More Improprieties Found in School Audits

More Improprieties Found in School Audits
A Report Uncovers Violations at a Second District

By Simon Eskow

Continued from the Home Page

The report cites instances over a two-year period of independence violations—such as posting transactions to the district’s accounting records, then auditing those same records—and failures to test for the possibility of fraud and evidence of weak internal controls, among other problems. The report compared these findings to those of an investigation of the Roslyn School District, another former client of the firm, although there were no allegations of fraud in the Manhasset report.

The report is part of a continuing investigation of school finances since allegations of fraud surfaced in the Roslyn School District in spring 2004. State investigations have spurred calls for audits of all state school districts, and a proposal of legislation to reform school district governance has been drafted by a coalition of state agencies and other groups, including the New York State Society of CPAs.

To date, the comptroller’s office has released reports on financial activities at five school districts, including the two arising from its investigation of Miller, Lily and Pearce, the now former auditor for 53 school districts. The firm is no longer in business.

More reports and investigations are certain, including, at least, a more extensive audit of Manhasset’s finances in the near future, officials said.

Observers held hope that the worst was over.

“I hope we don’t see any more Roslyns,” said Kevin McCoy, a member of the NYSSCPA’s Legislative Task Force. “I hope school finances are being conducted in the way they should be, in a manner that supports the function of providing education.”

McCoy, who will be a speaker at the NYSSCPA’s School District Auditing Conference in May, said there was no word on the progress of the bill drafted by a broad coalition of reformers and introduced in both houses of the state legislature. The bill would beef up school district governance and responsibility by requiring training for board members; requiring boards to establish audit committees; requiring schools to use a competitive bidding process to select audit firms; and generally requiring boards to become more involved in annual external audits.

“Hopefully, as a result of this legislation, the boards of the school districts will realize their responsibilities and take a more active role with their auditors,” McCoy said.

According to the Comptroller’s office, the Manhasset report stated that its firm failed to meet mandatory professional standards for conducting audits: 10 of the 22 standards for Manhasset’s 2002–2003 audit and nine of 22 for the 2003–2004 audit. The report also states that the firm sold financial software to the district, which created a conflict of interest and violated independence standards. According to the report, the firm also did not ensure that controls built into the software worked as designed; the controls were vulnerable to manipulation by many employees.

The report also found that the firm audited its own work, including 37 entries representing $130 million, and 68 adjustments totaling $7.4 million in a two-year period. Additionally, the firm did not look at cancelled checks, nor investigate the lack of supporting documentation for purchases as a potential weakness. The firm failed to investigate transactions where the district exceeded budgeted amounts or executed year-end adjustments.

According to the report, president of the Manhasset Board of Education Thomas J. Maimone wrote to the Comptroller in response to the investigation. “Your examination disclosed the poor quality of services, known only to (the firm), that the District received from its external audits,” Maimone wrote. “We consider the District fortunate that your examination did not reveal a pattern of ongoing fraud which the external auditors failed to detect. We attribute that to the integrity and underlying honesty of our staff.”

According to New York Newsday, William Petrillo, attorney for one of the firm’s partners, defended the firm’s work. “The firm’s long-held reputation for professionalism and integrity remains well deserved,” he said.