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					ALAN G. HEVESI                         STATE OF NEW YORK                                   MARK P. PATTISON
                                                                                         DEPUTY COMPTROLLER
 COMPTROLLER                    OFFICE OF THE STATE COMPTROLLER                DIVISION OF LOCAL GOVERNMENT SERVICE
                                            110 STATE STREET                            AND ECONOMIC DEVELOPMENT
                                         ALBANY, NEW YORK 12236                   Tel: (518) 474-4037 Fax: (518) 486-6479




                                                 April 26, 2005

   Mr. Paul Doyle, Superintendent
   And Members of the Board of Education of the
   Riverhead Central School District
   700 Osborne Avenue
   Riverhead, NY 11901-2996

   Report Number: S8-5-8

   Dear Mr. Doyle and Members of the Board of Education:

   One of the Office of the State Comptroller’s primary objectives is to identify areas where local governments
   and school districts can improve their operations and provide guidance and services that will assist local
   officials in making those improvements. Our goals are to develop and promote short-term and long-term
   strategies to enable and encourage local government and school district officials to reduce costs, improve
   service delivery and to account for and protect their entity’s assets.

   In accordance with these goals, we conducted an audit of 15 Long Island School Districts to determine
   whether School District officials have established appropriate internal controls over expenses incurred on
   behalf of School District managers and members of the Board of Education. Within the scope of this audit,
   we reviewed School District practices controlling expenses such as travel, conferences, meals, cell phones
   and credit cards. We included the Riverhead Central School District in our audit. The audit focused
   primarily on the period from July 1, 2002 through August 31, 2004.

   This report of examination letter summarizes our findings and recommendations specific to the Riverhead
   Central School District. We discussed the findings and recommendations with School District officials and
   considered their comments in preparing this report. The School District’s response is attached to this
   report in Appendix B. Since School District officials asked us to make a modification to our report, we
   have included additional information in Appendix C to show the change we made. At the completion of our
   audit of the 15 School Districts, we will prepare a global report that summarizes the significant issues we
   identified at all of the School Districts audited.
Summary of Findings

Our examination of the School District’s internal controls over administrative expenses disclosed weaknesses
in how officials structured and carried out the internal claims audit function and in how officials complied
with the Board of Education’s travel-related policies. In addition, we found a need for more policy
guidance from the Board of Education for some expenses. The Board of Education and managers have
opportunities to improve the School District’s control environment by updating and enforcing the existing
and recently approved policies over administrative expenses and by adopting a new policy to address
meals provided to employees at meetings. We identified the following areas needing improvement during
our audit period:

        The internal claims auditor, who worked as a principal clerk and records management officer for
        the School District, reported directly to the Assistant Superintendent for Business instead of the
        Board of Education. In addition, she told us that she did not review claims for appropriateness,
        nor did she refer otherwise questionable claims to the Board of Education. Instead, she forwarded
        questionable claims to the Treasurer and/or accounts payable clerk for resolution. Since these two
        individuals are involved in the cash disbursement process, they cannot provide the independent
        review of claims transactions necessary for good internal controls.

        The School District spent about $58,000 on 102 cellular telephones during our audit period. The
        Board of Education had not provided written policy guidance outlining which School District
        positions needed cellular telephones to conduct business, nor how they should use them until
        December 2004. Our examination disclosed that while some cellular telephones had minimal
        usage during our test months, others had significant overage charges because users exceeded their
        allotted minutes. In addition, the School District made only one attempt during our audit period to
        recoup funds from users who made personal calls.

        During our audit period, the School District expended more than $13,700 on travel and conference-
        related expenses for its managers and members of the Board of Education. While School District
        policies required the Superintendent to pre-approve conference attendance and officials to submit
        a standard voucher form detailing their expenses, managers did not always attach these forms to
        the claims paid by the School District. In addition, the Board of Education has not provided
        written guidance that outlines which expenses it will reimburse, or sets limits as to what it will pay.

        The School District paid about $9,800 in charges for two credit cards assigned to the Superintendent
        and Assistant Superintendent for Business during our audit period. The Board of Education had
        not adopted a written policy outlining how officials should use the credit cards. While officials
        attached supporting documentation to some credit card claims, the School District paid claims
        containing charges for things such as airfares, conference registration and flowers that did not have
        itemized receipts or invoices.




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        The School District expended about $13,630 for meals and refreshments at 79 meetings or events
        during our audit period. The Board of Education has not adopted a policy stipulating when it is
        appropriate to provide meals and refreshments at meetings.

School District officials have assessed internal controls over administrative expenses recently and have
implemented some new policies and procedures. For example, in December 2004, the School District
adopted a cellular telephone access and usage policy. In addition, the School District re-evaluated the
benefits and risks of School District credit cards and cancelled its general-purpose credit cards in October
2004. Additionally, to strengthen and redefine some of the functions in the business office, the School
District has given the responsibility of the bank reconciliations to the internal claims auditor instead of the
District Treasurer. Further, the School District has developed a purchase order form for providing meals
at meetings that tracks the purpose, number of people attended and funding source.

Background and Methodology

The Riverhead Central School District, located in Suffolk County, has approximately 4,800 students. To
accomplish its mission of educating students, the School District has seven educational buildings and a
workforce totaling about 900 employees as of December 2004. Its 2004-05 operating budget totals
about $82 million.

As part of our audit, we reviewed internal controls over administrative expenses. We obtained our
understanding of these internal controls by inquiry, observation, inspection of documents and records and
reviewing other audit reports. Our audit also included tests of the accounting records and supporting
documents that evidenced how School District officials authorized, incurred and paid administrative expenses
on behalf of managers and members of the Board of Education. In the Riverhead Central School District,
we defined “managers” to include the following positions that reported directly to the Superintendent and/
or Board of Education:

        Superintendent of Schools
        Assistant Superintendent for Instruction and Curriculum
        Assistant Superintendent for Business
        Assistant Superintendent for Personnel and Community Service
        Treasurer
        District Clerk

We also investigated taxpayer complaints that raised concerns falling within the scope and audit period of
this examination. We provided detailed conclusions about these complaints in Appendix A.




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We conducted our audit in accordance with Generally Accepted Government Auditing Standards. Such
standards require that we plan and conduct our audit to assess adequately those school district operations
within our audit scope. Further, those standards require that we understand the school district’s management
controls and compliance with those laws, rules and regulations that are relevant to the school district’s
operations included in our scope. An audit includes examining, on a test basis, evidence that supports the
transactions recorded in the accounting and operating records and applying such other auditing procedures,
as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for
our findings, conclusions and recommendations contained in this report.

Audit Results

The internal control system, which is established by management and implemented by School District
officials, is the integration of the activities, plans, attitudes, policies and efforts of the people of an organization
to provide reasonable assurance that the organization will achieve its objectives. A vital component in any
internal control system is the “tone at the top,” or the control environment. The foundation of any effective
control environment is competent managers with integrity that attentively monitor operations. Having a
good control environment helps ensure that all employees follow School District policies and procedures.

To establish the proper control environment, management must act with the highest ethical standards and
must adhere to the same rules and guidelines they expect all other staff to adhere to. Management must
show leadership in carefully safeguarding the public resources that are entrusted to them. To achieve these
goals, management must first establish clear policies and procedures that will govern operations, communicate
these broadly, and then ensure that all employees comply with these policies and procedures.

Inadequate Audit of Claims

School District officials presented us with a policy that outlines the internal claims auditor’s responsibilities.
Although the policy is not dated, officials told us that it has been in effect for a number of years. Among
other things, the policy specifies that the internal claims auditor is responsible for formally examining and
allowing or rejecting all claims against the School District. However, the internal claims auditor told us that
she did not review claims for appropriateness. In addition, while the School District’s organizational chart
shows the internal claims auditor reporting directly to the Board of Education, she worked as the principal
clerk and records management officer at the School District and the Assistant Superintendent for Business
was her direct supervisor. During our audit period, the internal claims auditor did not reject claims herself,
nor did she report questionable claims to the Board of Education. Instead, she forwarded questionable
claims to the Treasurer and/or accounts payable clerk for resolution. Since these two individuals are
involved in the cash disbursement process, they cannot provide the independent review of claims necessary
for good internal controls. Further, as demonstrated in our audit findings, some claims lacked the approval
forms and itemized receipts necessary to allow the internal claims auditor to determine that the goods and/
or services claimed were actual and necessary School District expenses.




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Conducting a proper audit of claims before the School District pays them is an integral part of any internal
control system. The internal claims auditor should conduct a deliberate and thorough review to determine
that proposed payments are valid, legal and represent necessary obligations incurred by authorized officials.
In addition, the internal claims auditor should determine that the School District, or its representatives,
actually received the goods and/or services described in the claims by viewing detailed receipts and written
statements from School District Officials to that effect. Another important factor in a good internal control
system is having the internal claims auditor report directly to the Board of Education instead of officials that
approve business transactions, purchase goods and/or services or account for financial transactions. If the
internal claims auditor reports directly to individuals with these duties, the function does not provide
independent oversight over those activities.

Additionally, when officials do not attach supporting documentation such as approval forms and original
invoices and receipts to the claims, the internal claims auditor cannot conduct proper audits of them. This
deficiency, combined with an internal claims auditor who reports directly to officials who authorize and
record business activities, greatly increases the risk that the School District will pay for inappropriate
administrative expenses.

Cellular Telephones

During our audit period, the Board of Education did not have a written policy outlining which School
District positions needed cellular telephones to conduct School District business, nor how they should use
them. The School District generally provided a telephone to the Superintendent, Assistant Superintendents,
director-level positions, athletic department employees, buildings and grounds staff, principals and certain
other full-time facilities and transportation employees. During our audit period, the School District spent
about $58,000 on 102 cellular telephones.

While the School District has elected to invest substantially in cellular technology over the past several
years, it may be able to cut its costs by reviewing usage and identifying other efficiencies. Our examination
of claims disclosed that three cellular telephones assigned to School District administrators had between
three and seven months where the telephones had no usage during the 13-month period tested. The
monthly cost of these telephones ranged between $43 and $68. In addition, during our audit period, the
School District paid significant overage fees on some cellular telephones. For example, in June 2004, the
cellular telephone bill had basic monthly service charges totaling $900 and telephone usage and overage
fees totaling another $896. Furthermore, during our audit period the School District made only one
attempt, in September 2003, to recoup funds from individuals for personal calls made on School District
cellular telephones. Although the School District received payments for personal calls from several employees
then, it did not continue the process during the remainder of our audit period.

We note that in December 2004, the School District adopted a cellular telephone policy that identifies
which positions require a cellular telephone and outlines a process for making repayments to the School
District for personal calls, if needed.




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Travel-related Expenses

The School District expended more than $13,700 on travel-related expenses for its managers and members
of the Board of Education during our audit period. We had the following observations:

    o Approval for Conference Attendance and Expense Voucher Forms - While the Board of Education
      has adopted written policies for conference attendance and expense reimbursements, School District
      officials did not always follow them. The Board’s policies require the Superintendent to pre-
      approve conference attendance and officials to use a standard voucher form that details their
      travel-related expenses. The policies also require School District officials to attach the forms to
      travel-related claims to obtain reimbursement. However, of the 85 travel-related claims that we
      tested, School District officials did not attach an expense voucher or conference approval form to
      27 claims.

        The failure to document the Superintendent’s approval of employees’ attendance at conferences
        and business meetings could result in a loss of control over travel-related expenses.

    o Lodging Costs - The Board of Education’s adopted policies do not specify which travel expenses
      the School District will reimburse, or set limits for what it will pay. Instead, the expense reimbursement
      policy compensates travelers for any actual and necessary travel-related costs incurred at
      conferences.

        Some local governments have opted to establish reasonable maximum per diem rates (i.e., daily
        rates established by the Internal Revenue Service for business travelers) for lodging that officials
        may not exceed, without approval, as a way to safeguard public funds. During our audit period,
        managers filed 12 claims that included overnight lodging while they traveled on School District
        business. The lodging costs paid by the School District in nine of these claims exceeded the
        Federal per diem reimbursement rates by amounts ranging from $2 to $78 per night. For example,
        the Superintendent stayed in Saratoga for a 2003 conference. While the Federal per diem rate in
        Saratoga at that time of year was $95 per night, the Superintendent stayed in a hotel room costing
        $173 per night.

School District Credit Cards

During our audit period, the Board of Education did not provide written policy guidance to officials on how
to use School District credit cards. The School District assigned two general-purpose credit cards to the
Superintendent and Assistant Superintendent for Business. Travel expenses incurred by managers and
members of the Board of Education comprised $3,044 of the $9,848 in charges to the credit cards during
our audit period.




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The School District’s expense reimbursement policy requires that officials submit a valid receipt for each
expense claimed. However, of 19 credit card claims tested, managers did not submit receipts on eight
claims for charges totaling $2,915. Charges such as plane tickets, conference registrations and flowers
lacked itemized receipts or invoices. The failure of School District managers to follow the Board of
Education’s policies can create an environment where it is acceptable for other employees not to follow
policies. In creating a proper control environment, it is crucial that senior managers adhere to the same
standards they expect other employees to follow.

School District officials informed us that they had re-evaluated the benefits and risks of general-purpose
credit cards and cancelled them in October 2004. Officials decided to retain the School District’s gas
credit cards and its credit card from a home improvement chain.

Meals and Refreshments at School District Meetings

The Board of Education has not adopted a written policy outlining when it is appropriate to provide meals
and refreshments to employees attending School District meetings. The School District expended about
$13,630 for meals and refreshments at 79 meetings or events during our audit period. However, contained
within these totals are meals and refreshments costing about $5,450 that the School District provided at 20
events held primarily for students or the public.

The School District provided meals and refreshments to employees attending meetings in two different
ways. The school lunch fund charged the general fund for about $7,975 in meals and refreshments that it
provided at 47 School District meetings or events. School lunch fund claims usually contained general
descriptions such as “Board of Education Special Meeting,” “Foreign Language” or “District Office Milk
Purchase,” along with dates and a list of the food and refreshments provided. However, the claims did not
provide information showing who attended the meetings, nor did they contain reasons why the attendees
needed food and refreshments to conduct School District business.

In addition to the meals provided by the school lunch fund, the School District also paid local vendors
$5,655 for meals and refreshments provided on 32 occasions. Unlike the claims paid to the school lunch
fund, 16 of the 32 vendors’ claims for such meals did not include any descriptions to show the purpose or
the number of people that attended the event or meeting. In addition, the School District paid two claims
that did not have receipts attached to them.

School District officials should be entitled to reimbursement of their actual and necessary expenses incurred
in the performance of their official duties. However, generally, the Board of Education should only consider
meals provided at meetings necessary when School District officials travel outside of their regular work
areas on official business for extended periods, or where events prevent them from taking time off during
mealtime for food consumption because of a pressing need to complete business. As the Board of Education
develops a written policy for meals and refreshments at School District meetings, it should require officials
to document who attended the meetings and how the meetings fit these conditions. In addition, the Board




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of Education should consider establishing maximum costs per attendee (e.g., rates established by the
Board of Education or the Internal Revenue Service for travelers) for meeting meals that officials could not
exceed, without approval, as a way to safeguard taxpayer funds.

In December 2004, the School District improved its purchase order form for meals provided from the
School Lunch Fund to include the number of people attending, purpose and funding source.

Recommendations

    1. The Board of Education should review and amend the duties of the internal claims auditor to
       ensure that she examines whether School District claims are appropriate before approving them.
       In addition, the Board should ensure that the internal claims auditor reports directly to it. The
       internal claims auditor should be an extension of the Board of Education and, therefore, independent
       of the individuals working in the business office.

    2. The Board of Education and its managers should monitor compliance with the recently adopted
       policy for cellular telephones and enforce the new provisions for seeking reimbursements from
       employees for personal usage. In addition, School District officials should perform a cost-benefit
       assessment of its cellular telephones to determine which positions needs telephones and the types
       of plans needed by each position. Further, the Board of Education should review and update its
       new policy periodically to meet the changing needs and priorities of the School District.

    3. The internal claims auditor should require that every claim contain enough supporting documentation
       (e.g., original itemized invoices or receipts, conference approval and voucher forms and explanations)
       to determine that it complies with School District policies, and that the amounts claimed represent
       actual and necessary School District expenses. The Board of Education should monitor whether
       School District officials comply with its policies.

    4. The Board of Education should either amend its existing travel-related policies or adopt a new
       written policy that details which travel-related expenses the School District will reimburse, and
       sets limits for how much it will pay. The Board should consider establishing reasonable maximum
       rates for lodging that officials could not exceed, without approval, to safeguard public funds.

    5. After considering legal requirements and policy considerations, the Board of Education should
       develop and adopt a written policy outlining when the School District may provide meals and
       refreshments to its employees at meetings and events. The policy should address who would
       approve such expenses and how School District officials would document the meetings’ attendees
       and business rationale. In addition, the Board should consider establishing maximum meal costs
       per attendee that officials could not exceed, without approval, as a way to safeguard taxpayer
       funds.




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It is your responsibility, as School District officials, to formulate a plan of action by assessing risks, designing
control procedures that address the identified risks in a cost effective way and determining how to address
deficiencies best. This plan of action should be available for public review in the office of the District Clerk
and the Office of the State Comptroller. See the attached document for additional information on filing a
corrective action plan. Our Office is available to assist you upon request. If you have any further questions,
please contact Associate Examiner Lori Coleman at 315-428-4192 or dcoleman@osc.state.ny.us

                                                     Sincerely,



                                                     Steven J. Hancox
                                                     Assistant Comptroller




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                                             APPENDIX A

                                    TAXPAYER COMPLAINTS


We reviewed the following complaints pertaining to the scope of our examination.

   1.
            a) We received a letter telling us, “The Assistant Superintendent for Business was paid on a
               line presented as her salary while awarding her additional salary on an additional line.”

               Audit Conclusion: Our examination reviewed the salary paid to the Assistant Superintendent
               for Business. The salary for the Assistant Superintendent for Business was charged to two
               separate appropriation accounts. However, the combined amount paid was equal to the
               amount contained in the Assistant Superintendent’s contract as approved by the Board of
               Education. We did not identify any extra salary payments to the Assistant Superintendent
               for Business above the amount approved by the Board of Education.

           b) The letter also told us, “This year our budget 2004-05 failed. The reduced budget, promising
              “bare bones” passed overwhelmingly. Immediately our two assistant superintendents’ pay
              was raised a total of $13,000 …”

               Audit Conclusion: Our examination determined that School District voters defeated the
               2004-05 budget on May 18, 2004. A revised budget was presented to School District
               voters and approved on June 15, 2004. On June 30, 2004, the two Assistant
               Superintendents salaries were increased by $6,474 and $6,064, respectively, or a total of
               $12,538. As part of our examination, we reviewed the salaries paid to senior School
               District officials, including the Assistant Superintendents. All salary amounts paid to School
               District managers were consistent with Board of Education approved contracts. Because
               there were sufficient appropriations available in the adopted budget to fund these salary
               increases, the Board of Education’s actions in this situation were legal.

           c) The letter also raised concerns about a $96,000 payment to a former Superintendent of
              Schools in addition to the departing Superintendent’s other entitlements.

               Audit Conclusion: On June 5, 2000, the former Superintendent of Schools submitted his
               letter of resignation, effective on June 30, 2000. The letter of resignation was contingent
               upon the terms and conditions of a settlement and general release agreement reached
               between the Superintendent and Board of Education. This agreement stipulated that the
               School District would pay $96,000 to the Superintendent as a full and complete settlement




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            and final satisfaction of his claim and any and all other claims which the Superintendent
            had, has or may have against the Board of Education and the School District. The
            Superintendent’s claim dealt with irreconcilable differences and disputes in regards to the
            working relationship between the Board of Education and the Superintendent of Schools.
            The settlement and general release agreement did not indicate how the two parties arrived
            at the $96,000 amount.

2. We received a letter that raised concerns that the principal at the Phillips Avenue Elementary
   School used $11,000 to refurbish her office without Board of Education approval.

    Audit Conclusion: We reviewed the School District’s files and records relating to the refurbishment
    of the principal’s office. According to an undated 2004-05 Capital Project budget request form
    submitted by the principal, she wanted to move the principal’s office to the music room for more
    space and better security. The total estimated cost of the project was $9,418. Based on the
    documentation reviewed, including the minutes of the proceedings of the Board of Education and
    other documents, we could not determine if this Capital Project budget request form was approved
    or denied.

   In September 2004, the Interim Facilities Operations Manager sent a memo to the Superintendent
   of Schools. In it, he indicated that the then Assistant Superintendent for Business instructed him in
   June 2004 to build a new office for the principal at Phillips Avenue Elementary School. Further,
   the Interim Facilities Operations Manager wrote, “At no point in time was he advised that the
   Board of Education, during the budget review, had told the principal and Assistant Superintendent
   for Business that the office project would not be done.”

   The office at Phillips Avenue Elementary School was refurbished and the cost associated with the
   renovation was $9,485 ($6,845.39 in supplies and materials & $2,954 in labor). Officials charged
   the purchased supplies and materials for the renovation to accounts maintained for the operation
   and maintenance of plant assets. In the 2004-05 budget documents, both the A1620 and A1621
   accounts had sufficient available appropriations to fund the cost of the principal’s office renovation
   project.

   According to the School District’s Purchasing Authority policy (6710), the Board of Education
   designates the School Business Manager as Purchasing Agent for the School District. Under the
   general supervision of the Superintendent of Schools, the Purchasing Agent is responsible for
   administering all purchasing activities made by the School District. The Purchasing Agent is authorized
   to issue purchase orders without prior approval of the Board when formal bidding procedures are
   not required by law and budget appropriations are adequate to cover such obligations. Because
   this project’s total cost was less than $20,000, it was not required to be formally bid. Also, as
   noted in the previous paragraph, there were sufficient budget appropriations to fund the project.




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    Based upon our review, the Assistant Superintendent for Business complied with School District
    policy when approving this project.

3. We received a letter from a taxpayer expressing concern that they had been unable to obtain
   information regarding the payout to the Superintendent who recently left the School District.

    Auditor Conclusion: As part of our review, we tested the vacation accruals of the former
    Superintendent of Schools. While the Superintendent received cash payments for unused vacation
    leave accruals, the amounts were consistent with Board of Education approved contract provisions.
    We did not identify any other payments made to the departing Superintendent.

4. We received a letter from a taxpayer that alleged that the School District leased a vehicle for the
   former Superintendent and that the Superintendent often used this vehicle for his own personal
   business.

    Audit Conclusion: According to the former Superintendent’s employment contract, the School
    District agreed to provide him with a leased vehicle for his official use. This agreement took effect
    July 24, 2001. We determined that, in July 2001, the School District provided the Superintendent
    with a 2001 Ford Expedition that it leased for his official use at a cost of $469 per month. The
    former Superintendent resigned from the School District on February 20, 2004 and officials
    terminated the lease agreement on March 31, 2004. When the leased vehicle was turned in, it had
    58,911 miles on it.

    School District officials told us that the Superintendent did not maintain a mileage records
    documenting his use of the vehicle. Accordingly, we could not determine what portion, if any, of
    the 58,911 miles were for the Superintendent’s personal use. During our audit period, we did not
    see any reimbursements from the Superintendent to the School District for the use of the vehicle.
    We note that the current Superintendent does not receive a School District vehicle.




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                                             APPENDIX B

                     RESPONSE FROM SCHOOL DISTRICT OFFICIALS



The school district officials’ response to this audit can be found on the following pages.




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                                            APPENDIX C

         OSC COMMENTS TO THE RIVERHEAD CENTRAL SCHOOL DISTRICT


In response to a comment in the School District’s response letter, we made the following modification to
our audit report:

Note 1

We removed the words “building and grounds” from the second paragraph of our finding on “Cellular
Telephones.”




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