Meeting of the Board of Regents | April 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:

March 27, 2008

STRATEGIC GOAL:

Goal 5

AUTHORIZATION(S):

REGENTS SUBCOMMITTEE ON AUDITS

MEETING ROADMAP

Date:  April 2008

Time:  TBD

Location:  TBD

TOPIC

OUTCOME

WHO

MINUTES

Opening Remarks

Chair

3

Review Agenda/Minutes (Attachment I)

Approval

Conway

2

State of New York Single Audit (Attachment II)

Information

Toski, Schaefer & Co.

20

Audit Trend – Procurement (Attachment III)

Information

OAS Staff

20

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

Questions answered

OSC and Department Audit Staff

15

Office of the State Comptroller

Argyle Central School District

√

√ 

Baldwin Union Free School District

√

Bellmore-Merrick Central High School District

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Camden Central School District

√ 

√ 

√

Copiague School District

√

East Hampton Union Free School District

√

√

√ 

East Meadow Union Free School District

√

Eden Central School District

√

√ 

√

Glens Falls Common School District

√

√

√ 

Hamburg Central School District

√

Harborfields Central School District

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Johnsburg Central School District

√

√

√

Letchworth Central School District

√

√ 

Mount Morris Central School District

√

√

Nassau County BOCES

√

√

√

√

Perry Central School District

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Piseco Common School District

√

 √

Prattsburgh Central School District

 √

√

Saratoga Springs City School District

Schoharie Central School District

√

√

√

√ 

Shelter Island Union Free School District

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Tompkins-Seneca-Tioga BOCES

√

√

 √

West Valley Central School District

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April Total

4

1

9

12

7

3

4

6

May 2007

June 2007

July 2007

October 2007

December 2007

January 2008

February 2008

March 2008

April 2008

Running Total

Procurement

9

11

12

20

12

11

12

6

4

97

Capital Assets

10

1

2

4

0

0

0

0

1

18

Claims Processing

13

3

12

17

17

18

13

6

9

108

Payroll

12

3

11

20

18

14

12

5

12

107

Cash

6

2

8

15

14

15

8

5

7

80

Financial Reporting

12

3

2

16

6

11

4

7

3

64

Information Technology

10

10

9

14

15

15

17

6

4

100

Capital Construction

2

1

1

0

0

1

0

0

0

5

Extraclassroom Activity Fund

1

1

0

1

1

2

1

0

0

7

Segregation of Duties

0

0

3

0

15

19

0

4

6

47

Budgeting

2

3

0

1

1

0

1

1

0

9

Conflict of Interest

0

0

0

4

3

3

0

0

0

10

Other

0

2

0

0

0

1

1

3

0

7

Total

77

40

60

112

102

110

69

43

46

659

Office of the State Comptroller

Audit

Major Finding(s)

Recommendation/Response

Argyle


Central School District

Internal Controls Over Selected Financial Operations

2007M-304

4th Judicial District

The current purchasing policy does not prescribe a process to follow when competitive bidding is not required. Fourteen purchases in excess of $1,000, totaling $60,220, were reviewed, and none of the purchases were supported by more than one quote.

Additionally, the District’s purchase order system is not operating effectively. Sixty-two out of 80 purchases totaling ($209,152 of $366,213) were made without purchase orders.

The District also had inadequate controls over the processing and payment of claims generated from the purchase of goods and services. Fourteen claims ($49,703) lacked documentation of proper approval and/or verification that billed goods or services were received.

There were no significant deficiencies found in the records related to the provision of employee compensation.

3


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding purchasing and employee compensation.

District officials have agreed to assign the purchasing agent with the responsibility of ensuring the procedures relating to the acquisition of goods and services are adhered to. Officials also agreed to improve upon their current requisition system as well as implement a process for prior approval through purchase orders. Lastly, the District has appointed a claims auditor to review and approve all claims for payment.

Baldwin UFSD, Bellmore-Merrick CHSD, Copiague SD, East Meadow UFSD, and Harborfields CSD

Policies to Distinguish Between Public Employees and Contractors

2008M-47

10th Judicial District

The Baldwin, Bellmore-Merrick, Copaigue, East Meadow and Harborfields school districts did not have formal procedures to distinguish between employees and independent contractors.

Mr. Reich was an independent contractor and each of the five districts incorrectly classified him as an employee. District officials at the five school districts neither supervised nor controlled how Mr. Reich performed his work, nor did they establish the amount of hours he worked on a normal workday.  Mr. Reich worked from his private law office and did not work fixed hours at any of the aforementioned districts. No resources were supplied to Mr. Reich to carry out any of his duties by any of the districts, and he serves as an employee to several districts concurrently, as well as offers his services to the public.

As a result, the Districts were incorrect in classifying Mr. Reich as an employee and should not have reported him as an employee to the Employees Retirement System (ERS).

1


recommendation for each district

The report’s recommendation was to submit corrected retirement reports to the Employee Retirement System (ERS).

Officials at all five districts agreed that Mr. Reich was not an employee of their Districts and should not have been reported as such to ERS.

It should also be noted that the Harborfields superintendent stated that when she started at the District in July 2005, the former superintendent did not inform her of the arrangement between the District and Mr. Reich. When she became aware, she suggested that Mr. Reich submit documentation of his days and hours worked. However, he never submitted any documentation, and as a result, the issue was not resolved.

Camden


Central School District

Internal Controls Over the Treasurer’s Check Disbursement Process

2007M-294

5th Judicial District

Contract for Excellence

There were deficiencies in the treasurer’s oversight of the check-signing function. District general fund accounts payable checks and payroll checks are printed at the Mohawk Regional Information Center, and the employees imprint the treasurer’s signature on the checks without any involvement by the treasurer. The treasurer also does not compare checks to an approved warrant or certified payroll register before the District issues the checks to ensure that all check disbursements have been approved by the claims auditor (claims) or approving officer (payroll).

The treasurer also failed to monitor the continuity of check number sequences between warrant or payroll periods, and therefore, does not maintain accountability for all checks issued.

3


recommendations

The report’s recommendations focused primarily on strengthening policies and procedures regarding the treasurer’s check disbursement process.

District officials agreed with the recommendations regarding the check disbursement process, but have indicated that they would like to continue with their current process of using the print service at the Mohawk Regional Information Center to produce printed checks for distribution. They will ensure that the treasurer’s signature is affixed only to approved payments.

East Hampton


Union Free School District Internal Controls Over Selected Financial Operations

2007M-297

10th Judicial District

The claims auditor audited claims prior to payment; however, the audit of claims was not documented.  In addition, the claims auditor did not report to the board.

The payroll clerk and the accounts payable clerk have access to the treasurer’s signature disk and the ability to print checks even in the absence of the treasurer.

3


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding claims auditing and the treasurer’s signature disk.

District officials agreed with the recommendations and have already established a corrective action plan to address the findings.

Eden


Central School District

Internal Controls Over District Operations

2007M-165

8th Judicial District

The board and District officials were remiss in their responsibilities to provide adequate planning, monitoring, oversight and management of capital project activitities.  The board delegated its duties to plan and monitor the activity of its capital program to its Architect.

The board and District officials do not adequately monitor the contractor that manages the District’s energy saving initiatives. For example, the District entered into a contractual amendment with a contractor to revise its Energy Performance Contract. The technical support for Energy Saving Improvements has escalated from $172,000 to almost $525,000.

The board has also failed to effectively address the treasurer’s duties and responsibilities to ensure they are properly segregated, and sufficient compensating controls to mitigate the risk and identify any errors were not established. As a result of these deficiencies, bank statements from August 2006 were not reconciled until January 2007.

Lastly, internal controls over claims processing are not operating effectively. Twenty-two Capital Projects Payments over a four-month period, totaling almost $2.7 million, were made before the claims auditor approved them. In addition, 50 claims paid in 2005 and 2006 were tested (totaling $635,000), and 90 percent of them had at least one deficiency.

15


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding planning and oversight, the treasurer’s segregation of duties and claims processing.

District officials have agreed to address the recommendations pertaining to contracts with the District’s architect, the planning and monitoring of all capital projects and bids, upgrading telephone and communications systems, as well as monitoring energy performance initiatives.

The District also stated that they plan to adequately segregate the duties of the District treasurer and implement procedures to ensure the effective audit of claims and protection of taxpayer monies.

Glens Falls


Common School District

Internal Controls Over Payroll and Claims Processing

2008M-5

4th Judicial District

The board did not approve payroll policies or procedures to guide employees in their day-to-day duties. The treasurer performed her duties without written guidance and direction from the board. There were no policies, resolutions, employment contracts, or collective bargaining agreements for 17 non-instructional employees.

The exit payment made to the most recently retired non-instructional employee was reviewed, and it was found that although the employee received a payment consisting of $4,200 for accumulated sick days and $1,703 for remaining vacation days, there was no policy or collective bargaining agreement to authorize this payment.

There were no major discrepancies in the District’s claims processing procedures.

2


recommendations

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

The District generally disagreed with the recommendations pertaining to the failure of the board to approve salaries for non-instructional employees and they also disagreed with the recommendation addressing the approval of salary increases.

However, they have since adopted adequate payroll policies and they have also established corrective action to ensure that all salaries and benefits provided to employees are covered by the terms of district-wide policies.

Hamburg


Central School District

Financial Condition

2008M-2

8th Judicial District

Fiscally stressed

The superintendent and the business administrator failed to provide the board with adequate and timely financial data. The District had a fund balance deficit of more than $200,000 in June of 2006. The board president stated that during the preparation of the 2006-07 budget, he was aware the general fund balance was being projected to be in a deficit position in June 2006. The budget relied on the use of $875,000 in fund balance that would not be available. There was no indication in the meeting minutes, that the board president informed the other board members there was a deficit. As a result, the board passed a budget that was fiscally irresponsible. The District ended the 2006-07 fiscal year with a general fund balance deficit of approximately $2 million.

District revenues were more than $1.2 million overestimated, which included $450,000 in Use of Money and Property, $215,000 in State aid, $160,000 in Sales Tax and $450,000 in other miscellaneous revenues.

The board also did not have a written plan to alleviate the District’s poor financial condition. The District’s estimates for 2007-08 in regards to their unreserved fund balance, was that it would likely be reduced to between $800,000 to $1.2 million. Based on the results of the report, this was found to be unreasonable.

5


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding to the District’s financial condition.

District officials agreed with the recommendations pertaining to developing a written plan to address the fund deficit as well as adopting realistic balanced budgets, establishing timely and complete financial information, and revising District policy for amending the budget.

Johnsburg


Central School District

Internal Controls Over Selected Financial Operations

2007M-240

4th Judicial District

The board did not adopt procedures to ensure that District officials monitored employees to ensure they had complied with board policies and related internal controls. Fourteen out of nineteen claims that were tested, did not contain required verbal or written quotes and were processed using confirming purchase orders, or exceeded the approved purchase order amounts. District personnel also did not include sufficient documentation for five credit card purchases, and nine other transactions out of seventy-nine claims reviewed.

The board also had not established any policies or procedures for auditing District claims, nor did it perform a proper audit of claims.

The board also failed to establish a payroll policy or any formal written procedures to guide the payroll process. There were 15 employees found that did not always sign their time cards, and at that time, cards of five of the fifteen employees were unsigned and/or lacked evidence of supervisory approval.

7


recommendations

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

The District agreed with the recommendations pertaining to the procurement policy, payroll review procedure and the timecard system. It was also indicated that the District plans to put forth extra effort to ensure the accuracy of the employee attendance system.

Letchworth


Central School District

Internal Controls Over Purchasing

2007M-306

8th Judicial District

Nineteen claims ($157,214) were tested to determine whether the District officials were complying with the board’s adopted procurement policy. We found that nine claims (totaling $125,160) were paid without evidence that District officials obtained the required verbal or written quotations. District officials confirmed that they did not seek competitive pricing in accordance with the board’s adopted procurement policy.

Five claims totaling $59,598 that were identified by District officials as purchases from state contracts were tested. All five were made from authorized state contract vendors; however, two of the purchases ($40,593) were not billed to the District at state contract pricing. Two vendors were found to have overcharged the District by a total of $3,580, and this happened as a result of the District not comparing vendor pricing to state contract documents for accuracy. After this was brought to the District’s attention, they obtained confirmation from the vendors that the District will receive credit for these overpayments.

2


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding purchasing.

District officials have agreed to require verbal and written quotes for purchase orders, as well as requiring state contract pricing lists from all state contract vendors.

Mount


Morris Central School District

Internal Controls Over Selected Financial Activities

2007M-301

7th Judicial District

The board audited claims on an exception only basis and, therefore, did not perform a proper audit of claims.

The District also failed to have adequate segregation of duties over cash receipts and payroll processes to ensure that one person does not control all phases of a transaction. The board also has not established written procedures over cash receipts and payroll processes.

4


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding claims processing and segregation of duties.

The District stated that they welcome the recommendations contained in the report, and that they will submit a corrective action plan within 90 days to address each finding.

Nassau County BOCES  Internal Controls for the period July 1, 2003 -  June 30, 2005 and July 1, 2006 - June 30, 2007

2007M-05

10th Judicial District

The board only required that claims be audited on a test basis after they are paid. This policy was contrary to law, and undermines the minimum requirements for a sound system of internal controls intended to manage and safeguard public resources entrusted to the board. The 2006-07 claims for diesel fuel, travel-related expenditures, meals, and credit card charges still lacked sufficient supporting documentation.

During the period of July 2003 through June 2005, BOCES paid approximately $11.6 million to 28 consultants for various professional and educational services. BOCES paid $10.8 million to 27 consultants without the benefit of competition. Only 12 of the 27 consultants had written contracts and only eight of those 12 contracts were presented to the board for review and approval. Lastly, BOCES paid $6.3 million to the other 15 consultants without a written contract.

As of August 2007, BOCES had not changed its procurement policy. Payments to 19 consultants were tested, and it was found that BOCES paid $2.8 million to 13 consultants without the benefit of competition. Three of the nineteen consultants were paid $692,622 without written contracts, and the services provided by seven consultants costing $968,248 were not approved by the board.

BOCES spent approximately $43,000 on credit card transactions. The supporting documentation was not always sufficient and usually consisted of credit card and illegible receipts, some of which were copies.

BOCES also did not require a password to access the operating system and network resources; and computer application users were required to change their password only when they suspected that someone had compromised their passwords.

Lastly, BOCES officials were using BOCES’ cars 77 percent of the time for personal business. $189,000 over five years could have been saved had it reimbursed its administrators for the business use of their personal vehicles.

19


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding control environment, claims processing, procurement, computer operations, and administrative expenses.

BOCES officials disagreed with the findings, and stated that the comptroller’s report presents an unbalanced and inaccurate picture of the internal controls within Nassau BOCES. BOCES officials state that the majority of the comptroller report’s findings were findings that BOCES had already addressed and were in the process of correcting prior to the audit team’s arrival.

Lastly, BOCES states that the Executive Summary did not reflect the changes implemented related to business practices and operations.

Perry


Central School District

Information Technology

2007M-285

8th Judicial District

The District’s two network servers are located on open-shelving in a file room in the business office. The file room is adjacent to an unlocked door which opens to a hallway in the high school. The door was also routinely open due to climate control issues. Under such conditions, it would be difficult for the District to ensure the prevention of unauthorized access. The District had also failed to establish the necessary policies and procedures for the backup of District information, including financial data. In addition, there was no formal disaster recovery plan in place.

The technology coordinator does not monitor the use of the District’s password, which allows the by-pass of the system’s filter.  The intent of such a filter by-pass is to allow students to research topics for school projects that would otherwise be blocked by the filter. With this password many non-educational related sites were accessed, which is a clear violation of the terms of the agreement between the District and internet provider.

4


recommendations

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

District officials agreed with the recommendations regarding access to the network servers, the security of back-up data, disaster recovery, and filter by-pass. They have indicated that they have since strengthened procedures, tightened security regarding passwords and computer usage, and have secured back-up data.

Piseco


Common School District

Internal Controls Over Payroll

2007M-280

4th Judicial District

The District has not established any written policies and procedures to describe employee responsibilities in processing and distributing bi-weekly payrolls or maintaining leave records. In the absence of a policy, the treasurer and secretary developed informal systems for payroll processing and accounting for leave accruals. As a result, the treasurer was solely responsible for processing $549,000 in payroll and fringe benefits with limited oversight. The secretary was also responsible for maintaining the leave accruals for all employees in the District with no oversight.

The treasurer was also directly responsible for almost all of the payroll duties, such as adding and deleting employees, entering payroll changes, entering hours worked, etc. Additionally, the only oversight included in the payroll system occurred when the board president signed payroll checks, and there was no indication that accuracy of the payroll was verified.

Although there were only three instances where leave request forms were not submitted, leave was not approved and leave usage could not be traced to attendance/time records. There were also five instances where the hours worked recorded on the timesheets were inaccurate because the time was estimated and submitted by the secretary and not the actual employee. Thirty additional timesheets were reviewed, and none of them were reviewed or approved, and 13 lacked the employee’s signature.

3


recommendations

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

The District is in agreement with the findings, and they have indicated that they have already taken corrective action to address the concerns.

Prattsburgh


Central School District

Internal Controls Over Information Technology

2007M-296

7th Judicial District

The board did not adequately safeguard the District’s computerized data and assets by establishing and implementing appropriate control policies. Employee access was not properly restricted. The treasurer’s signature was also stored in the computerized financial system and applied to all District checks by a BOCES employee. The District’s accounts payable clerk also used the treasurer’s unprotected signature without his direct oversight.

3


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding information technology and controls over the check signing process.

District officials have agreed to address all recommendations pertaining to user access rights, security controls in the financial accounting software, as well as the treasurer’s electronic signature.

Saratoga Springs


City School District

Internal Controls Over Payroll

2007M-286

4th Judicial District

All collective bargaining agreements and individual employee contracts covering the report period were reviewed, to ensure that payments and benefits were properly authorized and in accordance with the agreements. Salaries and leave time records, health insurance buy-out payments, and health/dental insurance contributions were reviewed, and no major discrepancies were found. All minor issues were addressed previously with the District officials. The District’s system of controls over the payroll process were designed appropriately and were working effectively.

0


recommendation

There were no recommendations.

Schoharie


Central School District

Internal Controls Over Selected Financial Activities

2007M-245

6th Judicial District

Formal policies and procedures relating to installation of personal software on District computers; addition, modification and deletion of user access rights; and a strong password system have not been adopted. The board also has not developed a formal disaster recovery plan or policies and procedures for the backup of financial and non-financial data.

The board also did not audit claims or appoint a claims auditor to do so. Seventy-seven percent of claims ($13.2 million) paid during the report were not audited. The claims auditor who was appointed, also does not report directly to the board, as required.

Lastly, the board did not adequately address control risks inherent in the District treasurer’s duties to ensure that she was accurately accounting for payroll-related transactions. The treasurer and senior account clerk also have full user access rights to the payroll functions in the financial software.

12


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding computerized data and assets, audit of claims, and payroll.

The District agreed with the recommendations pertaining to the adherence to the Computer Use Policy, network security, computer usage agreements, password procedures, and the physical security of the District server.

However, the District also stated that there was a major changeover in board membership, which is why control risk in the treasurer’s duties were not always previously addressed by the administrator.

Shelter


Island Union Free School District Internal Controls Over Employee Fringe Benefits and the School Lunch Fund

2007M-293

10th Judicial District

The District reimbursed four employees a total of $20,392 for waiving their right to participate in the health insurance plan, even though they were not specifically entitled to this benefit. As a result, the District paid more than necessary for waivers of the right to receive medical benefits.

Twenty-one days of cafeteria receipts were examined ($7,397) and found that they were deposited timely, but the District does not use cash registers and the cafeteria supervisor does not reconcile cash receipts to cafeteria sales.

4


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding employee fringe benefits and cafeteria receipts.

District officials agreed with the recommendations pertaining to updating the board policy on non-contractual personnel; however, they disagreed with those that regarded the historical intent of the board, as well as the board’s definition of medical insurance coverage.

Tompkins-Seneca-Tioga Board of Cooperative Educational Services Internal Controls Over Payroll and the Treasurer's Signature Disk

2007M-290

6th Judicial District

There is a lack of segregation of duties within the payroll process. The payroll clerk has complete control over the payroll process and full user-access rights to payroll functions in the computerized financial system. The board also appointed the payroll clerk as the BOCES official responsible for certifying the payroll. The payroll clerk processed approximately $12.8 million in payroll expenditures for the 2006-07 fiscal year with little or no oversight.

Payroll earnings reports, hourly timecards/timesheets, and cancelled payroll checks were selected and reviewed, and while no discrepancies were found, improper segregation of duties poses a risk to the District and should be amended.

Additionally, the treasurer does not supervise and control the use of her facsimile signature, nor is she present when clerks apply her signature to checks.

3


recommendations

The report's recommendations focused primarily on strengthening the policies and procedures regarding payroll and the treasurer's signature disk.

District officials agreed with the recommendations pertaining to the segregation of duties in payroll, and the supervision of the treasurer's signature disk, and have indicated that they plan to initiate corrective action.

West


Valley Central School District

Service Contract for the Internal Auditor

2007M-275

8th Judicial District

The BOCES employee serving as the internal auditor of the District would not be independent in performing the internal audit function.  The District has a contractual relationship with BOCES and paid approximately $1M for services.  This current arrangement is likely to put the BOCES employee in the position of evaluating significant services or programs that are provided to the District by BOCES, the individual’s employer, or reviewing the system of documentation for payments to the BOCES.

1


recommendation

The report recommended for the board to terminate the internal audit relationship with the Cattaraugus-Allegany BOCES and replace this position with an internal auditor who meets the independence requirements of the State Education Department guidance.

District officials agreed with the recommendation suggesting that the board terminate the internal audit relationship with BOCES, and replace this position with an internal auditor who meets the independence requirements. The District has indicated that they will seek a cost effective alternative to this agreement.