The state auditor, citing "numerous and egregious acts," has recommended that Gov. Linda Lingle remove Ted Liu as director of the state Department of Business, Economic Development and Tourism.

In a draft audit, state auditor Marion Higa alleges the department filed false financial reports related to a federal grant, spent lavishly and withheld information about a trade mission to China and South Korea in 2005, and mishandled finances at overseas offices in Beijing and Taipei.

"We observed an environment where compliance with laws, rules and regulations has been compromised over a considerable period of time," the draft audit concluded. "As it is the director who sets the 'tone at the top' for the entire department, a change in leadership would be appropriate."

Liu disputed the accuracy and questioned the timing of the draft audit. Lingle and Liu just returned from what the Lingle administration considers a successful trade and tourism promotion trip to China.

Liu disclosed the findings of the draft, which are supposed to remain confidential until officially released, because he said the conclusions are wrong.

"If there is any waste, it is found in a two-year plus investigation and a report that is erroneous, that fails to accurately assess factual information and that is unbalanced in its approach," Liu wrote in his response to the draft.

Higa said she is reviewing the responses. "I basically can't comment until we issue our report," she said.

Lingle said the auditor's draft suggests impropriety that did not occur. "The legislative auditor's report of DBEDT offers erroneous findings and demonstrates a lack of understanding and appreciation of the critical role Hawai'i's overseas offices in Beijing and Taipei play in the economic future of our state," the governor said in a statement.

Lingle also defended Liu, describing him as "an exceptional leader and innovator in the fields of energy, the economy, and international relations."

According to the draft audit, Higa found that Liu and his department withheld relevant information and provided false information to state and federal officials.

Among the most serious allegations is that the department filed false reports to the U.S. Department of Commerce related to a $399,500 grant from the federal Market Development Cooperator Program. The grant, intended to enhance the global competitiveness of U.S. manufacturing and service industries, was matched 2-to-1 by state money and in-kind contributions from tourism-related businesses.

The draft audit alleges the department told the federal government it spent all the money before the term of the grant expired in October 2007 when in fact the department banked the cash and still had $250,000 in state accounts as of last May. The audit also alleges the department improperly transferred some of the grant money to offset state budget cuts to its Beijing office.

'MISUSE' OF FUNDS

"The department," the audit found, "essentially padded its budget through the misuse of federal funds."

Liu, however, showed reporters an e-mail from the federal manager of the grant program that stated that the federal government was not aware of any unresolved financial reporting problems. The federal manager said that "at no time during the four-year project (did) we have any suspicion of any lack of effort on the part of Hawai'i, nor did we ever suspect a misuse of federal funds related to the project."

Liu admitted the department made an error by transferring money from the 2005 trade mission into the Taipei office's account, but he said measures have been taken to prevent a repeat of the mistake.

The draft audit was skeptical that Liu's and the department's actions were the result of human error. Investigators determined that the behavior was more likely part of a pattern of providing false or misleading information.

EARLIER PROBES

Liu has been the subject of several probes by state lawmakers and state agencies.

In 2006, the state procurement office found that the Lingle administration did not violate procurement law when it turned to a nonprofit without competitive bidding to handle private sponsorships of the 2005 trade mission. The state attorney general's office found that the administration did not violate any criminal laws.

In April, the state auditor cited the department for a range of procurement errors that were the "direct result of its lack of training, poor management oversight, and a weak control climate."

In June, the city prosecutor declined to file misdemeanor criminal charges in relation to the department's botched award of a hydrogen investment fund contract to the lowest-rated bidder. The prosecutor said he found evidence of "incompetence," but not a crime.