Meeting of the Board of Regents | June 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:

June 10, 2008

STRATEGIC GOAL:

Goal 5

AUTHORIZATION(S):

REGENTS SUBCOMMITTEE ON AUDITS

MEETING ROADMAP

Date:  June 2008

Time:  TBD

Location:  TBD

TOPIC

OUTCOME

WHO

MINUTES

Opening Remarks

Chair

3

Review Agenda/Minutes (Attachment I)

Approval

Conway

7

Audit Trend – Procurement (Attachment II)

Information

OAS Staff

20

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

Questions answered

OSC and Department Audit Staff

30

Audit

Procurement

Claims Processing

Payroll

Cash

Financial Reporting

Information Technology

Segregation of Duties

Budgeting

Finger-printing

Office of the State Comptroller

Beacon City School District

√

Campbell-Savona Central School District

Carthage Central School District

√

√

Chenango Valley Central School District

√

East Moriches Union Free School District

√

Fabius-Pompey Central School District

Forestville Central School District

√

√

Greater Amsterdam City School District

*Greece Central School District (footnote 1)

√

√

√

*Hamilton-Fulton-Montgomery BOCES

(footnote 2)

√

Island Trees Union Free School District

√

√

√

√

*New York City Department of Education Student Participation in the Supplemental Educational Services Program(footnote 3)

Audit

Procurement

Claims Processing

Payroll

Cash

Financial Reporting

Information Technology

Segregation of Duties

Budgeting

Finger-Printing

*Niagara Falls City School District

(footnote 2)

Pleasantville Union Free School District

√

*Pyramids Child Development Center

(footnote 4)

Roosevelt Union Free School District

√

South Country Central School District

√

Troy Enlarged City School District

√

Western New York Maritime Charter School

√

√

√

June 2008 Total

2

3

2

3

1

1

3

6

1

May 2007 – April 2008

May 2008

June 2008

Running Total

Procurement

97

9

2

108

Capital Assets

18

0

0

18

Claims Processing

108

9

3

120

Payroll

107

13

2

122

Cash

80

13

3

96

Financial Reporting

64

5

1

70

Information Technology

100

8

1

109

Capital Construction

5

0

0

5

Extraclassroom Activity Fund

7

0

0

7

Segregation of Duties

47

4

3

54

Budgeting

9

1

6

16

Conflict of Interest

10

2

0

12

Fingerprinting

0

5

1

6

Other

7

2

5

14

Total

659

71

27

757

Office of the State Comptroller

Audit

Major Finding(s)

Recommendation/Response

Beacon


City School District

2008-09 Tentative Budget Plan

B6-8-9

9th Judicial District

The significant revenue and expenditure projections in the proposed budget are reasonable. However, the District projects that its fund balance at June 30, 2008, will be approximately $4.26 million, which is more than the legal limit. The District’s 2008-09 proposed budget includes the appropriation of $1 million of projected fund balance to help finance 2008-09 operations. The appropriation of this amount of fund balance would still result in a fund balance that exceeds the 4 percent limit.

1


recommendation

It is recommended that the District take appropriate action to ensure that unappropriated fund balance does not exceed the 4 percent limit. A corrective action plan is required within 90 days to address exceeding the 4 percent limit.

Campbell-Savona Central School District 2008-09 Tentative Budget Plan

B2-8-12

7th Judicial District

The estimated budgeted revenues and appropriations are reasonable. Additionally, District officials have taken the appropriate action to address the recommendations contained in the May 2007 budget review audit report.

0


recommendation

There were no recommendations.

Carthage


Central School District

Internal Controls Over Cafeteria Receipts

2008M-40

5th Judicial District

Contract for Excellence

The District has not established adequate internal controls over cafeteria and vending machine cash receipts. The duties of cash handling, recordkeeping, and cash reconciliations are not properly segregated, independent reconciliations of cash sales to deposits are not being performed and there is a lack of supervisory review of the key cash receipt duties being performed.

Daily sales reports from the computer system are not compared with the money deposited by the elementary school head cashiers to verify that all moneys collected were deposited in the bank. Additionally, there is no supervision when the secretary counts the money, nor does she issue a receipt to the cashiers to document the transfer of funds. No one outside of the cash handling process confirms that the secretary deposited all the funds she received from the cafeterias. 

Funds received from the vending machines are also not counted under supervision, nor does the secretary issue a receipt to the cashier remitting her the money. The food service manager claimed that she was not aware of the risk associated with her secretary performing these duties without supervisory review.

During the report period, the District strengthened internal controls by requiring the elementary school head cashiers to forward a copy of their daily deposit slips to the secretary so the secretary can reconcile deposits with the daily sales reports. The head cashiers at the middle and high school also began issuing receipts to the food service secretary showing the amount of money each remitted to her for deposit.

4


recommendations

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

District officials accepted the recommendations pertaining to the adequate segregation of cash handling duties, the comparison of daily sales reports by an individual independent of cash collection, issuing and retaining duplicate receipts, and counting money from vendors prior to combining sales from the machines for deposit. Officials have agreed to initiate corrective action shortly if they have not already done so.

Chenango Valley Central School District  2008-09 Tentative Budget Plan

B4-8-14

6th Judicial District

Fiscally stressed

The significant revenue and expenditure estimates in the proposed budget are reasonable. However, District officials did not submit a proposed school lunch fund budget for the 2008-09 fiscal year.

The school lunch fund had deficit fund balances for the last six years. A comparison of fund balances over this period indicate that the fund balance deficit was approximately $95,000 on June 20, 2002, and then decreased slightly to a deficit of $74,000, but then increased significantly to more than $125,000. The superintendent stated that a budget for the school lunch fund will be prepared in early May 2008.

1


recommendation

It is recommended that District officials prepare and adopt a realistic school lunch fund budget immediately, and closely monitor actual results of operations throughout the 2008-09 fiscal year.

East Moriches Union Free School District Budget Review

B7-8-8

10th Judicial District

Fiscally concerned

The significant revenue and expenditure projections were reasonable. However, based on the calculation of the District’s fund balance, it is believed that revenues could exceed expenditures in the current year by as much as $900,000, which would increase the District’s unreserved fund balance to approximately $1 million by June 30, 2008. Most of the operating surplus is due to a $600,000 grant in aid which is non-recurring (one-shot) revenue that will not necessarily be received in the following year. The additional surplus of $300,000 is mostly due to the current year’s tuition costs being less than the amount budgeted. If the District were to continue with its current plans to use $550,000 in fund balance to help finance the 2008-09 budget, the unreserved fund balance as of June 30, 2008, would be about $450,000.

Lastly, the board needs to consider its appropriations for energy and utilities, BOCES services, and health insurance.

1


recommendation

It is recommended that District officials closely monitor the use of the fund balance to ensure that action is taken, if necessary, to identify other funding sources that can be used if the fund balance is no longer available to fund District operations. Additionally, a corrective action plan is required for appropriations for energy and utilities, BOCES services, and health insurance.

Fabius-Pompey


Central School District

2008-09 Tentative Budget Plan

B3-8-6

5th Judicial District

The tentative budget for the District and the budgeted estimated revenues and appropriations appear reasonable.

0


recommendation

There are no recommendations.

Forestville


Central School District

Internal Controls Over Cash Disbursements

2008M-07

8th Judicial District

The treasurer executes wire transfers without the approval of another individual, and the bank does not provide paper confirmation of wire transfer transactions to another District official or employee. Board members and the superintendent do not receive independent accounting/reporting that would provide them with a reliable means of monitoring the treasurer’s wire transfer activity. The treasurer also maintains the accounting records and performs monthly reconciliations of the bank statement balances to the accounting records, which results in a weakness in internal controls because these key duties are being performed by one individual with little or no oversight.

The new claims auditor was not provided with a written description of job duties which does not ensure there is an understanding of the position. Additionally, the claims auditor does not sign any of the claims to indicate that they were approved for payment.

4


recommendations

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

District officials have indicated that they agreed with the recommendations pertaining to wire transfers, reassigning the treasurer’s current duties, providing a written job description to the claims auditor, and implementing a process that requires the claims auditor to sign each claim. Officials stated that they have already begun taking corrective action to address the concerns.

Greater Amsterdam School District

2008-09 Tentative Budget Plan

B5-8-13

7th Judicial District

Contract for Excellence

The significant revenue and expenditure projections in the proposed budget are reasonable. Additionally, District officials have taken the appropriate action to address the recommendations contained in the May 2007 budget review audit report.

0


recommendation

There were no recommendations.

Greece


Central School District

Internal Controls Over Selected Financial Transactions

2007M-256

4th Judicial District

Contract for Excellence

The previous board failed to develop sound policies to manage District resources and did not properly manage District resources and there was a poor control environment in the District.

The Capital Improvement Project (CIP) has exceeded authorized funding by $2.5 million. Additional expenses were paid from the general fund and included a pay increase of about $1 million for the construction manager that was not approved by the board. The board stated that in the CIP’s first three years, it gave a “blank check” to the superintendent, who was able to use his discretion in authorizing purchases, including assets totaling $267,000 that are currently idle. Previously, a clerk hired by the District to monitor CIP progress quit his position in August 2004, because he was not given the authority and information needed to properly oversee the project. Lastly, 30 out of the 70 claims that were tested, worth $1.7 million, were paid without the architect’s certification that services billed were performed.

Officials did not claim all Medicaid reimbursements that they are entitled to. A review of a sample of claims showed the District failed to bill at least $110,000 of Medicaid services. It is estimated that the District failed to bill at least $2.2 million in eligible Medicaid services, costing the District about $560,000 in lost revenue.

Nineteen employees who left District employment, received a total of $175,000 for vacation benefit payments they may not have been entitled to. Also, a number of administrators were paid a total of $127,000 in additional compensation or benefits without board authorization.  Officials were paid over $300,000 in extra compensation because the board did not ensure contracts clearly identified benefits.

22


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding control environment, the Capital Improvement Project, Medicaid reimbursement, compensation, and information technology.

The current District officials and the new board generally agreed with the recommendations pertaining to control environment, strengthening board understanding of the District business, the code of conduct for assessing financial reporting culture, a whistleblower program, following up on audit reports, and planning for the Capital Improvement Project. Additionally, officials agreed with the recommendations regarding the purchase of idle assets, CIP expenditures, CIP General Fund, project status, depletion of CIP funds, payments to the construction manager, change orders, and internal claims, and audit function.

Officials generally disagreed with the recommendation involving payments being made without ensuring the work was performed.

Hamilton-Fulton-Montgomery BOCES  Controls Over Employee Classification

2008M-083

4th Judicial District

Tests of enrollment at BOCES revealed that five attorneys, all partners in a private law firm, were improperly enrolled in the New York State and Local Employees’ Retirement System (ERS) during the 2006-07 fiscal year because they were contractors, rather than public employees. As a result, taxpayers have subsidized payments to ERS on behalf of independent contractors who are not entitled to pension benefits. These attorneys, who were on the BOCES payroll as full-time employees, worked substantially less than the 1,157 days that the BOCES reported to ERS. The five partners actually worked 196 days, for which they were paid a total of $234,000.

2


recommendations

BOCES officials generally agreed with the recommendations. They have since suspended the pay of these attorneys, and the board adopted a resolution in March, ending the attorneys’ services for the 2007-08 fiscal year. They have also indicated that they plan to strengthen controls over worker classification processes.

Island Trees Union Free School District

Internal Controls Over Selected Financial Operations

2008M-18

10th Judicial District

The District did not adequately segregate duties over its financial operations. The District had given almost all control of its fiscal activities to the Assistant Superintendent for Finance and Administration without providing appropriate supervision for his work. The assistant superintendent oversees the business office and serves as the deputy treasurer and as the District’s purchasing agent.

The District’s claims auditing process is not well designed or functioning properly. No documentation existed to verify that 613 claims, paid by the District, were certified for payment by the claims auditor. Forty claims (totaling $157,560) were reviewed and it was found that the treasurer paid 28 of the claims totaling $133,211 before they were audited and approved by the claims auditor. Twenty travel reimbursements were also reviewed (totaling $8,918) and 19 of the claims ($8,599) did not have adequate approval documentation attached to the claims, as required.

Lastly, the District’s procurement policy did not require the use of an RFP process to procure professional services. The District did not solicit RFP’s when hiring four out of six providers for services totaling $449,497. Two of the four providers did not have a written contract or agreement with the District.

9


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding business office procedures, claims processing, and professional service providers.

District officials generally accepted the recommendations pertaining to certifications being retained on file, hiring a purchasing agent, travel and conference expenses, and contracts for professional service providers. They have agreed to initiate corrective action, if they have not already done so.

New York City Department of Education

Student Participation in the Supplemental Educational Services Program

2006-N-011

1st, 2nd, 11th, 12th Judicial District

Contract for Excellence

The NYC Department of Education (DOE) and the schools are offering the Supplemental Educational Services (SES) program in accordance with requirements, but can be more proactive and effective in promoting and encouraging enrollment.

SES are federally funded tutoring and remediation programs that are provided to students before or after school, or on weekends. The services are arranged by local schools and provided by specially approved contractors. The services must be offered to all eligible low-income students at schools where a significant portion of the student population is not meeting certain academic performance goals.

SES enrollment rates were analyzed and it was found that the rates varied considerably from school to school, ranging from 0 percent enrollment, to 99.8 percent. Three of the 45 schools had enrollment rates of at least 90 percent, while 15 of the schools had enrollment rates of 10 percent or less.

Additionally, some of the students enrolled in the program may not have been eligible, and $14.1 million was spent in providing tutoring and remediation programs for the potentially ineligible students.

12


recommendations

District officials agreed with the majority of the recommendations, however, they did disagree with 3 of the 12.

Officials disagreed with the recommendations pertaining to using NCLB funds to transport students to the program, the non-compliance with federal guidelines, and the requirement for the schools to provide the Office of Special Projects with the proper information.

District officials agreed with the recommendations pertaining to using less traditional forms of communication to promote SES, developing a system to formally evaluate the effectiveness of the program, having schools reach out to parents to discuss the program, as well as encourage those eligible to enroll their children. Additional recommendations which were agreed upon included strengthen overall communication among all parties involved in the SES program, revising the manual, and developing controls to prevent ineligible enrollments.

Niagara Falls


City School District


  Controls Over Employee Classification for the Period July 1, 2006 through June 30, 2007

2008M-089

8th Judicial District

Fiscally concerned

An attorney was improperly enrolled in the Employee Retirement System (ERS) during the 2006-07 fiscal year, because she was a contractor and not a valid public employee. The attorney was paid $42,827 in salary, and received $5,817 in health benefits. This attorney did not have a standard work day, hand in time sheets, and the District did not oversee any of her work. In fact, she works full-time from her own office at her father’s law firm.

2


recommendations

It is recommended that District officials formally notify ERS that prior District-related service credit for this attorney be removed from ERS, and that officials strengthen internal controls over the classification of workers.

District officials have indicated that they accept the recommendations and will correct the weaknesses identified in controls over the classification process, as well as make the corrections needed to legitimize the attorney’s employee status.

Pleasantville Union Free School District

Internal Controls Over the Claims Auditor Function

2008M-33

9th Judicial District

Thirty-three warrants were reviewed, and it was found that the claims auditor had not audited eight federal fund warrants for claims totaling $289,700. The District was missing 8 general fund warrants for claims totaling $3.2 million, and the claims auditor did not sign one general fund warrant for claims totaling $477,000. The District was missing warrants for claims totaling $672,700.

The claims auditor stated that she did not receive any written procedures or a written job description relating to her duties. The claims auditor also does not directly report to the board and does not consult with the board regarding concerns or questions about claims. The claims auditor is also a secretary in the middle school, and as part of her secretarial duties she was initiating, receiving, and signing for purchases, which created an environment where she audited her own work.

Furthermore, the claims auditor was not given a written job description nor the proper guidance to properly fulfill her job duties.

6


recommendations

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

District officials generally accepted the recommendations pertaining to warrants for both the federal and general fund, the claims auditor’s job description, the claims audit process, and proper documentation.

Pyramids


Child Development Center


  Compliance with the Reimbursable Cost Manual for the Fiscal Year Ended June 30, 2006

2007-S-91

4th Judicial District

$239,889


adjustment

There were material deficiencies in the Consolidated Fiscal Report (CFR) submitted by Pyramids. As a result, it is proposed that adjustments be made in the four educational programs reviewed, in order to reduce the total allowable costs by $239,889. These adjustments pertained to the executive director’s compensation and accruals for staff bonuses. Other adjustments included depreciation, amortization, accounting and legal fees, and penalties. Disallowances totaling $113,511 are proposed for the 9100 programs, $32,676 for the 9101 program, $20,255 for the 9135 program, and $73,447 for the 9160 program. These disallowances will likely cause the State Education Department (SED) to re-compute the tuition rates for these programs.

The Pyramids’ Board of Directors is also insufficiently independent. Four of the board’s five members had a direct relationship with the school. Three of the four members in question were employees of Pyramids.

8


recommendations

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

Three out of eight of the recommendations were addressed to SED, and pertained to making adjustments to the costs reported on Pyramids’ CFR, including recovering overpayments, assessing the ability of Pyramids’ officials and the CPA firm to prepare the CFR properly, and  requiring Pyramids to establish an independent board of directors. SED officials agreed with the three recommendations and indicated that they will take corrective action.

The other five recommendations were addressed to Pyramids to help improve controls over its CFR preparation and certain related financial and management practices. They did not specifically agree or disagree with the recommendations, and they disagreed with most of the proposed disallowances contained in the report. Officials did indicate, however, that they would seek to hire a qualified person to fill the position of controller to help ensure that Pyramids’ CFR complies with the manual.

Roosevelt Union Free School District

Third Quarter Report on the 2007-08 Adopted Budget for the Period July 1, 2007 through March 31, 2008

2008M-86

10th Judicial District

Fiscally stressed

The District adopted a 2007-08 general fund budget of $63.7 million. If the District maintains current revenue and expenditure trends, it could potentially have an operating surplus for 2007-08, of approximately $4.8 million.

The District could realize $2.35 million more in State aid than was originally estimated in the 2007-08 budget, and $850,000 more in other revenues compared to amounts originally budgeted. A deficit fund balance of $3.1 million would still remain on June 30, 2008.

Additionally, the infusion of the additional $14 million in State aid recently authorized by the State Legislature, will increase the District’s potential general fund operating surplus on June 30, 2008 from $4.8 million to $18.8 million.

Lastly, the school lunch fund shows a potential operating deficit of approximately $130,000 which would increase the existing accumulated deficit to $704,000 on June 30, 2008.

7


recommendations

District officials should maintain the same rate of spending and not commit resources for purposes not otherwise included in the adopted budget, closely review revenues budged from federal sources, and monitor special education appropriations. Additionally, officials should correct the imbalance in revenues and appropriations in the school lunch fund budget and present the corrected budget to the board. Revenues generated by the school lunch fund should be reviewed, an appropriation in the general fund budget should be established in order to subsidize the school lunch fund, as well as transfer general fund appropriations to the lunch fund.

South


Country Central School District

Budget Review

B7-8-7

10th Judicial District

Fiscally concerned

Almost $1.2 million in costs were not included in the budget or were underestimated, and $3.7 million in other costs were overestimated or over-budgeted. Debt principal repayments totaling $500,000 were excluded from the budget, health and dental benefit costs may be underestimated by about $390,000, and energy costs could be underestimated by approximately $300,000.

Additionally, estimates for the District’s contributions to the retirement systems were calculated using incorrect percentages, resulting in the District’s estimates being more than $1 million greater than what the District will be required to pay in 2008-09. Furthermore, personal service costs are likely over-budgeted by almost $2.7 million.

There were significant deficiencies in the District’s accounting system resulting in the unavailability of timely and accurate reports of the District’s financial status. District officials indicated that the reason records are not up-to-date is that the District has been in a period of transition following the resignation of the former District treasurer in 2007.

6


recommendations

It is recommended that the District adjust the tentative budget to include the issues mentioned.

The board should review the personal service costs in the 2008-09 budget, and revise the budget format to include actual revenues and expenditures for the last completed fiscal year, the current year to date, as well as the current fiscal year as amended to date.

Troy


Enlarged City School District

2008-09 Tentative Budget Plan

B5-8-15

3rd Judicial District

The significant revenue and expenditure projections in the 2008-09 tentative budget are reasonable. However, the tentative budget for 2008-09 included the appropriation of $6,125,000 of fund balance to help finance 2008-09 operations. After the appropriation of this amount of fund balance, the amount remaining would still result in an unreserved and unappropriated fund balance of $5.6 million. This amount exceeds the 4 percent statutory limit set for districts for the 2008-09 fiscal year by $1.9 million. Officials are facing the same legal limit issue in this year’s budget as with the 2007-08 budget, even though the statutory limit has been increased.

3


recommendations

It is recommended that District officials keep an amount of unreserved and unappropriated fund balance that complies with the legal limit, but that they do so in a fiscally responsible manner that does not jeopardize the District’s future financial stability. Officials should also monitor the District’s year end fund balance and develop plans for reserving fund balance that exceeds the 4 percent limitation. Officials could also consider reducing property taxes in a measured way to return some of the excess fund balance to residents.

Western New York


Maritime Charter School Internal Controls Over Selected Financial Activities

2007M-307

8th Judicial District

The board failed to establish adequate controls to ensure that School assets were properly safeguarded, and the lack of adequate monitoring of fingerprinting requirments resulted in the employment of an individual with a criminal record, the misappropriation of School funds, and the awarding of contracts to employees where it is unclear whether the Shool received value for the money spent. However, once the board was notified of the improprieties by their accounting firm, they terminated the employment of those who violated School policies, and referred the matter to law enforcement agencies.

Former School officials and employees took advantage of weaknesses in the internal control system, and manipulated the purchasing system. As a result, the School paid for goods and services totaling more than $95,000 that were either not delivered to the School, or were misappropriated after delivery.

Additionally, the board does not review the claims paid by the School, and has not established an independent claims audit function. Of 106 judgmentally selected claims totaling $296,601 that were paid between July 1, 2005 and August 28, 2007, there were deficiencies with 31 of the claims, totaling $122,381. The claims lacked proper approvals, supporting documentation, itemization of expenses, and/or indication that goods or services were received.

9


recommendations

The report’s recommendations focused primarily on strengthening the policies and procedures regarding board oversight, claims processing and related purchasing activities.

District officials generally accepted the recommendations regarding employee background checks, original invoices, purchase approval, employees as contractors, monitoring hiring practices, and ensuring that contracts are properly approved. The board has also agreed to adopt a comprehensive purchasing policy, appoint a claims auditor and adopt a claims audit policy.