Meeting of the Board of Regents | October 2008

THE STATE EDUCATION DEPARTMENT / THE UNIVERSITY OF THE STATE OF NEW YORK / ALBANY, NY 12234

TO:

Subcommittee on Audits

FROM:

Theresa E. Savo 

SUBJECT:

Board of Regents Oversight – Financial Accountability

DATE:

October 1, 2008

STRATEGIC GOAL:

Goal 5

AUTHORIZATION(S):

REGENTS SUBCOMMITTEE ON AUDITS

MEETING ROADMAP

Date:  October 2008

Time:  TBD

Location:  TBD

TOPIC

OUTCOME

WHO

MINUTES

Opening Remarks

Chair

3

Review Agenda/Minutes (Attachment I)

Approval

Conway

7

Wyandanch – Interim Status

Information

Szuberla

10

Completed Audits – Including a Summary of the Department’s Internal Audit Workgroup (Attachment II), Summary of Audit Findings (Attachment III), and Audit Report Abstracts (Attachment IV)

Questions answered

OSC and Department Audit Staff

20

Audit Trend – Conflict of Interest (Attachment V)

Information

OAS Staff

10

Draft Topics  - Office of Audit Services Two-Year Audit Plan 2008-2010(Attachment VI)

Input

Conway

10

Office of the State Comptroller

* A Starting Place (footnote 1)

√

√

* Elmira City School District (footnote 2)

√

√

√

√

Hadley-Luzerne Central School District

√

√

Highland Falls-Fort Montgomery Central School District

√

√

√

√

Mattituck-Cutchogue Union Free School District

√

√

√

√

North Tonawanda City School District

√

√

Oswego County BOCES

√

Port Chester-Rye Union Free School District

√

√

Roosevelt Union Free School District

√

Sag Harbor Union Free School District

√

√

√

√

*SED - Higher Education Opportunity Program (Report 2007-S-106) (footnote 3)

√

√

*SED - Security Over Regents Examinations Follow-up Report (Report 2008-F-13) (footnote 4)

√

Unadilla Valley Central School District

√

√

√

Union-Endicott Central School District

√

√

Union Free School District of the Tarrytowns

√

√

√

October 2008 Total

6

3

5

4

3

6

1

2

1

1

1

4

*Other:

1         Cost and Enrollment Data

2         Control Environment

3         Use of Higher Education Opportunity Program Funds and Enrollment

4         Regents Examinations

May 2007 - April 2008

May 2008

June 2008

September 2008

October 2008

Running Total

Procurement

97

9

2

35

6

149

Capital Assets

18

0

0

1

0

19

Claims Processing

108

9

3

16

3

139

Payroll

107

13

2

24

5

151

Cash

80

13

3

21

4

121

Financial Reporting

64

5

1

15

3

88

Information Technology

100

8

1

25

6

140

Capital Construction

5

0

0

0

0

5

Extraclassroom Activity Fund

7

0

0

6

1

14

Segregation of Duties

47

4

3

6

2

62

Budgeting

9

1

6

1

1

18

Conflict of Interest

10

2

0

4

1

17

Fingerprinting

0

5

1

0

1

7

Other

7

2

5

19

4

37

Total

659

71

27

173

37

967

Office of the State Comptroller

Audit

Major Finding(s)

Recommendation/Response

A Starting Place  Compliance with the Reimbursable Cost Manual For the Fiscal Year Ended June 30, 2006

2008-S-68

9th Judicial District

The audit was conducted to determine whether cost and enrollment data reported to the State Education Department (Department) by A Starting Place on the consolidated fiscal report (CFR) for the fiscal year ended June 30, 2006 was properly supported and eligible per the Department’s reimbursable Cost Manual.

For the year ended June 30, 2006, there was a net disallowance of $21,555 from the CFR submitted for the three preschool special education programs reviewed. The adjustments included disallowances totaling $28,230 for certain other-than-personal service costs that were not adequately documented. Additionally, the School under-claimed certain administrative personal service costs totaling $6,675. The net reduction in total allowable costs is $21,555.

The School had effective internal controls over its financial management practices, however the School’s board of directors was not independent, and new members who had no affiliation with the School, were needed to provide an appropriate level of oversight. The School also needs improved procedures for maintaining time and attendance records for certain administrative staff.

6 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding cost and enrollment reporting, direct care OTPS costs, non-direct payroll costs, student FTE enrollment, board governance, and time and attendance records.

Department officials agreed with the recommendations pertaining to making the appropriate adjustments to the costs reported on the CFR, and to follow-up with A Starting Place to determine management has taken the appropriate recommended actions. The Department has indicated that it will take the appropriate steps to address these recommendations.

School officials also agreed with the recommendations and indicated the steps they have taken and plan to take to implement them. They will review purchases to ensure they are eligible and properly documented. Officials will ensure that supervisors verify the completion of employee time sheets. The School will also maintain an independent board of directors.

The Rate Setting Unit will use the results of the audit to establish audited tuition rates.

Elmira


City School District

Internal Controls Over Selected Financial Activities

2008M-43

6th Judicial District

(Contract for Excellence District)

There were unauthorized and inappropriate payments for unused leave benefits to a former District administrator. There was $35,312 worth of inappropriate payments for 68 and one-half vacation days made to the former administrator. Additionally, all six employees who transferred to the Greater Southern Tier BOCES Central Business Office were paid for unused and accrued vacation time, despite their contracts failing to specify that this was allowed. The payments amounted to $9,272. The six employees were also allowed to carry over 45 and one-half vacation days from the 2004-05 fiscal year to 2005-06, which amounts to approximately $8,700, if converted to cash value, and this was also supplied without contract provisions. Further, the superintendent also approved a BOCES contract change for $56,000 without formal board approval.

Additionally, three former school administrators provided educational consulting to the summer school program, the Comprehensive Early Childhood program and the School Readiness Project for the District during the 2005-06 and 2006-07 fiscal years. In 2005-06, the work was performed without the benefit of a written contract. The board revised the purchasing policy, and procedures for procurement were revised to include the requirement that the purchasing manager shall send a copy of the contract to the District’s claims auditor. Guidelines for procurement of professional services were also revised, creating criteria for contracts and changing the limit for board approval of professional contracts to $10,000.

The board appointed the senior payroll account clerk as the District’s claims auditor from July 1, 2005 through April 2006, as opposed to appointing a claims auditor in accordance with State Education Department standards. After moving business staff to the central business office, the board appointed a BOCES employee who served as treasurer of another school district to serve as the District’s claims auditor.

10 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding control environment, payroll, claims auditor, and professional service contracts.

District officials generally agreed with the recommendations pertaining to the control environment. Specifically, the District has implemented corrective action to amend separation payments made to the former superintendent of management services and six employees; the BOCES contract change without board approval; and the appointment of a claims auditor in accordance with regulations.

Officials will also enter into possible litigation to recover the $35,312 in overpayments made to the former assistant superintendent, and the business office will continue to monitor oversight procedures to ensure employees are being properly paid. The District has also agreed to address the recommendations pertaining to the recovery of $9,272 in separation payments.

Hadley-Luzerne


Central School District

Internal Controls Over Extra-Classroom Activity Funds and Payroll

2008M-113

4th Judicial District

The board has established policies to govern the operations of the activity fund and has appointed a central treasurer to be responsible for receipts and disbursements. However, the board appointed faculty advisors to oversee only 10 of the 46 activities. The board also did not appoint a faculty auditor to oversee the management of the activity fund. As a result, neither the board nor District officials could be assured that activity fund monies were being accounted for properly in compliance with the regulations, and there was an increased risk that errors or irregularities could have occurred and gone undetected.

Financial records for eight extraclassroom activity accounts were reviewed, and it was found that advisors did not ensure that any records were maintained for six of the eight accounts. The records maintained for the remaining two accounts were inadequate.

Thirty-six bank deposit receipts, totaling $16,968, were reviewed, and it was found that the activity fund’s receipt documentation did not match the receipts posted to the central treasurer’s ledger. Eight posted receipts (totaling $4,343) were also missing from the extraclassroom activity deposit documentation, which were later accounted for. The advisor of the activity fund also did not maintain records of bank deposit receipts.

Twenty-one out of forty payments reviewed (totaling $40,502) lacked the student treasurer’s signature to indicate that it was an approved activity purchase. Additionally, 44 out of 62 deposits did not have the required signature of the student treasurer on deposit documentation.

The District also had sufficiently segregated the duties over the payroll process. Payrolls were tested and no significant expectations were found.

6 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding internal controls over extraclassroom activity funds and payroll.

District officials generally agreed with the recommendations. They indicated they have enhanced controls by making the treasurer a full-time position and as such, major risks, such as tax receipts, payroll and disbursement procedures, were strengthened. Mandatory training for all advisors will be provided, and clubs will not operate without board appointed advisors. A faculty auditor has also been appointed to oversee activity operations.

Highland


Falls-Fort Montgomery Central School District

Internal Controls Over Selected Financial Activities

2008M-91

9th Judicial District

There were various internal control weaknesses in the areas of purchasing, payroll, and information technology. Such weaknesses included a lack of proper policies and procedures, and poor documentation of activities.

Further, the District did not obtain fingerprint-supported background checks for 27 of 58 District employees, or four contractors who are in direct contact with students. Also, District officials did not obtain Employment Eligibility Verification Forms, as required by federal law, for nine of the 16 employees reviewed.

District officials hired 13 summer employees without any board authorization and three others were hired prior to board approval.  There was also a lack of segregation of duties in processing payrolls.

There were incompatible duties in purchasing, as the purchasing agent was also responsible for processing cash disbursements. District officials also did not seek competition when procuring legal, appraisal, architectural, telephone, and boiler repair services, totaling $161,361.

Finally, the business official has not developed or implemented effective access control to the financial software. The user rights of five former employees were not terminated in a timely manner when the employees left the District service.

18 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding personnel policies, payroll, purchasing, and information technology.

District officials generally agreed with the recommendations pertaining to criminal background checks and fingerprinting, the adequate segregation of duties in payroll, temporary summer staff appointments, segregation of duties in purchasing, written contracts with professional service providers, and computer user access rights.

The District will consider how to best revise and clarify policies and procedures concerning the recommendations, and will implement corrective action shortly.

Mattituck-Cutchogue Union Free School District

Internal Controls Over Selected Financial Activities

2008M-102

10th Judicial District

The board has not adopted the necessary policy guidance and at other times District officials had not properly implemented the board’s policies. The treasurer and deputy treasurer did not have separate signature disks and could place each other’s signatures on District checks. The accounts payable clerk did not enter 14 cash receipts totaling approximately $8.7 million into the daily cash receipt log, as required, and did not compare the log to bank deposits. Sixteen wire transfers totaling $6.1 million were initiated and executed without proper authorization or independent review.

The payroll clerk was able to change employee data, process payroll, and print signed paychecks without independent review. The business manager was also the financial system administrator, treasurer, and purchasing agent.

The District also did not adopt comprehensive IT policies and procedures to ensure the security of the District’s financial system and data.

10 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding cash receipts and disbursements, segregation of duties in the business office, and information technology.

District officials have indicated that they corrected the signature disk error with the auditors as witnesses, and the missing prior written authorization is also now being done on each wire transfer. Comprehensive IT controls and disaster recovery were not in place during the audit, but are in the process of being put in place during this fiscal year.

North Tonawanda


City School District

Internal Controls Over Selected Financial Operations

2008M-95

8th Judicial District

Total cafeteria collections as reported monthly to the District by its contracted food service vendor exceeded deposits actually made in the District’s bank account by $15,690 in the 2006-07 fiscal year, and by $21,663 in the first four months of the 2007-08 fiscal year. Additionally, there was also an overpayment of $1,453 for vendor services.

Further, District computers did not prompt users for proper identification to log onto the network and access the Internet and information stored on computers’ local hard drives. District officials also did not consistently install virus protection software, and some installed unauthorized software on District computers.

6 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding food service cash receipts and disbursements and District computers.

District officials generally agreed with the recommendations pertaining to the food and service overpayment, the client sales summary, monthly invoices, computer software packages, and password protection. The board will be developing a corrective action plan to address each recommendation.

Oswego


County Board of Cooperative Educational Services  Internal Controls Over Cash Receipts and Disbursements

2008M-141

5th Judicial District

BOCES officials have not established policies and procedures to ensure that there is an adequate segregation of duties for and oversight of the handling and recording of cash receipts. Cash collections were not monitored adequately. Even though the Art Department collected almost $73,000 of revenue during 2006-07, there were no effective internal checks on the coordinator. The Adult Education Department charges adult students tuition to enroll in BOCES programs. In 2006-07, the Adult Education Department brought in over $710,000 per the records at the business office. However, the Department record showed revenue of only about $686,000 and that database had not been reconciled to ensure that all revenue was recorded and controlled. As a result, there is an increased risk that errors might occur.

Additionally, there were deficiencies in the treasurer’s oversight of the check-signing function for computerized checks.

6 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding cash receipts and disbursements.

BOCES officials generally agreed with the recommendations pertaining to oversight guidance to BOCES management, the design of the business office and cash receipt functions, reliable records for the cash receipt process, system of internal controls over cash disbursement functions, the treasurer’s electronic signature, and the proper authorization of check disbursements. The BOCES has established expected implementation plan of action dates for each recommendation.

Port Chester-Rye Union Free School District Internal Controls Over Procurement and Computerized Data

2008M-128

9th Judicial District

(Contract for Excellence District)

The District made purchases from three vendors totaling $110,450, and paid five vendors $206,100 for services, all without competitive bidding or quotes. The District also paid $31,138 for a construction change order, without obtaining proper authorization. This is a total of $347,688 in goods and services procured without competition.

District employees are also not required to periodically change their passwords that permit access to some District computer applications.

Finally, District officials have not established adequate physical access controls to protect a server and its applications.

5 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding procurement and computerized data.

District officials generally agreed with the recommendations pertaining to soliciting bids for purchase orders, compliance with the RFP policy, monitoring construction contracts, user account access controls, and the security of servers. The District has indicated that they will initiate corrective action shortly, if they have not already done so.

Roosevelt


Union Free School District  Tentative Budget Plan for 2007-2008

2008M-179

10th Judicial District

(Fiscally Stressed)

The District’s general fund revenues and expenditures were reviewed, and it was determined that the District has a potential operating surplus for the year ending June 30, 2008, of over $21 million. If this surplus is realized, the District will end the 2007-08 fiscal year with a projected accumulated fund balance of over $13 million. The District’s general fund balance of $13 million may decrease by $766,000 at June 30, 2008 if District officials act to subsidize the school lunch fund operations with a general inter-fund transfer to eliminate the school lunch fund’s accumulated 2006-07 deficit of $573,000, and to subsidize the 2007-08 operating deficit of $192,000.

The District did not receive a $4 million cash advance on future State aid to which it was entitled because District officials failed to prepare and file a five-year financial plan with the commissioner of education as required.  (Subsequent to the audit, the District did file the five-year plan and the $4 million was released.)

Revenues should generally equal expenditures in the Special Aid fund. There was approximately $6 million dollars of grant money available during the 2007-08 fiscal year, of which $4.5 million was expended as of June 30, 2008. The difference would be carried forward into the next year.

7 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding the segregation of funds within the general fund balance, expenditures for BOCES services, and the preparation of the five-year financial plan with the commissioner of education.

The District has indicated that they have already segregated the $6 million received from New York State, and also that they will soon develop future plans for BOCES purchasing and will track expenses closely. The District has also indicated that they are currently finalizing the five-year financial plan report, and will distribute it on August 22, 2008.

Sag Harbor Union Free School District

Internal Controls Over Selected Financial Operations

2008M-71

10th Judicial District

District officials hired a vendor to provide certain educational services to the District. The company, Human Growth and Development Network, Inc. (HGDN) is partially owned and operated by a District retiree who was rehired by the District in January 2007 to be the interim assistant principal at the middle school.  He remained employed by the District until June 30, 2007.  He did not properly disclose his interest in contracts with the District.

The District’s business official/purchasing agent had administrative access rights to the computerized financial system and the board did not solicit requests for proposals (RFP) for independent auditing services, and the services were not part of a multi-year contract.

3 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding disclosure of interest in contracts, computerized financial system, and procurement of independent audit services.

District officials agreed that when the board engaged the services of a former Sag Harbor principal to act as the interim principal for the middle school, the board should have better disclosed the interest. They also agreed with the recommendation pertaining to the business official’s access to the complete districtwide database and the problem was already being addressed at the time of the audit. Finally, the District implemented the RFP recommendation when the district issued an RFP for external auditing services in April 2008 for the 2007-08 audit. District officials will be providing a corrective action plan to address the recommendations in the near future.

SED - Higher Education Opportunity Program

2007-S-106

The Higher Education Opportunity Program (HEOP) provides tutoring, counseling, tuition-support and financial assistance to economically and academically disadvantaged students attending private colleges and universities in New York State. From 2005-06, 5,376 students were enrolled in HEOP programs at 55 participating schools, and $21.7 million in HEOP funding was paid to the schools.

New York University, the Brooklyn Campus of Long Island University, Syracuse University, and the College of St. Rose in Albany were all reviewed to determine whether the schools were appropriately using their HEOP funds. Year-end progress reports were reviewed for the 2005-06 and 2006-07 academic years for these four participating schools, as well as samples of non-personal service expenditures, and a sample of personal service expenditures at each school. Each school was also visited to review documentation supporting the sampled expenditures.

All four schools were using the HEOP funds for the correct purposes. However, at Long Island University-Brooklyn, the total expenditures reported by the school at the end of the year did not always agree with the total amounts shown in the school’s records. The School had not retained its detailed HEOP expenditure records, therefore, those discrepancies were unable to be solved.

SED is required by law to publish an annual report summarizing HEOP activities at participating schools.  The Department is two years behind in its completion of these annual reports.

4 recommendations

The report’s recommendations focused primarily on the use of HEOP funds, allowable expenditures, accuracy of reported expenditures, accuracy of reported HEOP enrollments and their eligibility, and the Department’s annual reporting requirement.

The Department agreed with the recommendations pertaining to following up with LIU-Brooklyn to verify compliance with recordkeeping guidelines and using a risk-based approach during site visits to schools to examine the schools’ accounting records and ensuring compliance with HEOP guidelines. The Department also agreed to publish the annual HEOP report on time in the future.

SED -  Security Over Regents Examinations Follow-Up Report

2008-F-13

The initial report to test the security of the Regents examinations was issued on June 5, 2007, and it was conducted to determined whether schools complied with applicable Department requirements to maintain security over the examinations from the time the materials were received by the schools until the day the examinations were given. The report identified a number of schools that were not in compliance with the applicable SED guidance.

Some schools stored examination materials in unauthorized locations and/or opened sealed packages of examination materials before the allowed time. Because of these and other actions, it was concluded that the risk of breaches to examination security was increased at certain locations. The objective of the follow-up report was to assess the extent of implementation, as of June 27, 2008, of the recommendations included in the initial report.

9 recommendations

All recommendations from the initial report have been implemented, including providing security awareness training for schools, determining whether schools using unapproved safes should be allowed to retain their storage privileges, reminding school officials that sealed materials may not be opened until the allowed time and that exams needed for review only should not be requested through the regular ordering process. The Department was also able to effectively remind school officials of the inventory requirements for sealed exam materials and request that schools notify the Department when they received unordered or excess materials. The Department also developed a formal program for conducting regular site visits to schools to verify compliance with requirements, and they have periodically surveyed schools that have not recently been inspected to determine whether their storage facilities still meet Department requirements.

Unadilla


Valley Central School District


  Financial Operations

2008M-133

6th Judicial District

(Contract for Excellence District)

The District’s policy and procedural requirements were not followed, and as a result, credit cards were used by unauthorized users, and the District incurred late fees and finance charges. Further, fuel purchases were not supported with proper documentation.

The treasurer also did not supervise the use of his facsimile signature, and the treasurer is not informed when his signature is applied to accounts payable checks.

The board did not appoint an independent claims auditor in accordance with Department regulations, and instead the board appointed the Delaware Chenango Madison Otsego (DCMO) BOCES to serve as the District’s claims auditor. This arrangement may not be appropriate because the DCMO BOCES provides significant services to the District.

7 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding credit and fuel card usage, the treasurer’s signature, and the appointment of the claims auditor.

District officials generally agreed with the recommendations and they have agreed to establish corrective action as soon as possible.

Union-Endicott


Central School District

Claims Auditor and Internal Controls Over Cash from Vending Machine Sales

2008M-123

6th Judicial District

An individual was appointed as the District’s claims auditor, whose independence could be questionable. Cash assets from vending machine sales were also exposed to risk of theft.

The District contracted with Broome-Tioga BOCES for management support services for a total of $620,000 of which $507,000 was for central business office services. These services included several business related services, one of which was claims auditing. This arrangement is not appropriate because the District paid the BOCES approximately $12.6 million for various services including the claims audit function.

Further, District officials did not know how to access vending machine sales data and, therefore, could not reconcile the amount of cash they collected and deposited to vending machine sales.

2 recommendations

The report’s recommendations focused primarily on strengthening policies and procedures regarding the claims auditor, and cash from vending machine sales.

District officials generally agreed with the recommendation pertaining to the assurance that the appointment of the District’s claims auditor is in accordance with Department regulations. The District also agreed with the recommendation that the director should develop a process for reconciling vending machine sales to cash collected to ensure all cash from vending machine sales is accounted for properly. The District has indicated that they have already moved forward with new policies and procedures to amend all findings.

Union Free School District of the Tarrytowns

Internal Controls Over Selected Financial Operations

2008M-117

9th Judicial District

(Contract for Excellence District)

The District has not established adequate internal controls over purchasing. The District did not always follow General Municipal Law, or the District’s adopted purchasing policy when purchasing goods and services. The District did not request bids for eleven purchases and public work contracts, totaling $435,820, and the District also did not request competitive proposals to retain the services of nine professional service providers totaling $811,793. The District also did not obtain quotes to ensure they reviewed the best prices for purchases totaling $88,697.

The treasurer who is also the payroll clerk, performed most payroll functions and most cash management functions with insufficient oversight.

The District also did not account for four laptops on their inventory listing. One laptop was accounted for, but three remained missing at the end of the audit.

Internal controls over the District’s information technology were also insufficient. Most importantly, several users of the District’s financial software had access rights that exceeded the requirements of their job duties.

16 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding purchasing, segregation of duties, computer equipment, and information technology.

District officials generally agreed with the recommendations pertaining to competitive bidding, the segregation of duties for payroll, cash management, the missing computer equipment, and the District’s financial software. Officials have indicated that the appropriate policies and procedures have been implemented or will be implemented shortly, in order to amend all concerns.