Interview with New York State Comptroller Alan Hevesi
Robert H. Colson
CPA Journal Editor-in-Chief Robert Colson discussed
issues surrounding the recent problems in school districts
on Long Island with New York State Comptroller Alan Hevesi.
Hevesi became New York State Comptroller in 2002, after two
terms as Comptroller of New York City, beginning in 1993.
Before that, he spent 22 years in the New York State Assembly.
He lives in Queens. Comptroller Hevesi’s office has
initiated a number of steps to more effectively monitor management
of school districts throughout New York State. More information
about the Comptroller’s Office and his school district
initiatives can be found at www.osc.state.ny.us.
CPA Journal: Please explain your view
of the problems in the Roslyn and William Floyd school districts
that have caused such public concern.
Alan Hevesi: Let me focus on the big picture
and the background for the problems. There are 701 school
districts in New York State, and 127 of them are in Nassau
and Suffolk counties on Long Island. About 20 years ago,
the Comptroller’s Office made a strategic judgment
that it would focus its scarce audit resources on the state
agencies and the approximately 1,600 local governmental
units. Explicit in this decision, made because of insufficient
capacity to cover all audit needs, was the outcome that
school districts would no longer be audited by the Comptroller’s
Office. Over the past 20 years, by the way, the audit resources
in the Comptroller’s Office have declined by about
one-half as a result of continuously tighter state budgets.
Does this mean that there has been no state supervision
of school districts for the past 20 years?
Hevesi: Not at all. Part of the rationale
for the Comptroller’s Office to no longer audit school
districts was that school districts are directly supervised
by the New York State Education Department (SED). In addition,
by requirement of law, every school district is required
to have an audit by an independent certified public accountant.
There is no other state agency that supervises the state
agencies and governments, nor is there an independent audit
requirement for them. It made sense to focus our attention
What happened in the case of the Long
Island school districts? Were there audit failures?
Hevesi: The SED has labored under the same
budget constraints as the Comptroller’s Office, and
has not established its own audit program for school districts.
Now, we have also learned the bitter lesson that independent
audits of financial statements are fairly narrow in scope
and do not necessarily address issues of critical importance
to government and the public trust. I’m talking about
such things as fraud, internal control, mismanagement, misconduct,
and compliance with budgets. While financial statement audits
may provide information for outsiders to evaluate the creditworthiness
of the school district, their focus does not make them a
substitute for the fundamentals of making sure that money
intended for educational purposes is expended appropriately.
What is the status of your office’s
involvement in the Long Island cases?
Hevesi: In the case of the Roslyn school district,
where there are allegations of criminal behavior in the
misuse of $8 million, the district attorney has asked us
to conduct a complete investigation of the situation. We
have an 18-member team there now conducting an in-depth
investigation of the fiscal affairs of the district. On
the other hand, we are not at this time pursuing a similar
investigation in the William Floyd school district, because
the district attorney there is concerned about the integrity
of a possible criminal investigation.
Does the Comptroller’s Office
have its own investigations group?
Hevesi: We do have our own investigations
division, which has recently been reorganized and expanded.
The head of the division is an experienced former New York
City prosecutor. The division currently is investigating
18 cases involving potential criminal offenses in local
government, which were identified either by our local government
audit process or from tips by whistle-blowers.
Should the Comptroller’s Office
be conducting audits of school districts?
Hevesi: Yes, we should. I have asked the legislature
for $5.4 million annually to support a corps of 89 auditors
dedicated to audits of school districts. This request would
translate into $2.9 million this year because it is almost
half over. With such a corps, the Comptroller would be able
to audit each school district at least once every five years,
but the intent would be to create a more flexible audit
approach that would trigger audits and follow-up audits
on a more frequent basis in districts with problems. Such
an audit corps would place school districts on an audit
schedule similar to towns, villages, and counties. When
you think about it, $5.4 million is a very reasonable expenditure
to avoid $8 million losses.
What was your immediate response to the problems on Long
Hevesi: I announced early in August that the
Lawrence, Manhasset, and Hempstead school districts in Nassau
County and the Brentwood school district in Suffolk County
would be the subjects of in-depth audits performed by my
office. I also announced a fifth audit to examine administrative
expenses in at least 15 other districts, including East
Meadow, Locust Valley, North Shore, Plainedge, Syosset,
and Westbury in Nassau County and Three Village, Central
Islip, and Wyandanch in Suffolk County. We have also established
a process to select other school districts for such audits.
How do you select districts for such
Hevesi: In some cases, we have knowledge of
management problems in certain districts from past experience.
We also receive a large number of tips from whistleblowers.
Currently, 65 whistle-blowers have told us about 140 different
events in 32 school districts. Just because someone blows
a whistle on a school district does not make anything factual
or true, but the public is concerned about how their dollars
for education are being spent, and when members of the public
suspect mismanagement, misconduct, or fraud, we frequently
hear about it. These tips are leads for us to follow and
What has been the effect on the public of the
school district problems?
Hevesi: School districts and their budgets
are fundamentally part of the public process. School board
members are elected officials, and budgets are voted on
by the citizenry. Citizens expect that money budgeted for
educating children actually is expended for that purpose.
I have been impressed by the public response on Long Island.
This is the first time that I have seen the announcement
of a pending audit make front-page newspaper headlines.
It’s not uncommon for the announcement of the Comptroller’s
audit findings of some fiscal scandal to appear in the newspaper,
but in this case the announcement that audits will occur
is not only in the newspaper but in front-page headlines.
I would say that the public is keenly interested in the
fiscal responsibility of their school districts.
Is the problem related only to
the narrowness of financial statement audits? Are better
and more audits the only solution needed?
Hevesi: The problem is broader than what can
be addressed in audits. Even the most detailed audit is
not necessarily a foolproof protection against fraud, mismanagement,
and other types of misconduct. Audits and appropriate state
supervision are necessary, but the best protection against
the types of problems that arose on Long Island is effective
internal controls. The Comptroller’s Office is organizing
an extensive training program for school board members,
school officials, superintendents, and independent auditors
to help establish and maintain the proper fiscal culture
in school districts.
What does the training program include?
Hevesi: The program has the following components:
We are working cooperatively with the New York State School
Boards Association (NYSSBA), Council of School Superintendents
(NYSCOSS), and Association of School Business Officials
(NYSASBO). The Office of the State Comptroller (OSC) will
participate with them in up to 20 hands-on training seminars
during the 2004–2005 school year. OSC staff will
deliver training on internal controls, fraud prevention
and detection, and auditing standards.
OSC will cosponsor a special seminar at the NYSCOSS state
meeting in Saratoga Springs on September 21. I will deliver
a keynote address on ethics and accountability.
OSC will cosponsor a conference, “Preserving the
Public’s Trust,” with the Nassau-Suffolk School
Board Association, the Nassau County Council of School
Superintendents, and the Suffolk County School Superintendents
Association on Long Island on October 5. I will speak
on governance and accountability.
OSC will air statewide a public teleconference for school
and superintendents, “Leadership and Accountability:
Preventative Medicine for Fraud,” on October 26.
A panel of experts in preventing and detecting fraud will
join me in a panel discussion.
OSC is also updating its training manuals and reference
guides for school business officials and is developing
“sensible practices” for school superintendents
and school board members.
Are you considering any changes to the regulatory
requirements for school districts?
Hevesi: Yes, we are. OSC is meeting with the
SED to review existing regulations regarding independent
audits. In addition, a working group composed of staff from
SED, NYSCOSS, NYSSBA, NYSASBO, and the NYSSCPA is meeting
under the OSC’s leadership to develop specific recommendations
for strengthening auditing, training, and financial oversight
by school district officials and their boards. Some of the
areas we are discussing include:
Enhanced standards for financial statement audits;
Expanded internal control auditing and training by OSC
Creating school district audit committees;
Selection and rotation of audit firms;
Mandatory and recommended financial training for school
Ethics and disclosure standards.
What are your concerns about the selection and rotation
of audit firms?
Hevesi: A difficult logistical problem arises
because of the small number of audit firms that engage in
school district audits. A periodic change in the auditor
provides a fresh look at the situation and reduces the potential
for the development of overly close and friendly relationships
that could create a conflict of interest. Some CPA firms
are large enough to rotate the audit partner periodically,
which is very helpful. Other CPA firms, on the other hand,
are just not large enough to provide alternative audit partners.
In such cases, audit firm rotation should occur on a periodic
basis. We’re looking at the auditor selection process,
too, in order to make sure it is as objective and independent
as possible and that school districts are not choosing auditors
solely on the basis of quoted fees without carefully considering
the work plan associated with the fees.
Are you concerned that there are similar
problems of corruption and mismanagement in other units
of state government?
Hevesi: Our office has continuously audited
and supervised state agencies, town, villages, and counties.
I feel confident that these supervised entities are in much
better shape than the school districts, which have been
left unsupervised. The program I outlined earlier focuses
on the OSC, in cooperation with the SED, supervising school
districts much more closely.
Does your audit authority also extend
to state authorities?
Hevesi: Yes, it does. We have focused attention
on them much more closely since I took office in 2002, because
of the problems in the authorities caused by inadequate
supervision. Authorities have been called the “secret
government.” Not because we do not know about them:
They are critical for our daily lives and have a very positive
impact on them. But they are secretive, preferring not to
disclose their affairs in the way that we expect governmental
agencies to do. Nor are they subject to the same transparency
requirements as the state government. Essentially, our experience
indicates that unsupervised entities have more problems
with corruption, fraud, misconduct, and management than
do supervised entities. Supervision, monitoring, and auditing
are keys to healthy governmental units.
What are you doing about the state authorities?
Hevesi: We’re trying to get our hands
around the problem and to establish the same fundamental
accountability and monitoring as we have in other areas.
a little background on the state authorities: The first
was established in 1921. In 1956, the state government decided
there were too many authorities, and a commission was appointed
to study the problem. Upon the commission’s recommendation,
the legislature eliminated 20 authorities—seven that
were already out of business and 13 that should have been
out of business—to bring the total number of authorities
to 33. Just after I took office in 2002, we decided to enumerate
all the authorities created by the state. We initiated a
survey and were astonished when we found 642 authorities.
When we published our survey, we continued to receive leads
about authorities we had missed. We’re pretty certain
now that we have just about all of them identified, and
that number exceeds 700.
MTA [Metropolitan Transportation Authority] is a good example
of our recent activity related to authorities. The MTA suffered
from very difficult corruption issues and management problems.
Our office performed an in-depth investigation and worked
out a plan of action with the MTA. The MTA adopted the plan
and cleaned up its act. They made the necessary reforms
to their governance, management, and fiscal procedures.
The OSC issued new regulations on budgetary and administration
processes for them. We plan to issue these regulations more
widely in the near future.
What are the statutory responsibilities of the Comptroller?
Hevesi: The New York State Comptroller has
a very broad set of responsibilities. Let me enumerate them
Audit authority for any expenditure of state funds or
funds that should be received by the state. This authority
extends to private-sector organizations as well as governmental
Contract officer for New York State. The state enters
about 44,000 contracts every year. The Comptroller reviews
them all and has veto authority over them. If you recall,
I exercised that veto in a somewhat controversial situation
involving the sale of development rights along the Erie
Canal. My predecessor had approved a contract subject
to the information available at the time. When we reviewed
the contract at a later date, much of the information
submitted by the Canal Authority to support the contract
was false. Consequently, I vetoed the contract.
Budget review and analysis. The OSC analyzes the state
budget and the budgets of state governmental units, and
exercises review authority over them.
Sole trustee of the New York State Pension Fund. Our state
pension fund involves more than 964,000 individuals and
$100 billion in investments. It is the second-largest
pension fund in the country. The Comptroller is the sole
trustee of the fund.
How large is the OSC staff?
Hevesi: We have about 2,400 staff members,
mostly professionals and their support staffs. They all
help me fulfill the constitutional and statutory obligations
of the Comptroller. We have responsibility for the budgets,
contracts, and audits of state government, state agencies,
1,600 towns, villages, and counties, 701 school districts,
and over 700 authorities and for the retirement savings
of more than 964,000 individuals in the state retirement
system. I am hoping that number soon increases by 89 newly
When we were discussing auditor selection
and rotation you seemed to have another thought on your
mind. Was there something else you wanted to add about independent
Hevesi: I was thinking of the settlement that
the state pension fund has just won in the case of the Raytheon
Corporation. Raytheon paid a settlement of $410 million
and its auditors paid a settlement of $50 million. Raytheon
filed a false report with the SEC, which the audit firm
signed off on three days before signing a consulting contract
with Raytheon. Raytheon paid the audit firm $4 million for
the audit, and the consulting contract was for $103 million.
I cannot help but draw a connection between the two events.
In Enron, Andersen received $25 million for the audit and
$26 million for consulting. Of course, Andersen is now out
of business. I was thinking about the loss to America when
CPA firms fail to constrain themselves ethically. Rotation
of auditors is one way for the public to intervene to remove
the temptation to trade good, professional audits for the
money from consulting business.
H. Colson, PhD, CPA, is Editor-in-Chief of The