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:

November 24, 2008

STRATEGIC GOAL:

Goal 5

AUTHORIZATION(S):

REGENTS SUBCOMMITTEE ON AUDITS

MEETING ROADMAP

Date:  December 2008

Time:  TBD

Location:  TBD

TOPIC

OUTCOME

WHO

MINUTES

Opening Remarks

Chair

3

Review Agenda/Minutes (Attachment I)

Approval

Conway

7

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

15

Audit of the Financial Statements of New York State

Questions answered

KPMG Staff

15

Internal Control Process and Annual Certification

Information

Rivers

10

Audit Trend – Payroll (Attachment V)

Information

Guzman

10

Bay Shore Union Free School District

√

√

√

Brookfield Central School District

√

√

√

Connetquot Central School District

√

√

√

√

Crown Point Central School District

√

√

Ellicottville Central School District

√

√

√

Farmingdale Union Free School District

√

√

√

Honeoye Central School District

√

√

Medina Central School District

√

New Hartford Central School District

√

Newark Valley Central School District

√

√

√

North Bellmore Union Free School District

√

√

√

√

√

North Merrick Union Free School District

√

√

√

Peru Central School District

√

√

√

√

Pocantico Hills Central School District

√

√

√

Port Washington Union Free School District

√

√

√

Queensbury Union Free School District

√

√

Roosevelt Union Free School District

√

√

√

South Lewis Central School District

√

* West Canada Valley Central School District (footnote 1)

√

√

√

December 2008 Total

8

5

10

5

5

11

1

1

1

3

1

1

* Other:

1

Fuel Inventory

May 2007 - April 2008

May 2008

June 2008

September 2008

October 2008

November 2008

December 2008

Running Total

Procurement

97

9

2

35

6

6

8

163

Capital Assets

18

0

0

1

0

0

0

19

Claims Processing

108

9

3

16

3

7

5

151

Payroll

107

13

2

24

5

7

10

168

Cash

80

13

3

21

4

4

5

130

Financial Reporting

64

5

1

15

3

8

5

101

Information Technology

100

8

1

25

6

11

11

162

Capital Construction

5

0

0

0

0

0

0

5

Extraclassroom Activity Fund

7

0

0

6

1

1

1

16

Segregation of Duties

47

4

3

6

2

2

1

65

Budgeting

9

1

6

1

1

0

1

19

Conflict of Interest

10

2

0

4

1

1

3

21

Fingerprinting

0

5

1

0

1

1

1

9

Other

7

2

5

19

4

17

1

55

Total Findings

659

71

27

173

37

65

52

1,084

Office of the State Comptroller

Audit

Major Finding(s)

Recommendation/Response

Bay Shore Union Free School District

Internal Controls Over Selected Financial Operations

2008M-138

10th Judicial District

The District put far more money than was necessary into the Employee Benefit Accrued Liability Reserve (EBALR) fund. As of June 30, 2007, the EBALR fund had a balance of $20,487,930 while the District reported a liability for accrued compensated absences of only $10,503,284. The review revealed $4,331,035 of the $10,503,284 in stated liability were for costs that cannot legally be paid from this reserve fund. Instead, they have paid for compensated absences costs from the general fund. District officials said they would use the $14.3 million excess fund balance to pay for retiree health insurance benefits, which is not allowed by law. The District also failed to credit $410,000 in interest earned on EBALR fund monies to the reserve as required by law.

The District continued to use the same professionals year after year without competition, and officials paid ten vendors $979,681 for professional services without soliciting competitive proposals. In addition, board resolutions to hire three professionals who were paid $46,260 were insufficient because they did not indicate the services that the professionals expected to provide. It was also found that four professionals did not submit sufficiently itemized invoices to support payments, totaling $70,613. The District also entered into three purchase contracts and seven public works contracts without following competitive bidding requirements.

Finally, the District has not developed comprehensive policies to address unauthorized computer access or a disaster recovery plan.

12 recommendations

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

District officials generally agreed with the recommendations pertaining to post employment benefit liabilities, requests for proposals, and internal control weaknesses for competitive bidding. The District has agreed to implement corrective action shortly.

Brookfield Central School District

Internal Controls Over Claims Auditing and Cash Disbursements

2008M-172

6th Judicial District

The board failed to establish appropriate controls over the audit of claims, and the board elected to retain its authority to audit District claims rather than to appoint a claims auditor. Instead of having the entire board audit claims, they appointed two members to audit, which is not permissible by Education Law. Claims paid with 113 manually prepared checks, totaling over $1.7 million, processed by the business manager/treasurer, showed no indication of the claims being audited by the board.

Further, 69 claims ($96,000) were paid by computer-printed checks listed on warrants that were not provided to the board for audit.

The business manager/treasurer performed incompatible duties, and there is no effective oversight of the business manager/treasurer, thereby increasing the risk of inappropriate payments.

There were also weaknesses in internal controls over the District’s process for classifying workers being enrolled in the Employee Retirement System.

5 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding claims auditing, cash disbursements, and the classification of employees.

District officials generally agreed with the recommendations pertaining to the audit of claims by the board, the duties of the business manager, and internal controls for the Employee Retirement System.

The District has agreed to initiate corrective action as soon as possible to address all recommendations.

Connetquot Central School District

Internal Controls Over Financial Operations

2008M-115

10th Judicial District

Because the District did not properly establish policies to ensure that appropriate internal controls were in place over budget preparation, taxpayers have paid more than necessary, two teachers were overpaid, and equipment and data are at risk.

Budget appropriations have exceeded expenditures by $17.2 million over the past three years. The resulting increase in fund balance was partially offset by transfers totaling $8.7 million to an Employee Benefit Accrued Liability Reserve (EBALR) fund. The transfers, however, increased the balance in the EBALR fund to $4.1 million more than necessary to fund obligations. Transfers were made by the interim assistant superintendent for business in the amount of $405,085, prior to board approval.

The spouse of a teacher did not disclose her interest in a contract for the purchase of various supplies totaling $1,535 from the corporation for which she was the chief executive officer.

Two teachers were overpaid $8,377 because payments were not being independently reviewed.

Finally, adequate controls for information technology have not been properly implemented.

14 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding financial condition, interest in contracts, separation payments, and information technology.

The District disagreed with the findings concerning the budgeting practices of the District, and states that District residents did not pay more than necessary in tax payments.

District officials agreed with the recommendations pertaining to the financial condition and exceeding expenditures, the Employee Benefit Accrued Liability Reserve fund, the distribution of the code of ethics, employee benefits and salaries, and user access to the District’s network. They have agreed to initiate corrective action as soon as possible.

Crown Point Central School District

Internal Controls Over Payroll and Information Technology

2008M-178

4th Judicial District

The District did not have adequately segregated duties among the employees involved in the payroll process. The District also did not maintain time records for regular hours worked by employees. Employee records were also not always complete, and as a result, the District incorrectly paid $863 to three employees for their lunch breaks.

The superintendent, treasurer, and deputy treasurer have computer access rights to all aspects of the computerized financial system, along with system administrator rights to the overall system.

4 recommendations

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

District officials generally agreed with the recommendations pertaining to the payroll segregation of duties, payroll timekeeping, and user rights to information technology. Corrective action will be implemented shortly, if it has not already been done so.

Ellicottville Central School District

Internal Controls Over Selected Financial Operations

2008M-106

8th Judicial District

As of June 30, 2006, the unreserved and unappropriated general fund balance totaled $1.67 million, which represented 17 percent of the $9.7 million budgeted for the 2006-2007 fiscal year. This amount is in excess of the 2 percent limit that Real Property Tax Law authorized a school district to retain. The District also had reserves in amounts that are not necessary or reasonable.

Further, the payroll clerk could apply the treasurer’s electronic signature to District payroll checks because of the access rights she has been granted. The District also does not produce or obtain audit logs for management review. Finally, the District does not have a disaster recovery plan to protect equipment and data in case of an emergency.

9 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding financial condition, computerized data, and claims processing.

District officials have agreed with the recommendations pertaining to budget projections, revenues, and expenditures. Officials have also agreed with findings related to the District’s fund balance, as well as the implementation of an appropriate disaster recovery program. The District has discussed the recommendations, and is taking the necessary steps to develop a corrective action plan that will address the recommendations.

Farmingdale Union Free School District

Internal Controls Over Selected Financial Operations

2008M-57

10th Judicial District

The District’s Employee Benefit Accrued Liability Reserve (EBALR) fund has a balance of $11 million, which is more than twice the amount of the related liability.

The treasurer did not maintain adequate control over her signature disk to prevent unauthorized disbursement of District funds.

Thirty users had access to both enter and approve requisitions. Users shared passwords to gain access to functions they were restricted from under their own usernames.

A board member also did not disclose his interest in a telecommunications firm that has a contract with the District. Disclosure of his interest is required by General Municipal Law.

9 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding financial operations, computer data safeguards, and conflict of interest.

District officials generally agreed with the recommendations pertaining to EBALR transfer funds and investments, the safeguarding of the treasurer’s signature disk, and signing checks in the treasurer’s absence. The District has also agreed to the findings regarding computer access privileges, password protection, and disclosing interest in contracts. The District has agreed to implement corrective action to address all findings.

Honeoye Central School District

Internal Controls Over Segregation of Duties and the Computerized Financial System

2008M-132

7th Judicial District

The District’s internal controls over the computerized business management system (system) were inadequate to protect District assets and data. Access authorizations were not properly restricted based on the job duties of employees, and the system does not generate basic reports necessary to monitor financial activity.

5 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding segregation of duties, and the computerized financial system.

District officials generally agreed with the recommendations pertaining to the protection of District assets and data, and the restriction of computer access. The District has indicated that they have added some levels of control to the duties of the payroll clerk and treasurer, and that they have updated the financial system, which now allows for better control over password assignments and user access.

Medina Central School District

Internal Controls Over Selected Financial Operations

2008M-20

8th Judicial District

(Fiscal Concern)

The District did not formally advertise bids for seven purchases (totaling $246,000). There was no documentation to indicate that multiple vendors were considered, or to justify the failure of District officials to solicit competition.

The District’s transportation department did not have adequate procedures in place to monitor the use of the District’s eight fuel credit cards; and the District’s existing credit card policy does not address the use of fuel credit cards. Sixty-three unleaded fuel purchases (totaling $1,648) were listed on the monthly fuel card statements, but not documented in District records, and another 32 unleaded fuel purchases (totaling $1,473) were listed in District records, but the records did not  identify the vehicles for which the fuel was used. Another six purchases ($600) were insufficiently documented. Also, there was one fuel credit card discovered missing in October 2007, which showed seven fuel purchases ($200) with no supporting documentation.

4 recommendations

The report’s recommendations focused primarily on strengthening policies and procedures regarding purchasing and fuel credit cards.

The District has agreed with the recommendations pertaining to the revision of the purchasing policy, the revision of the credit card policy to address the use of fuel credit cards, and the practice of off-site purchasing. The District has agreed to initiate corrective action to address all recommendations.

New Hartford Central School District

Internal Controls Over Fuel Inventory

2008M-186

5th Judicial District

District officials have not developed written policies and procedures for controlling vehicle fuel inventories. The District also did not assign separate ID numbers for each vehicle and piece of equipment, and to each employee authorized to access fuel, and did not require employees to input odometer readings to track mileage.

Additionally, equipment, gas cans, and the driver’s education vehicle are not given their own unique ID numbers. Therefore, when fuel is pumped for these purposes, two miscellaneous codes are entered into the system instead of Distinct ID numbers.

District officials also did not regularly analyze fuel usage reports for reasonableness, and the District did not maintain perpetual inventory records showing fuel deliveries, usage, and inventory on hand.

4 recommendations

The report’s recommendations focused primarily on strengthening fuel inventory controls.

District officials have agreed with the recommendations pertaining to developing proper internal control policies for fuel inventory records, using new computer software to fullest capabilities to record odometer readings, maintenance of fuel consumption records, as well as perpetual inventory records. The District will implement corrective action shortly to address all recommendations.

Newark Valley Central School District

Internal Controls Over Selected District Operations

2008M-144

6th Judicial District

The District either has not performed the required background checks, or officials did not have required supporting documentation on file to confirm that the background check was performed for three of the District’s independent contractors who had direct student contact. The District did not have documentation or updated clearance for an employee who also had direct contact with students.

The District had control weaknesses related to payroll processes.  However, the District has procured the services of BOCES and now has established adequate procedures for authorizing, recording, and processing payroll and benefit payments.

Further, the board’s appointment of a Broome-Tioga BOCES employee as a claims auditor, was not in accordance with Department regulations.

2 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding criminal background checks, payroll, and the claims auditor.

District officials have agreed to the recommendations pertaining to the maintenance of documentation for the required fingerprint-supported criminal background checks on all employees and contractors who have direct student contact. Additionally, the District has agreed to be vigilant to ensure that the Clearance Form is printed and placed in the file to prevent future problems. The District has also agreed to correct the segregation of duties within payroll, and appoint a claims auditor in accordance with SED regulations. The District has agreed to implement a corrective action plan to address all recommendations.

North Bellmore Union Free School District  Internal Controls Over Selected Financial Operations

2008M-166

10th Judicial District

Duties in the payroll department were not adequately segregated. The employee responsible for processing payroll and maintaining leave accrual balances could also add employees to the payroll system, update employee data, such as, pay rates, and print and sign payroll checks.

The treasurer also does not retain control over her signature stamp or her electronic signature. The payroll clerk, accounts payable clerk, employee benefits clerk, and business office manager, all have access to the treasurer’s signature stamp and electronic signature.

The District’s two gasoline credit cards were kept in the custody of a local gas station rather than at the District. Credit card activity was reviewed, and there were instances of altered information on charge card slips and missing charge slips. There were also discrepancies in odometer readings and unrealistic gasoline usage.

Finally, there were no policies in place for monitoring remote access to the computerized accounting system.

7 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding the segregation of payroll duties, the treasurer’s office, gasoline credit cards, and remote access for computers.

District officials generally agreed with the recommendations pertaining to incompatible payroll duties, control of the treasurer’s signature stamp, appointing a deputy treasurer, and updating the District’s credit card policies to require monitoring credit card use. The District had indicated that corrective action has been taken.

North Merrick Union Free School District  Internal Controls Over Selected Financial Operations

2008M-63

10th Judicial District

District officials established an Employee Benefit Accrued Liability Reserve (EBALR) fund in April 2003 using $2.25 million of excess fund balance. There was no analysis performed to determine if this was a reasonable amount and, as a result, it is over funded by as much as $1.7 million. Since the fund was established, the District has only used $100,000 from the reserve as of May 2007.

The board also did not receive timely information for monitoring the District’s fiscal operations. This limits the board’s ability to monitor the budget and make decisions concerning budget status and transfers.

Further, the District did not solicit competition for professional services (totaling $1,133,035).

Finally, access to the computer system is not controlled, audit logs are not maintained, and servers are not secure.

13 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding financial operations, professional services, and information technology.

District officials agreed with the recommendations pertaining to the EBALR fund, the budget status and budget transfers, claims audit, IT policies, and the treasurer’s signature disk. They have agreed to implement corrective action to address each of the findings.

Peru Central School District

Internal Controls Over Selected Financial Activities

2008M-122

4th Judicial District

District officials did not adequately segregate duties over payroll and provided minimal oversight. The District failed to update the business administrator’s employment contract, and inaccurately documented longevity pay for an employee. Further, no prior approval was given for overtime payments made to the payroll clerk and account clerk, totaling $10,545. Certain employees’ leave accruals did not conform to the benefits authorized in their contracts.

Account clerks affixed the treasurer’s signature to payroll and accounts payable checks without the treasurer’s oversight or review.  Cash receipts were also not properly accounted for, or deposited timely. District officials were unable to account for cash collected at three sporting events and were unable to identify the origin of $1,410 of cash on hand in District sales. Sports-admission receipts were deposited in the amount of $8,886 12 days or more from the date funds were received.

Additionally, none of the ten activity fund accounts reviewed maintained a student ledger during the 2006-2007 school year. Twenty disbursements totaling $10,431 lacked adequate documentation. Seventeen cash receipts were also deposited 12 days or more from the date funds were received.

Finally, controls were not sufficient to adequately safeguard the District’s IT system and the data that is stored in it.

36 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding payroll, cash receipts and disbursements, extra-classroom activity funds, and information technology.

District officials agreed with the recommendations pertaining to protocols for cell phones, competitive bidding, conference and workshop reimbursement, inventory control, mandatory training for board members on fiscal oversight matters, meals and refreshments, Medicaid reimbursement, multi-year finance planning and purchase orders, and other areas of fiscal accountability. The District has indicated that they have established and updated policies for all of the recommendations.

Pocantico Hills Central School District

Internal Controls Over Selected Financial Operations

2008M-156

9th Judicial District

The purchasing agent approved purchases totaling $66,101 from three vendors that should have been but were not competitively bid. Furthermore, the purchasing agent did not monitor the purchase order procedures to ensure that District employees used the purchase order system correctly. As a result, ten purchases totaling $35,125 were made using confirming purchase orders, allowing staff to circumvent the purchase order system.

The claims auditor did not perform a complete audit of all District claims, did not verify the accuracy of the warrant, and did not always properly complete the certification section of the warrants.

Finally, there were significant weaknesses in the District’s controls relating to password security and the current financial software has minimum capability for generating audit logs.

12 recommendations

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

District officials have agreed with the recommendations and have indicated that the deficiencies within the claims auditing process will be addressed with the implementation of recently approved financial software, and that steps to improve the financial condition of the District have already been taken. Additionally, an additional business office position was created and filled, and the claims auditor was replaced. A comprehensive acceptable use policy will soon be completed.

Port Washington Union Free School District  Internal Controls Over Selected Financial Operations

2008M-161

10th Judicial District

Three District employees (that were paid a combined total of $101,215 as vendors) did not disclose their interest in contracts with the District, as required by law.

There was also 981 gallons of gas that went unaccounted for, and fuel usage records were inaccurate and incomplete.

Finally, District controls over access privileges are not completely effective, and several individuals had user rights that were not in accordance with their job functions.

3 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding interest in contracts, fuel use and inventory, and computer access controls.

District officials generally agreed with the recommendations pertaining to the process for employees to disclose interest in contracts with the District, ensuring tighter controls over fuel use and inventory, and safeguarding computer access controls. They have agreed to initiate corrective action shortly.

Queensbury Union Free School District

Internal Controls Over Selected Financial Operations

2008M-174

4th Judicial District

The balance of the District’s Employee Benefit Accrued Liability Reserve (EBALR) fund totaled $7.6 million. As of June 30, 2007, the reserve balance was over ten times the amount of the District’s related liability for employee benefits chargeable to the reserve. The board and District officials raised new taxes at the same time that they were placing funds in the EBALR fund they did not need.

Twenty-two claims (totaling $128,411) did not meet criteria and should not have been paid prior to being audited. District officials also did not adhere to the board’s credit card policy.

4 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding the EBALR fund and claims processing.

District officials agreed with the recommendations pertaining to claims processing, and indicated that they planned to take corrective action, if they have not already. They did not, however, agree with the recommendations pertaining to the  EBALR fund. The District states that they did not increase property taxes solely to build reserve funds, and instead, state that tax increases have been reasonable and in line with county and statewide averages.

Roosevelt Union Free School District  Tentative Budget Plan for 2008-2009

2008M-235

10th Judicial District

(Fiscal Stress)

At the completion of the first quarter of the 2008-2009 fiscal year, the District's spending has generally been within the limits established by the board in its enacted budget. There were, however, several areas of concern which should be addressed by District officials. The District is not making adequate use of its encumbrance system to control expenditures. Many known expenditures have not been encumbered and some budgetary accounts have not been accurately established.

7 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding budgeting,

District officials agreed with the recommendations pertaining to budget transfers submitted to the board, the prevention of appropriation overexpenditures, BOCES estimated costs, leftover appropriations from grant programs, Academic Improvement Grant funds, and the Special Aid fund. The District has agreed to implement corrective action.

South Lewis Central School District

Internal Controls Over District-Operated Vending Machine Receipts

2008M-212

5th Judicial District

Cash from vending machine sales are not counted (by the teacher’s aide) in the presence of another District employee, nor does another District employee periodically compare vending machine counter records with corresponding bank deposits. There is also no process in place to effectively monitor and reconcile vending machine sales to items stocked and disbursed. Finally, a duplicate receipt is not issued to the teacher’s aide by the food service helper.

3 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding District vending machine sales.

District officials agreed with the recommendations pertaining to the policies for counting the cash from vending machines, comparing meter readings to the cash removed and deposited, and policies for cash receipts. Corrective action has been implemented for each of the findings.

West Canada Valley Central School District  Internal Controls Over Selected Financial Activities

2008M-168

5th Judicial District

The financial duties of the business manager/treasurer are not properly segregated and compensating controls are not in place. The business manager/treasurer is not involved in the check signing process and does not exercise control over the use of his facsimile signature to sign checks.

Additionally, 15 out of 18 contracts tested that were not subject to competitive bidding, totaling $107,936, did not have documentation to show that competition was sought by obtaining written and/or verbal quotes, or requests for proposals.

Maintenance department records were compared to the transportation department’s records for November and December of 2007, and the amount of fuel pumped per the transportation department’s records exceeded the amount per the maintenance department’s records by 270 and 34 gallons for diesel and gasoline, respectively. This was not immediately recognized because there was no process in place to compare usage records or investigate differences.

7 recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding cash disbursements, purchasing, and fuel inventory.

District officials agreed with the recommendations pertaining to entering new employees, accounts payable, joining the central business office, and check signing. The District also agreed with the recommendations pertaining to procurement regulations, and discrepancies in fuel inventory records. The District has indicated that they will initiate corrective action shortly in order to address all concerns.