March 2000

SED to Require Internal Audit Committee for School Boards

Committee Questions Independence, Society to Comment

The New York State Education Department announced last December that the Board of Regents proposes to adopt a regulation "to require that organizations encompassed within the University of the State of New York establish an audit committee as part of their governance structure." These organizations include all secondary and higher educational institutions, such as private and public schools, colleges, and universities, as well as libraries and museums. SED sent the announcement to various groups, including the NYSSCPA, for preliminary comments.

Under the proposed regulation, every school board and board of cooperative services (BOCES) and any educational institution that has a governing board of trustees or directors with annual total revenue exceeding $300,000 must establish an internal audit committee. This committee will consist of at least three individuals selected from the institution or school district's governing board and will be responsible for general oversight of the management of, and making recommendations and reports to the board on, the institution or district's financial affairs.

Society Committees Respond

Upon receipt of the initial proposal, Susan Barossi, chair of the NYSSCPA Government Accounting and Auditing Committee, invited SED to the committee's February 19 meeting, where SED Audit Manager Michael A. Abbott discussed the reasons behind the proposed regulations and provided examples of accounting errors discovered by SED in financial statements submitted by school boards and educational institutions. He said the regents drafted the proposal to address the state's concerns about the inadequacy of the financial oversight of the more than 4,000 SED-chartered entities.

Abbott presented details of the proposal and said that the audit committee also will recommend to the board the selection of an independent auditor if law or board policy requires an audit; review with management the results of the institution or school board's annual financial report or audit and the adequacy of its internal controls and report this review to the governing board; and inquire about significant risks or exposures, assess the steps taken by management to minimize such risks, and report such inquiry and assessment to the governing board.

Society committee members expressed concerns about the independence of an audit committee made up of members of the entity's governing body; the lack of basic accounting or auditing knowledge on the part of the committee; the low threshold for mandating an audit committee and the potential number of entities that exceed the threshold; and the absence of enforcement powers.

Abbott said that as of February 19, his unit had received more than 90 comments, the vast majority of which are negative. He reported that the biggest complaint is that the proposal is too cumbersome and prescriptive. In view of the large number of preliminary comments, the regents subcommittee on audits has instructed SED to establish an internal work group to further study the proposal.

"The regents subcommittee maintains that SED has the responsibility to provide guidance to educational institutions to help ensure that boards are providing adequate oversight and the institutions are accountable for the use of public funds," Abbot said. "The work group will continue to seek input from the various organizations, explore options to enhance accountability, and then make recommendations to the subcommittee to help boards of educational institutions provide the necessary oversight."

SED will review the preliminary comments and publish the proposed regulations in the State Register for public comment. Barossi's committee has appointed a subcommittee to respond. The Society's Public Schools Committee, chaired by Thomas Jay Lauffer, will meet with Abbott in early spring and has formed a similar subcommittee. *