Conference Sets a Bold Tone for School District Auditing
Proposed Legislation and Its Impact Examined

By Jay Dismukes

ALBANY—Regulators, CPAs and school officials came together last month during a first-of-a-kind conference designed to impart best practices and ideas—from a proposed five-point plan on internal controls to increased skepticism by outside auditors—that could help prevent the types of financial scandals that have occurred in the Long Island school system.

During the School District Auditing Conference on May 4 in Albany, nearly a dozen professionals scrutinized the relationship school boards and management traditionally have had with their auditors, talked about the importance of financial education, and identified key risk areas, all in an effort to produce better school audits and safeguard taxpayer money.

How We Got Here

The need for the Foundation for Accounting Education conference became apparent in the wake of the ongoing audit investigation by the New York State Comptroller’s Office into the financial management and transactions of more than 20 Long Island school districts. At the heart of the investigation has been the accounting scandal that took place in the Roslyn School District in which $11.2 million is believed to have been stolen; 29 individuals have been implicated, including several school officials who have been arrested and charged with theft or misuse of funds; and the outside auditing firm allegedly violated numerous mandatory professional standards.

As a result, Comptroller Alan Hevesi and a coalition of officials, legislators and organizations, including the New York State Society of CPAs, in January proposed a five-point plan designed to strengthen internal controls in school districts. The plan calls for requiring training of school board members in their financial oversight responsibilities, establishing an internal audit function in school districts, creating audit committees, mandating competitive bids when schools engage outside auditors, and involving school boards more closely in the auditing process and in maintaining internal controls. To date, state legislators have submitted two bills that draw heavily from these recommendations. According to several individuals familiar with the legislation, prospects for passage look good.

“Hopefully, this education will come up with some of the deficiencies we think are out there,” said speaker and NYSSCPA Legislative Task Force member Kevin McCoy, on the proposed legislation. “This will increase their (school boards’) knowledge, and we, as auditors, can feel more comfortable that they know what we are talking about.”

McCoy, managing director for Marvin and Company, P.C., pointed out that some school boards will even be surprised to learn that outside auditors don’t prepare their district’s financial statements.

McCoy touched on certain aspects of the five-point plan, noting that a qualified professional who can make an annual risk assessment will be the best candidate for the internal audit function—not a responsibility, he said, that should be left to a junior accountant. This function will require that audit committees, which oversee the internal auditor, also understand risk. During McCoy’s presentation, conference cochair Marilyn A. Pendergast remarked that if public school clients want an internal control audit, they will need to understand that these audits can take as long as a financial statement audit.

McCoy also emphasized the significance of a school board–developed corrective action plan that addresses the conditions and findings detailed in the audit report or management letter.

The Brass Tacks

During the conference approximately 120 attendees learned of some of the more extraordinary findings to have emerged from the investigation into Roslyn’s finances.

According to Assistant Comptroller Steven J. Hancox, the investigation alleges that there were five school-funded trips taken to Las Vegas and two trips to New Orleans for a total of $50,000; $600,000 in grocery bills; 69 computers purchased for personal use; reimbursements for dry cleaning, long distance calls, personal trainers and rental facilities; and disguised payments to American Express and Nations for $1.5 million and $720,000, respectively.

Hancox said much of the theft occurred through personal credit cards and lax methods for paying the district’s bills. In different instances, checks were not authorized, claims reviewed lacked essential documentation, personal items were charged to maintenance accounts, and vendor payments actually went toward credit cards and loans, he said. The comptroller’s office estimates that nearly 20 people had access to the district’s computer system, allowing them to change transactions. The school board, he said, had little authority over management and didn’t know how to implement financial oversight.

Hancox also said Roslyn’s audit firm failed to live up to its professional obligations and lacked independence, at one point allegedly serving as the district’s business manager.

During his presentation, Hancox urged the auditors attending the conference to take more initiative when they have any doubts or concerns and to try to take a “forest-for-the-trees” approach to the audit.

“As a profession, we are more concerned about how to do something rather than determining whether it should be done,” Hancox said.

In particular, Hancox said, public school auditors must give greater consideration to a district’s computer systems and individuals who have access to it and always bear in mind the possibility of management override of internal controls. He called on the auditors to fully embrace the concepts in fraud standard SAS 99, although he acknowledged that there is a significant cost factor involved.

“We should not consider this as insulting to management—it’s our job,” he said. “Thinking about how management can override the system must be part of the audit.”

What the Experts Say

In the second half of the conference Allan Blum, a partner with Loeb and Troper, discussed the makings of an effective internal control structure. He noted that more than one individual needs to be involved in the process and access to a treasurer’s signature must be limited.

“If you have someone checking transactions, the likelihood of potential fraud or defalcation should be reduced. The mindset of the fraudster should change,” said speaker David M. Rottkamp, a partner at Loeb & Troper, who gave a presentation on the internal audit provision of the five-point plan.

For this function to be successful, Rottkamp said, school district management will have to let the internal auditor do his job, allowing a direct line of communication between him and the treasurer and the audit committee, which will need to identify the most significant risk areas to focus on.

During this part of the presentation, several audience members wanted to know how this function would be funded. Rottkamp noted that cost-effective options included outsourcing, hiring a part-time professional, or even having districts share their internal auditor with other districts. A representative from the comptroller’s office also observed that an internal auditor may also be able to identify cost savings previously unknown.

And in one of the last presentations of the day, Julie Floch, partner and director at Eisner LLP, led a panel that shared their views on ethics.

“You can’t take for granted that people have the level of honesty and integrity that you expect,” said Canandaigua Board of Education member Caroline Shipley. “One issue with the school districts is the closeness of the people and the development of strong friendships. You have to develop the courage to look past those friendships.”

Conference cochair Brian A. Caswell said he is a big believer in ethics education, especially for young accounting staff that need to be familiar with rather complex independence rules. As a simple rule of thumb, he remarked that one way of determining sound ethics is to ask, “If I do this, would my Mom think it’s okay?”

Cochair Pendergast added that it’s fine to place trust in others, just be sure to always verify what they’ve said.