School Boards Don’t Need State Oversight

By Patrick J. Manley and Robert J. Manley

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New York State Comptroller Alan Hevesi has stated that school districts should be audited more frequently by state and external auditors. In his book Out of Crisis, Edwards Deming explained how inspection will not improve a faulty system. To change the weak and ineffective systems of board oversight of financial practices in school districts, school boards need a clear method of audit control. Most school boards lack the financial reporting skills to establish clear and appropriate procedures for an audit committee.

Improving Board Practices

In a study of school board financial practices in New York State conducted by Carol Eisenberg of Dowling College, less than 40% of trustees agreed that their boards matched planned expenditures against revenues on a monthly basis or asked questions about the monthly district treasurer’s report. Only 42% of board members agreed that they examined fund balances at least twice each year, and only 46% reported that they asked for justifications of a transfer of appropriations. H.S. Grace, in The CPA Journal (March 2002), stated: “The board with and through its audit committee must accept the ultimate responsibility for the quality and integrity of the risk and control environment.” Most boards report that they do not consistently practice the financial procedures that fiduciary experts would require.

How can school boards ensure the financial integrity of the school district? First, each school board should have a policy that establishes a board audit committee composed of two board members, an internal auditor appointed by the board, the district treasurer, and the business official. Their duties should be to verify annually that the checks and balances within the financial system are operating as described in the board’s policy. Board policy should provide answers to the following questions:

• Is the person who approves a purchase order different from the one who pays it?
• Do all vendor checks appear on the warrants and receive board approval?
• Are all nonpayroll checks written to senior executives reviewed by the audit committee and approved by the board?
• Is there an annual audit procedure for all payroll checks?
• Is there an annual audit procedure for inventory?
• Are two independent signatures required for authorizing all checks before the treasurer signs them?
• Does the board have a procedure to project costs for all contracts before approval?

In order for audit committees to perform adequately, members must share expertise in accounting, internal controls, audits, and financial reporting. John Biggs, former president of TIAA-CREF, noted in the Journal of Financial Practice and Education that the entire financial reporting process is fragile and relies upon the integrity of all parties. To function properly, most school boards will need training in some basic tasks. School boards should establish internal audit committees to guide the financial integrity of the district. School boards should also examine their policies and practices regarding financial reporting. Checks and balances within the financial system should be examined annually, and external auditing firms should be required by board policy to conduct a public evaluation as part of the normal annual audit.

Direction and Guidance

School boards don’t need the state comptroller to do their work; they need to have clear direction and guidance about their financial duties. The external auditors that make considerable money from school districts should be required in their contracts to train boards and their audit committees in their financial duties. New York State school boards don’t need another layer of costly bureaucracy applied to their overly burdened work. They need their own professional and external auditors to do a better job educating them and guiding them to achieve sound financial practices.