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

TO:

The Honorable the Members of the Board of Regents

Subcommittee on Audits

FROM:

Theresa E. Savo 

SUBJECT:

Board of Regents Oversight – Financial Accountability

DATE:

March 8, 2007

STRATEGIC GOAL:

Goal 5

AUTHORIZATION(S):

Office of State Comptroller

Audit

Major Finding(s)

Recommendation/Response

Three Village Central School District – Internal Controls Report 2006M-66

10^th Judicial District

$0 adjustment

The audit found that the Board inappropriately approved lifetime health insurance benefits for the former Director of Plant and Facilities.  In addition, the District spent $165,320 for meals and refreshments at 975 meetings without documentation of who attended the majority of the meetings or why meals and/or refreshments were provided at any of them; paid $1,382 in expenditures incurred by two former administrators who arrived at a conference three days prior to its start and reimbursed District officials $1,467 for meals that were not supported by itemized bills; and paid approximately $1,600 for nine cell phones that were not used during the audit period.

The audit also found unsubstantiated overtime payments totaling $20,320 and control weaknesses over cash collections that totaled about $3 million in tuition and registration fees for student and community resident programs.

Furthermore, auditors identified over $74,000 in contracts that were not bid in accordance with law and District policy.  The District also did not have written contracts with some professionals.  In addition, certain District officers and employees did not disclose their interest in contracts with the District.

Finally, the District did not establish policies and procedures to ensure that capital assets were accurately recorded and properly accounted for and there were no records to indicate that the District had received money from the sale of ten items approved for disposal by the Board.

29 recommendations

The report’s recommendations focused on strengthening policies and procedures regarding employee benefits, meals and refreshments at District meetings, travel, cell phones, attendance, cash collections, segregation of duties, unclaimed checks, contracts, purchasing, and capital assets.

District officials generally agreed with the report’s findings, but emphasized that a different administration was in place during the period when the problems occurred and that over 95 percent of the recommendations had been implemented prior to the report’s issuance.

Ulster BOCES – Mid-Hudson Regional Information Center Report 2006M-101

3^rd Judicial District

$0 adjustment

The audit found that Ulster BOCES Mid-Hudson Regional Information Center (RIC) officials do not have a system in place to periodically review the access rights associated with user accounts; personnel had unlimited access to the school districts’ financial accounts systems; the doors to the computer center were not always secured; and the check stock was not properly secured.

The audit also identified a potentially sensitive control weakness within the financial management system and information technology infrastructure maintained by the RIC; however, due to the sensitive nature of the finding, details of the weakness were omitted from the audit report.

0 recommendations

District officials generally disagreed with the audit findings.  BOCES officials felt they have sufficient controls in place to address the concerns identified through the audit.

Lakeland Central School District – Financial Condition and Internal Controls Over Capital Projects Report 2006M-124

9^th Judicial District

$0 adjustment

The audit found that the District has a deteriorating financial condition that is due to recurring operating deficits in the general fund that totaled over $4.2 million for fiscal years 2002-03 through 2004-05. The District planned to use fund balances in 2002-03 and 2003-04 as a financing source instead of raising real property tax revenue; this decreased the amount of fund balance available to help finance the 2004-05 budget.  The District then incurred an unplanned operating deficit of about $1.2 million in 2004-2005, which resulted in a $10,895 general fund accumulated deficit on June 30, 2005.

The audit also found that the District’s deteriorating financial condition was largely the result of the Board’s failure to monitor spending and the District’s failure to maintain accurate and complete accounting records, and implement proper budgetary practices.  In June 2005, the Board made significant changes in the District’s senior management to address the fiscal stress.  Over the next several months, the Board implemented a districtwide “freeze” to correct the current spending plan and respond to the potential overspending of the 2005-06 budget.  The new administration began track-ing budgeted appropriations to actual expenditures; however, reporting deficien-cies still existed in April 2006.

Finally, the audit found that the lack of accurate and complete financial records also prevented the Board and other officials from properly overseeing and managing the District’s capital projects.  As a result, expenditures for the District’s capital projects exceeded the $22.8 million budget by $563,488 by the end of the audit period.

9 recommendations

The report recommends Board and District officials carefully monitor the District’s budget, and make necessary adjustments to avoid unplanned operating deficits and to maintain an adequate amount of unreserved fund balance.

In addition, the District should develop and maintain a comprehensive policy for financial management, internal controls, the accounting process, and the training of key accounting personnel; designate an individual to be responsible for the oversight of State aid claims; and ensure that year-end adjusting journal entries for capital projects are reversed for the next fiscal year.  District officials should properly encumber all obligations to maintain budgetary control and accurate records.

Furthermore, the report recommends the Board ensure that the District has sufficient staff to maintain the accounting function and regularly monitor capital project expenditures to ensure that expenditures do not exceed the approved budget. 

Finally, the report recommends that bond proceeds should be segregated and not commingled with other funds.

District officials generally agree with the report’s findings and have taken action to address the recommendations.

Capital Region BOCES – Northeastern Regional Information Center

Report 2006M-132

3^rd Judicial District

$0 adjustment

The audit found that the BOCES does not perform a complete regional annual inventory of its technology assets; BOCES officials have not developed a written disaster recover plan; BOCES personnel had the ability to remotely access all financial software system modules at school districts it serves; and the BOCES did not review access logs to monitor activity within the financial software system.

0 recommendations

BOCES officials acknowledged the conditions identified in the report and have developed a corrective action plan to address them.

Lake Pleasant Central School District – Internal Controls Over Information Technology Systems Report 2006M-148

4^th Judicial District

$0 adjustment

The audit found that the District does not protect its computer equipment from unauthorized access, routinely back up District data, or have a formal disaster plan because the Board has not developed policies and procedures to address these issues.

1 recommendation

The report recommends the Board adopt policies and procedures to strengthen internal controls relating to IT equipment storage, data backup, and disaster recovery.

District officials agree with the report’s findings.

Chatham Central School District – Internal Controls Over Capital Assets and Purchasing

Report 2006M-152

3^rd Judicial District

$0 adjustment

The audit found that the District did not always verify the quantity of goods received prior to payment, place inventory tags or complete property record cards to identify assets as they were received, or conduct a physical inventory count of its capital assets since 1998.  Auditors found that when the District ordered 80 computers and received shipment, they actually received 100 computers. The discrepancy went undetected by District officials because the person receiving the shipment did not provide the purchasing agent or the accounting office with written evidence of the condition, quantity, and quality of the goods received.  In addition, the District ordered 80 monitors, of which 14, valued at $1,610 were never used and stored in the basement of the Middle School.  Furthermore, the disposal of 265 computers and 20 printers was not handled according to District policy.

Finally, the audit found that even though the District has established internal controls related to purchasing, there are indications that the controls were not operating effectively.  The District was unable to supply the auditors with documentation that the purchase of a mower costing $10,099 had been competitively bid, or telephone quotes for the purchase of a snow-blower costing $7,500.  The District also paid an independent contractor based on claims that did not contain adequate itemization as to the specific work performed, or hours worked.

10 recommendations

The report recommends District officials develop a compre-hensive capital asset policy; designate a property control manager to be responsible for tracking capital assets; periodically verify their capital assets and determine whether equipment is necessary prior to purchase; ensure the District’s capital asset disposal policy is enforced; and enforce and monitor compliance with the District’s procurement policy as it relates to required number of quotes for purchases under the competitive bidding thresholds, and the required documentation to support purchase decisions.

The report also recommends the Board review its procedures for the audit and approval of claims, and take steps to ensure that only properly itemized and supported claims, containing the signature of an officer or employee receiving the materials, are approved for payment; and enter into written agreements with professionals, stipulating the services to be provided and the basis for compensation.

The report further recommends that goods be inspected and counted when received, delivery slips and invoices should be signed, and the Board and purchasing agent should adhere to the requirements of General Municipal Law when procuring goods and services subject to the competitive bidding laws.

District officials agreed with the majority of recommendations and are taking corrective action.

Ossining Union Free School District – internal Controls Over Capital Assets and Gasoline Credit Cards Report 2006M-154

9^th Judicial District

$0 adjustment

The audit found that the Board had not developed a comprehensive capital asset policy or procedures required to achieve adequate internal controls.  In addition, the District inventory record does not contain serial numbers, model numbers, location, and acquisition cost for all assets.  Furthermore, the District has not performed an annual physical inventory since November 2002.

The audit also found that although the Board developed and implemented a credit card policy, procedures for monitoring credit card usage were not developed.  Auditors found that District employees submitted gasoline credit card receipts late, which resulted in the District incurring late payment fees, and that no one monitors gasoline credit card usage.                        

11 recommendations

The report recommends the Board develop and adopt capital asset policies and procedures that provide for recording, accounting, tracking, and safeguarding assets; ensure the property control manager tracks and monitors District assets; review the practice of loaning equipment; and update its policy to include procedures for monitoring gasoline credit card usage.

The report also recommends District officials update the record for each asset or group of assets to include a description of the item; perform periodic physical inventories to ensure the accuracy of the records and determine the existence and condition of the assets; retrieve a piece of loaned video equipment and take an inventory of the television studio; monitor gasoline credit card usage; and perform a periodic analysis of individual credit card usage.

Finally, the report recommends the property control manager ensure that assets are tagged with unique identifiers and the District should discontinue the practice of selling equipment to Board members.

Officials generally agreed with the recommendations and a corrective action plan is being implemented.

Jefferson-Lewis-Hamilton-Herkimer-Oneida Board of Cooperative Educational Services – Internal Controls Over Selected Financial Activities

Report 2006M-157

5^th Judicial District

$0 adjustment

The audit found that two Business Office employees have unchecked control over sensitive transactions because their job duties are not properly segregated.  One employee handles all payroll processing and disbursement duties and another handles all cash receipts collection and recording duties.  Both these employees control all phases of the transactions they process, have access to the assets, and are not subject to supervisory review procedures that would prevent or detect errors or irregularities in their work.  Furthermore, similar control deficiencies were found at the Continuing Education Office where one employee collects over $400,000 annually for adult tuition and maintains all tuition accounting records.  This employee also performs duties without any effective verification of the integrity of their work.

Auditors also found that BOCES inappropriately made five unauthorized payments to retiring employees, totaling over $7,500.  In addition, they found that the Assistant Superintendent did not share an inventory report, which identified 485 missing items with an aggregate cost of $427,522, to the Board or the District Superintendent and did not require staff to follow up on the missing items. Additionally, the BOCES deleted 281 of the missing items costing $159,374 from the property record, without investigation, because they had been missing for two consecutive annual inventories.  The Board was not informed about the write-off and potential loss of the items.  Finally, auditors sampled 40 missing items and located 33 of them, showing that the inventory results were not accurate.

9 recommendations

The report recommends the Board provide oversight guidance to BOCES manage-ment by adopting and communicating written internal control policies for payroll and cash receipts; and evaluate the inappropriate payments made to employees and determine whether it should pursue recovery.

Additionally, BOCES manage-ment should formally evaluate the design of the Business Office and adult tuition billing and cash receipts functions and implement a system of internal controls that adequately safeguards cash resources; formally evaluate the Assistant Business Manager’s user rights needs for the financial accounting system and limit their access to only those functions necessary to perform assigned duties; and utilize the results of physical inventories to identify, assess, and correct equipment control deficiencies.

Lastly, the report recommends the District Superintendent and the Board monitor the results of annual physical inventories and require a prompt, thorough investigation of losses and other significant discrepancies.

District officials agreed with the recommendations and have taken corrective action.

Morris Central School District – Conflict of Interest

Report 2006M-188

6^th Judicial District

$0 adjustment

The audit found that the District Board adopted a code of ethics for all District personnel in 1997, which prohibited conflicts of interests.  However, it did not effectively monitor whether District personnel were complying with the code.  Auditors found that the District’s claims auditor was the corporate secretary and her spouse was the vice president of an insurance agency that did business with the District.  The claims auditor had the responsibility of auditing all claims against the District, including $77,026 in claims paid to her personal employer.

1 recommendation

The report recommends that the Board should review its code of ethics and the conflicts of interest provisions of General Municipal Law, and ensure that District officials and personnel comply with the requirements of both the code and the law.

District officials agreed with the recommendation and have taken corrective action.

Livingston Manor Central School District – Safeguarding District Assets

Report 2006M-195

3^rd Judicial District

$0 adjustment

The audit identified questionable payments to the former Superintendent and former buildings and grounds superintendent for improper expense reim-bursements and a questionable increase in base salary.

The audit also found that the District’s payroll clerk has the ability to create a new employee, input salary detail, process the payroll, and distribute paychecks.  Audit testing revealed six employees that were added to the payroll without Board approval.

In addition, the audit found the business office manager is directly responsible for collecting and depositing cash, recording cash receipts in the accounting records, and reconciling the bank accounts.  Further-more, a test of 15 open purchase orders showed that 6 exceeded the amount authorized.

Finally, the audit found that District officials did not conduct periodic physical inventories, or positively identify assets on the capital asset list.  Audit testing revealed that of the 55 assets tested, none were tagged.

8 recommendations

The report recommends that the Board segregate payroll duties; establish and monitor procedures to ensure that the payroll clerk does not add names to the payroll without Board authorization; ensure that payments made to senior managers are in conformance with established employment contracts, and that valid employment contracts are in place for all managers; design controls over cash receipts to ensure adequate segregation of duties; and design controls to ensure that open purchase orders are monitored and expenditures do not exceed original authorized amounts without approval.

The report also recommends that District officials conduct periodic payroll payouts where the employees are required to show identification and sign for their paycheck.

District officials generally agreed with the recommendations and have taken corrective action.

Follow-Up Report (2006-F-43) of the Archives Partnership Trust, Internal Controls over Financial Operations (Report 2005-S-24).

$0 adjustment

The Office of the State Comptroller’s October 2005 audit concluded that the Trust had adequate internal controls over its financial management operations.  The audit also identified several areas where the Trust could further strengthen its internal controls or improve compliance with existing policies and procedures.  These areas included investments, procurement and contracting, and equipment and asset management. 

The follow up found that Trust officials have made significant progress in implementing the recom-mendations made in the initial audit report.  Four of the recommendations have been implemented and three recommendations (which addressed procure-ment and contracting) were not applicable because the Trust had not awarded any new contracts since the initial report was issued.

Roosevelt Union Free School District

Report 2007M-14

10^th Judicial District

$0 adjustment

The audit found that in fiscal year 2004-2005, the District reported an unreserved general fund balance of approximately $1.2 million, and in fiscal year 2005-2006, the District’s general fund incurred an operating deficit of about $5.7 million and recorded additional negative adjustments of about $1.7 million.  As a result, on June 30, 2006, the District’s accumulated unreserved general fund deficit was approximately $6.2 million.  Auditors reviewed the 2006-2007 fiscal year budget and concluded that because of over-budgeted revenues and under-budgeted expenditures, the District may incur a $6.1 million operating deficit as of June 30, 2007; therefore, the District could potentially end the 2006-2007 fiscal year with a general fund deficit of $12.3 million.

The audit also found that the District officials had inappropriately “borrowed” $16 million from the capital projects fund and “loaned” it to the general fund to pay operating expenditures.  Even though the general fund has been paid back, Local Finance Law prohibits such borrowing.

Furthermore, the audit concluded that poor budgeting and financial management practices have been the primary cause of the District’s deteriorating financial condition.  Auditors found the District has made repeated errors in budgeting for State aid revenue and personal service expenditures and has appropriated much of its anticipated fund balance, even after being advised against doing so by the Office of the State Comptroller.

Finally, the audit identified weaknesses in the District’s purchase order system, purchasing and procurement controls, use of financial accounting software, and the claims auditor function.  Auditors believe that these weaknesses have allowed the District to over-spend budget line items and incur expenses without prior approval.

10 recommendations

The report recommends that the District’s Board of Education immediately review all projected fiscal year 2006-2007 expenditures with the State Education Department and eliminate all non-critical items; comply with the 2002 Legislative requirement to review and annually update the five-year financial stabilization plan for the District; develop formal budgeting procedures and appoint a budget officer; not appropriate the entire unreserved fund balance for the next year’s budgeted expenditures; monitor staffing and program levels throughout the year to ensure operational costs aren’t exceeded; periodically review financial activity budget reports; ensure all purchases contain a purchase order; and appoint a purchasing agent to review and authorize District purchases.

The report also recommends that District officials should ensure that software controls prevent the posting of an expenditure to an overspent account, and that the claims auditor review and approve all claims prior to payment.

The Board generally agreed with the report’s findings and has taken action to address the recommendations.