Audit of Internal Financial Controls for School District Lists Multiple Problems

January 20, 2017

 

 

by Barbara O’Brien

Although the outside audit of the Windham School District for the year ending June 30, 2016, showed a “clean” finding in regard to the financial accounting, a review indicates that there are serious problems with the internal controls employed for the same period.

Sheryl Stephens Burke, one of the partners of the auditing firm of Melanson and Heath, met with school board members during their first meeting of the New Year.  Burke started out her presentation by saying there were “no issues” with the records for the 2015-2016 school year.  “The numbers were good,” she said, but then went on to say that there are many recommendations regarding the internal controls used by the prior administration.  “Some are more significant than others,” Burke added, noting that not all of the issues could be addressed at the same time.  The recommendations “are not intended to recreate the wheel,” she explained.  Burke also emphasized that some of the problems have already been addressed by the new administration, which began its duties the beginning of July.

Former administrators for SAU 95 include Interim Superintendent Tina McCoy and Business Administrator Adam Steel; both of whom left the district’s employment the end of this past June.  Current administrators include Superintendent Richard Langlois and Business Administrator William Hickey.  Kori Becht, who previously served as the school district’s curriculum, instruction and assessment director, is now the assistant superintendent.

The list of recommendations being made is lengthy and virtually covers the entire range of internal controls needing to be improved.  Areas scrutinized and for which changes are being recommended include the following:

The expansion of anti-fraud controls; the implementation of additional high level controls; the implementation of monthly financial reporting, including a list of line item transfers with explanations; adjustments to the general ledger; reports regarding expenditures for information technology; reduction of what was described as “an excessive” number of transfers between budgetary lines; improvement in the authorization process for expenditures; a lack of segregation of employee duties regarding financial transactions (identified as a “significant deficiency”); the need to create comprehensive job descriptions for those handling budgetary functions; and the prohibition of excessive use of district-issued credit cards ($183,000 charged to a dozen different credit cards); the elimination of approving purchases after the fact (identified as a “significant risk area”).

Other areas being scrutinized are the elimination of district funds being used for retirement parties and gifts; the elimination of district purchases being delivered to employee’s home addresses; the elimination of gift cards and iTunes cards, being paid for with district funds, but no accounting of what was purchased; the elimination of reimbursements and purchases without prior approval; the need for purchases through vendors to be done only by individuals not directly involved in projects, etc.; the need for centralized purchasing to better utilize district funds; implement segregation of duties pertaining to payroll to avoid possible fraud (one employee currently doing too many things); all cash receipts must involve acceptance by two people and be documented; multiple problems in accounting for student activity funds; improvement needed in accounting for grant money received; and the need for a detailed inventory and tracking system for fixed assets and equipment (under the prior administration was not accurate and not complete).

Burke explained that student activity funds often cause serious issues for organizations, due to insufficient accounting techniques.  A student activity fund is defined as money raised by students and used for student activities only.  Noting that student activity funds within the Windham School District are lacking in good internal reviews, Burke said, “It seemed to cause a bit of a nightmare.”  Burke particularly pointed out what are known as “principal’s accounts”; with one for each of the four schools in the district.  “This money should be used only for students; not for staff appreciation or gifts,” she commented; recommending that the accounts be “closed.”  “Student related is not teacher related,” Burke stated.

Burke recommended that accounting duties for student activity funds also be segregated and that ongoing training be provided to those involved in the management of these funds.  “If there is the perception that you’re being watched, it is less likely that things will go wrong,” Burke said.  There needs to be better control of cash, she said, with two people being on hand to document any receipts.  And, never allow a check to be written “to cash,” she urged.

Looking on the bright side, School Board Vice-Chairman Rob Breton said, “The good news is that the new administration is already addressing many of these issues.”

School board member Tom Murray said that rectifying the problems with internal controls is “extremely important to me.”  Murray agreed that an anti-fraud program, a whistle-blower policy and a risk management plan need to be implemented.  Assistant Superintendent Becht said these issues are top agenda items for the district policy committee.

Chairman Daniel-Popovici-Muller said he wants to see the responsibilities of the finance committee, a sub-committee of the school board, expanded.  Popovici-Muller pointed out that a finance committee is not the same as an elected budget committee.  “We don’t plan to have a budget committee, ever,” he said.

Noting that the school district had spent money to have its own accounting practices reviewed, school board member Ken Eyring said he didn’t want to see the auditor’s recommendations “fall through the cracks.”  Eyring said he had no problems with the current administration or the flow of information to the school board.  Eyring said he “was amazed by how quickly many of the issues were addressed by the new administration.”  Eyring recalled that he had asked for manifests to be supplied to the school board, even before taking office almost three years ago, so that board members could perform their fiduciary duties.  “Only since the new administration came on board has this been done,” Eyring said.  “We need to make sure the budget is spent as intended and as much as possible gets into the classroom” he said.  As for the recommended whistle-blower policy, Eyring said, “employees should never be afraid of losing their livelihood for telling the truth!”

Murray also questioned whether the reported cost per pupil in Windham is accurate; stating that he believes it is significantly higher than being stated, as some expenses are listed elsewhere in the budget “as other.”  “We all know there are a lot of gray areas in accounting,” Popovici-Muller commented.

Popovici-Muller spoke of the importance of segregating accounting duties.  “There must be cross-checking,” he said.

Murray added that he had expressed concern about “poor budgeting” last year, due to discrepancies.  Murray said there were approximately 800 fund balance transfers in just one year, totaling about $5.5 million.  The auditing review qualified this number of transfers as “inordinate.”  “There might not be another school district in New Hampshire, perhaps in the entire country, with a higher number of line item transfers,” Murray said.  “Transfers need to be approved at the school board level,” Murray said, to prevent this from happening in the future.

School board member Dennis Senibaldi was more conciliatory in his comments on the internal controls report.  “The previous administration used a different methodology, but I do believe they were budgeting properly,” Senibaldi said.  It’s not fair to keep saying that what was done previously was done poorly, Senibaldi stated, adding that he feels he needs to stand up for employees no longer with the school district.

During the public input session of the meeting, resident Cynthia Finn said she is concerned over the review.  “I’m not going to finger-point,” she said, “but we do need to learn from past practices.”  “School board members and school district employees all work for us,” Finn continued.  “They are stewards of our money!”  Finn also mentioned that there were school board members, as well as members of the public, who attempted to bring this issue to light for years, but, instead, were “mocked and disrespected by others.”  Finn said she was very grateful for the new administration and hoped that residents were paying close attention to these recent reports.

Resident Rich Amari spoke of the “red flags” that should have been paid attention to this past year and previously.  Amari also thanked Tom Murray for standing up and representing taxpayers even when he was being ridiculed by certain members of the community.

“It was a group effort,” Murray said.  “I don’t want to take all the credit.”

Amari urged the current school board to look into what took place in regard to accounting.  “I don’t want my kids exposed to people who aren’t on the up and up,” Amari said.

“The point of this exercise is to do better moving forward,” Senibaldi aid.  “The school board needs to digest this report and work with staff over the next few months. “  The district isn’t falling apart,” Senibaldi said.  “There are just ways to do things better.”  “The past is relevant to what we’re talking about,” Breton said.  “I don’t want to live in it, but we need to learn from it.  I want things to be cleaner than ever, moving forward.”

Popovici-Muller was quite outspoken in his reaction to the auditor’s report.  “The lack of control was unbelievable,” he said.  “The fact that people felt comfortable doing these things is a joke!”  Popovici-Muller said he did not intend to go after any one individual for possible infractions, but wanted, instead, to continue improving the use of best business practices.  “Changes need to be smart and permanent,” Popovici-Muller said.

“The past problems are not minor in my opinion,” Murray said, adding that he had serious concerns over tuition reimbursement for certain employees, as well as the method used for hiring outside contractors and issues surrounding the so-called ‘principal’s accounts.’”  “This is very troubling to me,” Murray said; questioning whether legal action should be taken against the “more egregious” actions.

Senibaldi said he didn’t want to dwell on past mistakes.  “You learn from them,” he said.  “I guarantee that the new administration, that this school board, will make mistakes moving forward,” Senibaldi said; suggesting that workshops be conducted on the most pressing issues involving accounting methods.

“If we don’t get these recommendations done immediately and permanently, we aren’t doing our fiduciary duty,” Murray said.  He also commended Eyring for his due diligence over the past three years, adding that it was Eyring’s idea to create a finance committee; one which subsequently recommended the internal controls audit.

“We can’t take these recommendations lightly,” Eyring said, adding that he feels the issues recently brought to light are “still embedded in the culture of this school district.”  “We need to acknowledge these issues to fix them and to have accountability,” Eyring said.  “We need to keep a laser focus!”

Near to the conclusion of the discussion, Superintendent Langlois said, “We’re not going to fix all these issues overnight.”  “There is no quick fix, but the issues have now been exposed and the wagon will keep rolling forward,” he said.  “While there are some things that have to be fixed immediately, the key is to do it right,” he stated.

Finance Committee Vice-Chairman Steve Bookless said he had questions about where all the money spent with credit cards had been used ($183,000).  If answers can’t be found, impropriety should be suspected, Bookless said.  If fraud is found, legal action should be taken, he urged.  “There needs to be accountability and consequences for anyone who violates policies,” he said.

A few days after the meeting, Ken Eyring spoke about his feelings on the need to improve internal controls.  “I have raised many concerns for years, regarding a lack of good accounting practices in the district, but previous administrations and school boards ignored my warnings,” Eyring said.  “This Internal Controls Report validates those concerns and reveals additional, more serious issues.  It’s important for Windham residents to read it themselves, to learn more about the many areas of risk that have been identified,” he said.

Go to www.sau95.org and click on the “WSD Internal Control Review” link on the lower left to view the report.

Moving forward, the school board and current administration will continue to work with the auditing firm, as well as David Jack, an outside consultant and former business administrator, to develop appropriate accounting policies.