schedule is not intended to be a complete presentation of operating expenses in conformity with accounting principles generally accepted in the United States or other comprehensive basis of accounting. The information set forth in the accompanying Schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material aspects in relation to the basic financial statements taken as a whole. The report then identified the following operating expenses: (1) utilities costing $1,006,724; (2) maintenance costing $764,841; (3) janitorial costing $548,888; (4) security costing 393,372; (5) insurance costing $95,105; and (6) administration costing $76,311. Upon reviewing the reports created by Ernst & Young, Mr. Gaspar concluded that Ernst & Young had not issued "a standard audit opinion" because "it simply states that they've audited the financial statements of the Department of Transportation without indicating that they've done anything to review the financial statements of the Port

Note one provides, among other things, that "[t]he Schedule of Standard Operating Expenses is prepared on the basis of accounting as defined by Article 4 of the standard World Trade Center lease agreement." The testimony indicated that the basis of accounting was the definition of operating expenses from the Lease. -8-

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Administration itself."

Moreover, Gebhardt & Smith concluded that the audit was

insufficient because Ernest & Young "had not determined the operating expenses that they're required to under the lease." The reports did not indicate that the auditor "reviewed the backup information," and Gebhardt & Smith believed that the auditor "should have gone back to the Maryland Port Administration's records to review their invoices" and the lease "to determine what categories of expenses are properly passed onto tenants." Consequently, Gebhardt & Smith refused to make any further payment of operating expenses because "we wanted more information to show that they were going to calculate the amount based on what's required under the lease and we never received that [information]." The MPA continued to send statements regarding Gebhardt & Smith's share of the operating expenses.8 Gebhardt & Smith did not pay any bills for operating expenses from 2004 to 2006. In 2006, Gebhardt & Smith decided to file suit due to concerns "that if [Gebhardt & Smith] actually did owe money it was building up," and Gebhardt & Smith "felt that was the only way that we could force the state to actually give us some proper calculation of what

In a letter dated September 29, 2004, the MPA informed Gebhardt & Smith that it owed an additional $41,156.85 for fiscal year 2003, and that it owed $69,641.15 for estimated operating expenses for fiscal year 2005. In a letter dated July 28, 2005, the MPA indicated that the actual operating expenses for fiscal year 2004 were $764.16 less than already billed. The letter advised that Gebhardt & Smith owed $106,100.48 for estimated operating expenses for fiscal year 2006. In a letter dated May 31, 2006, the MPA stated that Gebhardt & Smith owed an additional $28,270.07 for actual operating expenses for fiscal year 2005. The letter advised Gebhardt & Smith that it owed $114,121.53 for estimated operating expenses for fiscal year 2007. -9-

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we owed." On April 6, 2006, Gebhardt & Smith filed a complaint in the Circuit Court for Baltimore City, requesting that the court issue a declaratory judgment to determine, among other things, "the actual operating expenses" for 2002 to 2006. Gebhardt & Smith alleged that, as a result of deficit concerns facing the State in 2003, the State decided to sell the WTC, and it "set out to increase the revenue generated by the building." Gebhardt & Smith contended that "the only avenue for MPA to generate additional revenue from the building was to increase the operating expense pass throughs that were billed to tenants as additional rent." It claimed that, "[b]y inflating the operating expenses passed on to the tenants, MPA could increase its profit from the leasing activity" and this would "deceptively make the building appear more profitable than it actually was and potentially enable the building to command a higher price upon its sale." Gebhardt & Smith cited costs for security and the apportionment of liability insurance as "egregious example[s]" of "inflated, improper and unauthorized charges[.]" Gebhardt & Smith also requested that the court declare that it "is not responsible for paying its percentage of the increase in annual real property taxes that will result from MPA selling the World Trade Center to a person that is not tax exempt[,]" that "MPA is estopped from including the salary and benefits of MDTA Police as an operating expense[,]" and that Gebhardt & Smith "does not owe pre-judgment or contractual interest on the amount of any additional rent for increase in operating expenses for any fiscal year after the base year that may be its obligation under the lease[.]"

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On June 30, 2006, MPA filed an answer and a counterclaim. The counterclaim alleged that Gebhardt & Smith breached the Lease agreement when it failed to pay operating expenses from September 30, 2003, to June 2006, the MPA requested that the court enter a judgment against Gebhardt & Smith for $302,882.45, plus fees and interest. In July 2006, Gebhardt & Smith vacated its leased office space in the WTC. The Lease expired on September 30, 2006, and Gebhardt & Smith paid all base rent owed through the termination of the Lease. On July 27, 2006, Gebhardt & Smith filed an amended complaint, adding a claim that the MPA engaged in "constructive fraud." It alleged that the MPA "owed a limited fiduciary duty to Gebhardt & Smith . . . to account for the actual operating expenses . . ." which it "failed to fulfill" "by asking for operating expenses it knew were not due." Gebhardt & Smith alleged that "Ernst & Young LLP falsified the operating expense calculation to assist and to aid and abet MPA in its efforts to defraud Gebhardt & Smith." On October 10, 2006, Gebhardt & Smith filed a motion to dismiss its Declaratory Judgment Complaint on the ground that it involved the same issues as the counter-claim, i.e., "MPA asserts that additional rent is due, and Gebhardt & Smith denies that any additional rent is owed." Gebhardt & Smith explained: "Because of the counter-claim, the case is fundamentally a collection case for an alleged breach of lease," and "MPA is the natural

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plaintiff and Gebhardt & Smith, the natural defendant." The court granted Gebhardt & Smith's motion and dismissed Gebhardt & Smith's complaint for a declaratory judgment.9 On April 23, 2007, MPA filed an amended counterclaim. Count I alleged that Gebhardt & Smith breached its contract with the MPA when it did not pay for "additional rent" under the Lease. Count II alleged that Gebhardt & Smith was unjustly enriched when Gebhardt & Smith received "the benefit of services for which other WTC tenants have paid," but it has refused "to pay the operating expense increase required under its lease[.]" MPA requested that the court enter judgment in its favor for $400,502.84, plus prejudgement interest at 12 percent per year, and a 17 percent fee "to cover all State collection and administrative costs." On May 7, 2007, Gebhardt & Smith filed a Motion to Dismiss or for Summary Judgment, arguing that the Lease is "void and unenforceable" because the MPA "may not, within the limitations of the Maryland Constitution and the Maryland Port Administration's governing statute, operate a commercial office building catering to and occupied predominantly by businesses that have nothing to do with maritime trade or activities." The court denied Gebhardt & Smith's motion. On June 18, 2007, the MPA and the State of Maryland, Central Collection Unit ("CCU") filed a second amended counterclaim, which added CCU as an additional plaintiff. On June 27, 2007, Gebhardt & Smith responded and filed a Motion to Strike Second

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At trial, Gebhardt & Smith was the defendant and the MPA was the plaintiff. -12-

Amended Counterclaim, arguing that "delinquent accounts which are referred to the CCU for collection are subject to a 17% collection fee" and "it appears that the MPA's real motive for referring its claim against [Gebhardt & Smith] to the CCU is simply to artificially inflate the amount of its claim by 17%." The court granted Gebhardt & Smith's motion. On February 25, 2008, the MPA filed a motion for summary judgment, raising three arguments why judgment should be entered in its favor. First, the MPA argued that, "[b]ecause G&S has identified no fraudulent or bad faith conduct by MPA in compiling the operating expenses for relevant fiscal years, G&S is bound by the `final determination' of these expenses." Second, the MPA argued that it was entitled to summary judgment based on sovereign immunity. Third, the MPA argued that "G&S waived its right to rescind or avoid its obligations under the 1992 WTC Lease" when it continued to occupy the office space after receiving the documentation provided by the MPA regarding operating expenses. The circuit court denied this motion. On February 26, 2008, Gebhardt & Smith moved for summary judgment, arguing that the contract was unenforceable because the MPA failed to satisfy a condition precedent in the contract, that an independent, certified public accountant certify the amount of operating expenses. The circuit court denied this motion. On June 23, 2008, trial commenced. Michael Miller, Director of Maritime

Commercial Management with the Maryland Port Authority, testified that the MPA is part of the Maryland Department of Transportation ("MDOT"), and the MPA operates the WTC on behalf of MDOT. He testified that there are costs associated with operating the World -13-

Trade Center, including basic management costs, utility costs, security, insurance, operating expenses, and leasing costs, and each tenant, pursuant to its lease agreement, pays its proportional share of operating expenses. Joe Ford, the assistant comptroller with the Maryland Port Administration, testified that he was involved in the preparation of the operating expense schedules for MPA beginning in 2000. The MPA uses an electronic accounting system called Financial Management Information System ("FMIS") to track invoices and payments. Mr. Ford's office made the initial determination whether an invoice should be classified as an operating expense that would be billed and paid by the WTC's tenants. After Mr. Ford compiled the numbers and accumulated all the supporting documentation, the MDOT Office of Audits reviewed the information and made adjustments to the numbers, where necessary. For example, in 2001, they recommended adjustments of $128,000. When the audit by MDOT was complete, they sent the "formal audit report" to the outside auditor, who was either Ernst & Young or SB & Company, and also provided Mr. Ford with a copy of the report.10 Once Ernst & Young or SB & Company completed its procedures, it provided Mr. Ford with a copy of the report that it created. When Mr. Ford received the report from Ernst & Young or SB & Company, the bill was sent to tenants for actual operating expenses.

Ernst & Young performed this review for fiscal years 2001 through 2004. SB & Company, as a subcontractor for another accounting firm, performed this review for fiscal years 2005 and 2006. -14-

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Mr. Ford testified that he understood the phrase "Lessor's certified public accountant," as used in Article 4(d) of the Lease, to refer to the work performed by Ernst & Young or SB & Company, not the Office of Audits. Mr. Ford is not a certified public accountant, but he has an "internal auditor certification." Mark Gaspar, Administrative Partner with Gebhardt & Smith, testified that he was responsible for paying the rent for the office space rented by Gebhardt & Smith. Mr. Gaspar testified that, ordinarily, the operating expense bills were "fairly small," and he did not spend very much time reviewing the bill before it was paid. In 2002, Mr. Gaspar paid a bill for operating expenses for approximately $4,800 "[b]ecause it was a small amount" and "the letter represented to me that it had been . . . audited and certified by an independent public accountant." Mr. Gaspar stated that, if the letter had not included this statement, he would have asked "for further information to make sure that they were not just calculated by [the WTC's building manager] or someone with the building." Upon receiving the bill for $56,000 in operating expenses in 2003, however, Mr. Gaspar took the bill to two other partners with Gebhardt & Smith. Gebhardt & Smith initially requested additional

information from the WTC building manager, but it ultimately decided not to pay the bill because, after the reviewing the documentation provided by the WTC, it did not believe that the MPA had complied with the terms of the Lease. James Smith, Managing Partner with Gebhardt & Smith, testified that Gebhardt & Smith leased office space in the WTC beginning in 1977. Following Hurricane Isabel, while Gebhardt & Smith was displaced from the WTC, Mr. Gaspar brought to his attention a bill -15-

for operating expenses. Mr. Smith characterized the increase from the prior year as a "very de minimus amount." Mr. Smith testified that he understood the phrase "Lessor's certified public accountant" to refer to "somebody independent" of the MPA and MDOT, and it was "of great importance to us that an independent public account[ant] following audit standards verified [the operating expense] numbers." Christine Carmon, Fiscal Accounts Manager with the MPA, testified that she prepared invoices for operating expenses for each tenant of the WTC. She testified that the letter that she sent to Gebhardt & Smith, indicating that WTC's operating expenses were "audited and certified by an independent public accountant," was a "form letter that was handed off" to her by her predecessor. She explained that, upon receiving "the report from the independent auditor," she would mail invoices for operating expenses to each tenant of the WTC. She testified, however, that the report from the accountants was not required by the Lease. She further testified that Gebhardt & Smith paid all of its base rent, but it had not paid its share of the operating expenses. Joseph Lambdin,11 Director of the Maryland Department of Transportation, Office of Audits, testified that he is a certified public accountant. He oversees the work of his office, which conducted audits on the WTC's operating expenses for fiscal years 2001-2006. Mr. Lambdin testified that he has managers that "do the first line supervision of the work,"

Mr. Lambdin's name is spelled in the record both as "Lamden" and "Lambdin." We will use "Lambdin" throughout this opinion because, based on a letter he signed that is part of the record, that appears to be the correct spelling. -16-

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but he monitors the progress and signs the work. The Office of Audits employs three managers and six staff auditors; some of these auditors are certified public accountants. Mr. Lambdin testified that, pursuant to government auditing standards, there was no independence issue with regard to his office performing audit procedures on the MPA. He testified that his office was free from any impairments, including personal, organizational, and external impairments.12 He explained that he reports directly to the head of the agency,

Mr. Lambdin referred to government auditing standards. Section 3.16, The Comptroller General of the United States in Government Auditing Standards "Organizational Independence for Internal Audit Functions," provides: 3.16 Certain federal, state, or local government entities employ auditors to work for management of the audited entities. These auditors may be subject to administrative direction from persons involved in the entity management process. . . . Under [generally accepted government auditing standards], a government internal audit function can be presumed to be free from organizational impairments to independence for reporting internally if the head of the audit organization meets all of the following criteria: a. is accountable to the head or deputy head of the government entity or to those charged with governance; b. reports the audit results both to the head or deputy head of the government entity and to those charged with governance; c. is located organizationally outside the staff or line-management function of the unit under audit; d. has access to those charged with governance; and e. is sufficiently removed from political pressures to conduct audits and report findings, opinions, and conclusions objectively without fear of political reprisal. COMPTROLLER GENERAL OF THE UNITED STATES, GOVERNMENT AUDITING STANDARDS

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