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					OFFICE   OF THE   NEW YORK STATE COMPTROLLER
                  D IVISION OF LOCAL GOVERNMENT
                      & SCHOOL ACCOUNTABILITY




         Lisbon
 Central School District
    Internal Controls Over
     Financial Operations
           Report of Examination
                   Period Covered:
            July 1, 2007 — March 31, 2009
                      2009M-197




               Thomas P. DiNapoli
                                Table of Contents



                                                                                Page

AUTHORITY LETTER                                                                 2


INTRODUCTION                                                                     3
           Background                                                            3
           Objective                                                             3
           Scope and Methodology                                                 4
           Comments of District Officials and Corrective Action                   4


FINANCIAL OPERATIONS                                                             5
            Recommendations                                                      7


APPENDIX    A   Response From District Officials                                  9
APPENDIX    B   Audit Methodology and Standards                                 11
APPENDIX    C   How to Obtain Additional Copies of the Report                   13
APPENDIX    D   Local Regional Office Listing                                    14




                       DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY          1
                                                                                       1
                                                 State of New York
                                    Office of the State Comptroller


Division of Local Government
and School Accountability

November 2009

Dear School District Officials:

A top priority of the Office of the State Comptroller is to help school district officials manage their
districts efficiently and effectively and, by so doing, provide accountability for tax dollars spent to
support district operations. The Comptroller oversees the fiscal affairs of districts statewide, as well
as districts’ compliance with relevant statutes and observance of good business practices. This fiscal
oversight is accomplished, in part, through our audits, which identify opportunities for improving
district operations and Board of Education governance. Audits also can identify strategies to reduce
district costs and to strengthen controls intended to safeguard district assets.

Following is a report of our audit of the Lisbon Central School District, entitled Internal Controls
Over Financial Operations. This audit was conducted pursuant to Article V, Section 1 of the State
Constitution and the State Comptroller’s authority as set forth in Article 3 of the General Municipal
Law.

This audit’s results and recommendations are resources for district officials to use in effectively
managing operations and in meeting the expectations of their constituents. If you have questions about
this report, please feel free to contact the local regional office for your county, as listed at the end of
this report.

Respectfully submitted,


Office of the State Comptroller
Division of Local Government
and School Accountability




   2         OFFICE OF THE NEW YORK STATE COMPTROLLER
                          Introduction
Background        The Lisbon Central School District (District) is located in the
                  Towns of Lisbon, Madrid, Waddington and the City of Ogdensburg
                  in St. Lawrence County. The District is governed by the Board of
                  Education (Board) which comprises seven elected members. The
                  Board is responsible for the general management and control of the
                  District’s financial and educational affairs. The Superintendent of
                  Schools (Superintendent) is the chief executive officer of the District
                  and is responsible, along with other administrative staff, for the day-
                  to-day management of the District under the direction of the Board.

                  There is one school in operation within the District, with
                  approximately 590 students and 134 employees. The District’s
                  budgeted expenditures for the 2008-09 fiscal year were $10.5 million,
                  which were funded primarily with State aid, real property taxes, and
                  grants.

                  The District has two full-time employees in the Business Office.
                  The Business Manager/Treasurer is responsible for the day-to-day
                  operations of the Business Office. She prepares and monitors budgets
                  for the District, records cash receipts, prepares deposit slips and
                  deposits checks and cash, prepares bank reconciliations, prepares
                  monthly Treasurer Reports and other budget and financial reports
                  when requested by the Board, and supervises the accounts payable
                  clerk. In addition to these duties, she performs all aspects of the
                  payroll process including adding new employees and adjusting
                  employees’ pay rates or salaries.

                  The accounts payable clerk is responsible for preparing purchase
                  orders upon receiving approved requisitions, processing the accounts
                  payable claims, and acting as the central receiving person. In addition,
                  she signs the accounts payable checks using a signature stamp
                  machine with the Treasurer’s signature. Both the Business Manager/
                  Treasurer and the accounts payable clerk have full access to all of the
                  District’s computerized accounting functions.

Objective         The objective of our audit was to determine if internal controls
                  over selected financial operations were appropriately designed and
                  operating effectively. Our audit addressed the following related
                  question:

                     •   Have District officials established adequate internal controls
                         over Business Office financial operations to ensure that
                         District assets are properly safeguarded?

             DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                  3
                                                                                     3
Scope and                  Our overall goal was to assess the adequacy of the internal controls
Methodology                put in place by officials to safeguard District assets. To accomplish
                           this, we performed an initial assessment of the internal controls so
                           that we could design our audit to focus on those areas most at risk.
                           Our initial assessment included evaluations of the following areas:
                           financial oversight, cash receipts and disbursements, purchasing,
                           payroll and personal services and information technology. Based on
                           that evaluation, we determined that controls appeared to be adequate
                           and limited risk existed in most of the financial areas we reviewed.
                           We determined that risk existed in the cash receipts and disbursements
                           areas and, therefore, we examined policies and procedures over
                           Business Office financial operations for the period July 1, 2007 to
                           March 31, 2009.

                           We conducted our audit in accordance with generally accepted
                           government auditing standards (GAGAS). More information on
                           such standards and the methodology used in performing this audit is
                           included in Appendix B of this report.

Comments of District       The results of our audit and recommendations have been discussed
Officials and Corrective    with District officials and their comments, which appear in Appendix
Action                     A, have been considered in preparing this report.

                           The Board has the responsibility to initiate corrective action.
                           Pursuant to Section 35 of the General Municipal Law, Section 2116-
                           a (3)(c) of the Education Law, and Section 170.12 of the Regulations
                           of the Commissioner of Education, a written corrective action plan
                           (CAP) that addresses the findings and recommendations in this report
                           must be prepared and provided to our office within 90 days, with a
                           copy forwarded to the Commissioner of Education.. To the extent
                           practicable, implementation of the CAP must begin by the end of
                           the next fiscal year. For more information on preparing and filing
                           your CAP, please refer to our brochure, Responding to an OSC Audit
                           Report, which you received with the draft audit report. The Board
                           should make the CAP available for public review in the District
                           Clerk’s office.




  4        OFFICE OF THE NEW YORK STATE COMPTROLLER
      Financial Operations

     District officials are responsible for establishing an internal control
     system that provides reasonable assurance that cash and other
     resources are safeguarded and accounted for, and that financial
     transactions are authorized and properly recorded. District
     management is responsible for implementing the Board’s control
     directives by designing and documenting appropriate operating
     policies, practices and procedures and properly delineating employee
     responsibilities. Such policies and procedures include providing
     for the adequate segregation of financial duties and ensuring that
     cash receipts are properly recorded and disbursements are properly
     authorized. Identifying incompatible duties and implementing
     policies to separate those duties can also be addressed through the use
     of access controls to the District’s computerized accounting system;
     for example, only allowing one person the ability to enter and adjust
     vendor information. If it is not practical to adequately segregate
     duties, District officials should institute compensating controls
     such as independent review of the accounting records by someone
     who is not involved in key transactions. Another important control
     includes the Treasurer’s control and supervision over the use of her
     facsimile signature. Once adequate internal controls are in place,
     District officials should monitor them periodically to ensure they are
     operating effectively.

     District officials have not segregated financial duties related to
     the payroll and cash receipt functions for the Business Manager/
     Treasurer. Additionally, the Business Manager/Treasurer has not
     adequately controlled access to and use of her signature. Finally,
     District officials have not implemented access controls to their
     computerized accounting system to ensure that individuals only have
     access to those applications that are needed to perform their duties. As
     a result, there is an increased risk that District funds could be used for
     other than District purposes.

     Segregation of Duties – An effective system of internal controls
     requires the proper distribution of duties so that the same
     individual does not perform incompatible functions. A proper
     division of responsibility ensures that the work of one employee is
     independently checked in the course of another employee’s regular
     duties. Additionally, the reconciliation of bank account balances to
     general ledger cash balances is an essential control activity. When
     done effectively, this process provides for the timely identification
     and documentation of differences between District and bank records.
     Without accurate and complete bank reconciliations, performed and

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                   5
                                                                         5
                    reviewed by an individual independent of the cash custody and record
                    keeping functions, District officials cannot have a reasonable level
                    of assurance that the accounting records are correct or that monies
                    are accounted for properly. Because the District has only two full-
                    time employees handling its business operations, it may not always be
                    possible to segregate duties optimally. If the duties of receiving cash
                    or making disbursements, recordkeeping and authorizing transactions
                    cannot be separated, District officials should put compensating
                    controls in place.

                       •   Payroll – Payroll duties are not adequately segregated because
                           the Business Manager/Treasurer performed all aspects of
                           the process including adding new employees, adjusting
                           employees pay rates or salaries and signing payroll checks.
                           Additionally, she makes electronic wire transfers between
                           District bank accounts, prepares general journal entries, and
                           prepares the payroll account bank reconciliations. These
                           duties are incompatible when performed by one individual.
                           District officials did not institute compensating controls to
                           alleviate the risk posed by the Business Manager/Treasurer’s
                           incompatible duties, such as having someone other than her
                           receive and review bank statements and canceled checks;
                           review her bank reconciliations; or review the payroll change
                           logs. Although the Superintendent certified payrolls, the lack
                           of compensating controls could allow the Business Manager/
                           Treasurer to write a payroll check to herself after the payroll
                           had been certified and go undetected.

                       •   Cash Receipts – Cash receipt duties are not properly
                           segregated. The Business Manager/Treasurer records cash
                           receipts, prepares deposit slips, deposits checks and cash, and
                           also prepares bank reconciliations, without any oversight.
                           These duties are not compatible when performed by one
                           individual.

                    Treasurer’s Signature – The Treasurer plays a critical role in the cash
                    disbursement process as the District official responsible for signing
                    checks. The Treasurer must ensure that her signature is not used to
                    make payments that have not been approved. The Business Manager,
                    as Treasurer, does not adequately supervise and control the use of
                    her facsimile signature used to sign accounts payable checks. The
                    accounts payable clerk applies the Treasurer’s signature to accounts
                    payable checks. This procedure does not allow the Treasurer to
                    adequately control the signature process, nor does it allow her to
                    verify the accuracy and consistency of the printed accounts payable
                    checks. We found that after the claims auditor approves the claims,
                    the Business Manager/Treasurer reviews them for budgetary

6   OFFICE OF THE NEW YORK STATE COMPTROLLER
                       implications. The Business Manager/Treasurer then gives the claims
                       to the accounts payable clerk who applies the Treasurer’s signature
                       to the checks. There is no comparison of signed checks to warrants
                       or claims by someone independent of the accounts payable function.
                       At the conclusion of our fieldwork, District officials informed us that
                       the District is going to stop using the signature machine. Instead, the
                       Treasurer will hand sign checks.

                       Accounting Access Controls – District officials have not
                       implemented adequate access controls for their computerized
                       accounting system to ensure proper segregation of duties. The
                       Business Manager/Treasurer and the accounts payable clerk have
                       access to all accounting functions within the computerized system.
                       Access should be limited to only those functions needed to perform
                       their regular duties. Having access to all the accounting functions
                       could allow these individuals to perform an improper transaction that
                       might not be detected.

                       To address the risks associated with the lack of segregation of duties
                       in the payroll and cash receipt functions, and the lack of controls
                       over the signature process and access to the accounting system,
                       we reviewed all bank account transactions for November 2007 and
                       November 2008. We reviewed 104 cash receipt transactions, totaling
                       approximately $3.7 million, during the two-month period to ensure
                       that they were supported and recorded. We reviewed 907 cash
                       disbursements, totaling approximately $3.6 million, to ensure that
                       the transactions were reasonable, supported, authorized, followed the
                       proper claim process, and were appropriate District expenditures. We
                       also reviewed the payroll records for the Business Manager/Treasurer
                       and the accounts payable clerk for the two-month period to ensure
                       that their salaries were paid at Board-approved rates and that the
                       withholdings were calculated correctly.

                       Although no exceptions were identified, the failure of District
                       officials to implement necessary controls over the lack of segregation
                       of duties, the use of the check-signing machine and access to the
                       computerized accounting system significantly increases the risk that
                       funds could be misappropriated and the loss or theft would not be
                       detected and corrected.

Recommendations        1. District officials should ensure that the duties and responsibilities
                          over the payroll and cash receipt processes are properly
                          segregated. If it is not practical to segregate duties, other
                          compensating controls should be established such as having
                          someone independent of those processes review the work of staff
                          and review exception/change reports and audit logs from the
                          computerized accounting system.

                  DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                 7
                                                                                         7
                    2. The Treasurer should maintain control of her facsimile signature
                       and supervise the signature process for all District cash
                       disbursements.

                    3. District officials should ensure that access rights to the
                       computerized accounting system are assigned to users based on
                       their job descriptions and responsibilities.




8   OFFICE OF THE NEW YORK STATE COMPTROLLER
                                          APPENDIX A

                      RESPONSE FROM DISTRICT OFFICIALS

The District officials’ response to this audit can be found on the following page.




                          DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY    9
                                                                                    9
10   OFFICE OF THE NEW YORK STATE COMPTROLLER
                                          APPENDIX B

                     AUDIT METHODOLOGY AND STANDARDS

Our overall goal was to assess the adequacy of the internal controls put in place by officials to
safeguard District assets. To accomplish this, we performed an initial assessment of the internal
controls so that we could design our audit to focus on those areas most at risk. Our initial assessment
included evaluations of the following areas: financial oversight, cash receipts and disbursements,
purchasing, payroll and personal services and information technology.

During the initial assessment, we interviewed appropriate District officials, performed limited tests
of transactions and reviewed pertinent documents, such as District policies and procedures manuals,
Board minutes, and financial records and reports. In addition, we obtained information directly from
the computerized financial databases and then analyzed it electronically using computer-assisted
techniques. This approach provided us with additional information about the District’s financial
transactions as recorded in its databases. Further, we reviewed the District’s internal controls and
procedures over the computerized financial databases to help ensure that the information produced by
such systems was reliable.

After reviewing the information gathered during our initial assessment, we determined where
weaknesses existed, and evaluated those weaknesses for the risk of potential fraud, theft and/
or professional misconduct. Based on that evaluation, we determined that controls appeared to be
adequate, and limited risk existed in most of the areas we reviewed. We then decided on the reported
objectives and scope by selecting for audit those areas most at risk. We selected the payroll, cash
receipts and accounts payable processes, control over the Treasurer’s signature and accounting system
access rights for further audit testing.

Due to the lack of segregation of duties, coupled with poor controls over access to the accounting
system and the use of the Treasurer’s signature, we focused our testing on bank statement activity for
all of the bank accounts, including general fund, school lunch fund, Federal fund, trust and agency
fund and payroll. We reviewed the bank statements for all accounts for November 2007 and November
2008 for any suspicious activity. We interviewed District staff involved in the cash receipt and
disbursement process. We examined the following records to determine the effectiveness of internal
controls pertaining to the payroll, cash receipts and accounts payable functions and the controls over
the Treasurer’s signature and to identify any associated effect of deficiencies found in those controls:

   •   Employee payroll files (W-4s, due schedules, and voluntary payroll reductions (tax shelter
       annuity))

   •   Collective bargaining agreements and individual employment contracts

   •   Payroll registers and employee earnings records generated from the District’s financial
       software system

   •   Board minutes

   •   Approved pre-warrant lists

                          DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                 11
                                                                                                 11
   •   Detailed general ledger account for cash

   •   Electronic cash disbursement and payroll files

   •   November 2008 and 2007 bank statements and canceled checks

   •   Contracts with vendors

   •   Supporting documentation for various claims (invoices and packing slips)

   •   Supplemental schedules (salary schedules and bidding) presented at Board meetings

   •   Treasurer’s report for November 2008 and 2007

   •   Journal entries

   •   Cash receipts and cash disbursements journals

We also reviewed user rights and access permissions to the payroll module of the financial system for
our audit period to determine if the assigned user rights and access were appropriate. We interviewed
employees in the District’s Information Technology Department and the District Business Office
concerning the administrative rights to the financial system.

We conducted this performance audit in accordance with generally accepted government auditing
standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objective.




  12        OFFICE OF THE NEW YORK STATE COMPTROLLER
                                           APPENDIX C

           HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT


To obtain copies of this report, write or visit our web page:




                                    Office of the State Comptroller
                                    Public Information Office
                                    110 State Street, 15th Floor
                                    Albany, New York 12236
                                    (518) 474-4015
                                    http://www.osc.state.ny.us/localgov/




                           DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY   13
                                                                                    13
                                                    APPENDIX D
                             OFFICE OF THE STATE COMPTROLLER
                              DIVISION OF LOCAL GOVERNMENT
                               AND SCHOOL ACCOUNTABILITY
                                            Steven J. Hancox, Deputy Comptroller
                                            John C. Traylor, Assistant Comptroller

                                      LOCAL REGIONAL OFFICE LISTING
BUFFALO REGIONAL OFFICE                                      GLENS FALLS REGIONAL OFFICE
Robert Meller, Chief Examiner                                Karl Smoczynski, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
295 Main Street, Suite 1032                                  One Broad Street Plaza
Buffalo, New York 14203-2510                                 Glens Falls, New York 12801-4396
(716) 847-3647 Fax (716) 847-3643                            (518) 793-0057 Fax (518) 793-5797
Email: Muni-Buffalo@osc.state.ny.us                          Email: Muni-GlensFalls@osc.state.ny.us

Serving: Allegany, Cattaraugus, Chautauqua, Erie,            Serving: Clinton, Essex, Franklin, Fulton, Hamilton,
Genesee, Niagara, Orleans, Wyoming counties                  Montgomery, Rensselaer, Saratoga, Warren, Washington
                                                             counties

ROCHESTER REGIONAL OFFICE                                    ALBANY REGIONAL OFFICE
Edward V. Grant, Jr., Chief Examiner                         Kenneth Madej, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
The Powers Building                                          22 Computer Drive West
16 West Main Street – Suite 522                              Albany, New York 12205-1695
Rochester, New York 14614-1608                               (518) 438-0093 Fax (518) 438-0367
(585) 454-2460 Fax (585) 454-3545                            Email: Muni-Albany@osc.state.ny.us
Email: Muni-Rochester@osc.state.ny.us
                                                             Serving: Albany, Columbia, Dutchess, Greene,
Serving: Cayuga, Chemung, Livingston, Monroe,                Schenectady, Ulster counties
Ontario, Schuyler, Seneca, Steuben, Wayne, Yates
counties

SYRACUSE REGIONAL OFFICE                                     HAUPPAUGE REGIONAL OFFICE
Eugene A. Camp, Chief Examiner                               Jeffrey P. Leonard, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
State Office Building, Room 409                               NYS Office Building, Room 3A10
333 E. Washington Street                                     Veterans Memorial Highway
Syracuse, New York 13202-1428                                Hauppauge, New York 11788-5533
(315) 428-4192 Fax (315) 426-2119                            (631) 952-6534 Fax (631) 952-6530
Email: Muni-Syracuse@osc.state.ny.us                         Email: Muni-Hauppauge@osc.state.ny.us

Serving: Herkimer, Jefferson, Lewis, Madison,                Serving: Nassau, Suffolk counties
Oneida, Onondaga, Oswego, St. Lawrence counties

BINGHAMTON REGIONAL OFFICE
Patrick Carbone, Chief Examiner                              NEWBURGH REGIONAL OFFICE
Office of the State Comptroller                               Christopher Ellis, Chief Examiner
State Office Building, Room 1702                              Office of the State Comptroller
44 Hawley Street                                             33 Airport Center Drive, Suite 103
Binghamton, New York 13901-4417                              New Windsor, New York 12553-4725
(607) 721-8306 Fax (607) 721-8313                            (845) 567-0858 Fax (845) 567-0080
Email: Muni-Binghamton@osc.state.ny.us                       Email: Muni-Newburgh@osc.state.ny.us

Serving: Broome, Chenango, Cortland, Delaware,               Serving: Orange, Putnam, Rockland, Westchester
Otsego, Schoharie, Sullivan, Tioga, Tompkins                 counties
counties



  14            OFFICE OF THE NEW YORK STATE COMPTROLLER