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




    Lyndonville Central
      School District
Internal Controls Over Payroll


           Report of Examination
                   Period Covered:
            July 1, 2007 — March 6, 2009
                      2009M-79




              Thomas P. DiNapoli
                                Table of Contents



                                                                                Page

AUTHORITY LETTER                                                                 2


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


INTERNAL CONTROLS OVER PAYROLL                                                   5
            Recommendations                                                      8


APPENDIX    A   Response From District Officials                                  9
APPENDIX    B   Audit Methodology and Standards                                 13
APPENDIX    C   How to Obtain Additional Copies of the Report                   14
APPENDIX    D   Local Regional Office Listing                                    15




                       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

October 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 Lyndonville Central School District, entitled Internal Controls
Over Payroll. 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 Lyndonville Central School District (District) is located in the
                   Towns of Carlton, Gaines, Ridgeway and Yates in Orleans County.
                   The District is governed by the Board of Education (Board) which
                   comprises nine 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. The responsibility for the
                   District’s finances and accounting records rests primarily with the
                   Business Manager.

                   There are two schools in operation within the District, with
                   approximately 760 students and 130 employees. The District’s
                   budgeted expenditures for the 2007-08 fiscal year were $10.7 million,
                   which were funded primarily with State aid, real property taxes and
                   grants.

                   The District uses a “Summary of Benefits and Procedures” agreement
                   (benefit agreement) to set forth terms of employment for certain
                   full-time and part-time employee groups1 who are not covered by
                   collective bargaining agreements. There are 12 benefit agreements
                   and each class of employee has its own benefit agreement to
                   address the job expectations, compensation guidelines and fringe
                   benefits specific to each position. Each employee, along with a
                   District official, signs a separate “salary notice” which indicates the
                   employee’s compensation for the fiscal year.

Objective          The objective of our audit was to examine the District’s internal
                   controls over payroll. Our audit addressed the following related
                   question:

                       •   Are internal controls over payroll appropriately designed and
                           operating effectively to adequately safeguard District assets?

Scope and          We examined the District’s internal controls over payroll for the
Methodology        period July 1, 2007, to March 6, 2009.

                   We conducted our audit in accordance with generally accepted
                   government auditing standards (GAGAS). More information on

                   1
                    These employee groups include custodial, bus driver, teacher aides, teaching
                   assistants, school nurse, clerical and mechanic positions.

              DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                      3
                                                                                          3
                           such standards and the methodology used in performing this audit are
                           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. District officials
                           generally agreed with our recommendations and indicated that they
                           planned to initiate corrective action.

                           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
Internal Controls Over Payroll

     An effective system of internal control over payroll ensures that
     employees are properly compensated and provided the fringe benefits
     to which they are duly entitled. District officials have chosen to
     document the salary and fringe benefits and defined management
     expectations for non-union employees using salary notices and
     the “Summary of Benefits and Procedures” agreement (benefit
     agreement). It is therefore important that the Board ensure that benefit
     agreements clearly define the compensation guidelines and fringe
     benefits to which employees are duly entitled.

     Internal controls over payroll are not appropriately designed and
     operating effectively to adequately safeguard District assets. There are
     12 benefit agreements in place for non-union employees. However,
     the Board did not ensure that the agreements define the compensation
     guidelines and fringe benefits to which employees are entitled and the
     necessary documentation required to obtain certain fringe benefits.
     As a result, it is unclear if the provisions of the agreements convey
     the Board’s intentions for the positions covered, and employees may
     be receiving compensation to which they are not entitled. Further
     details are as follows:

     Payments in Lieu of Health Insurance — Eight benefit agreements
     for full-time employees include a provision that allows for payments
     in lieu of health insurance to employees who are eligible for health
     insurance coverage but elect not to participate in the District’s plan.
     According to the agreement, an employee is eligible for District
     health insurance if his or her spouse does not have family insurance
     through his or her place of employment. Although an employee must
     fill out an application to receive a payment in lieu of health insurance,
     the benefit agreements do not specify the information that must be
     provided. Due to this control weakness, we reviewed the applications
     filled out for seven employees who received payments in lieu of
     health insurance totaling $7,700 to determine if the applications
     included sufficient information to determine eligibility for payment.
     We found that the applications did not request, and the employees did
     not provide, information as to whether they had a spouse who had
     family insurance through his or her place of employment. As a result,
     District officials did not have sufficient information to determine
     eligibility for payment and these employees may have received
     payments to which they were not entitled.




DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                  5
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                    Bus Drivers — The benefit agreement covering full-time bus drivers
                    states that salary notices2 will be provided to each employee to indicate
                    the amount of compensation to be paid based on six hours per day for
                    regular driving assignments. This annual compensation is calculated
                    by multiplying the hourly rate by 186 days and is paid over 21 pay
                    periods. However, the benefit agreement lacks guidance on how to
                    compensate bus drivers when they work less than six hours per day,
                    or how to adjust their base pay when routes are added, changed or
                    cancelled. In addition, the benefit agreement does not address how to
                    calculate bus drivers’ leave time3 when the driver consistently works
                    less than a six-hour workday.

                    Due to these control weaknesses, we reviewed the time sheets for 11
                    bus drivers.4 We found that during the 2007-08 and 2008-09 fiscal
                    years, all nine of the full-time bus drivers worked less than the six
                    hours per day used to calculate their base pay. We also noted that one
                    part-time driver who was hired to work 4.5 hours per day, and was
                    compensated for 4.5 hours per day, actually worked an average of
                    1.35 hours per day during 2007-08, and an average of 1 hour per day
                    during 2008-09.

                    In addition, four full-time bus drivers received extra pay for bus
                    runs that occurred during their normal six-hour workday. As an
                    example, for the past 10 years, one bus driver has been compensated
                    at a rate of base pay plus 50 percent for a bus run during the normal
                    six-hour workday. This arrangement was documented in the driver’s
                    salary notice. However, as noted from the time sheets, this driver
                    only worked an average of five hours per day on the routes attributed
                    to the six hours per day used to calculate the base pay, and worked
                    only two hours per day for the extra 50 percent received. Further, in
                    October 2008, the Board approved paying two other bus drivers for
                    midday runs5 at their hourly rate in addition to their base pay, which
                    was based on a 6-hour workday. Adding these routes resulted in their
                    working an average of 5.98 and 6.31 hours per day during 2008-09
                    (through January 2009).

                    The head bus driver/head mechanic and senior payroll clerk were
                    aware that certain drivers were working less than six hours per day
                    on the routes that were used to calculate their base pay. However,
                    they did not alert the Business Manager of these occurrences because
                    they assumed that the salary notices were binding contracts that could
                    not be altered. We question why the Board would compensate bus

                    2
                      Salary notices are signed by the employee and the Business Manager.
                    3
                      Full-time bus driver leave time consists of 10 sick days, 3 personal days and 12
                    official District holidays that occur during the school year.
                    4
                      Three payroll periods were tested for each fiscal year.
                    5
                      These midday runs average 1.75 hours per day.

6   OFFICE OF THE NEW YORK STATE COMPTROLLER
     drivers for providing additional bus runs before the drivers fulfill their
     commitment to work six hours per day. Projecting the differences
     between the hourly rates paid based on time sheet hours and the hourly
     rates per the benefit agreements, we estimate that the District’s bus
     drivers were paid $48,000 and $49,000 for time not worked during
     the 2007-08 and 2008-09 fiscal years, respectively.

     We also reviewed monthly reports to the New York State and Local
     Retirement System (Retirement System) to determine the number of
     hours worked that were being reported for full-time bus drivers as
     service credit. We found that they were being reported as having
     worked six hours per day and reported our findings to the Retirement
     System. The Retirement System contacted the District to indicate that
     the employees have been reported incorrectly and must, therefore,
     have their accounts corrected retroactively back to their first date of
     employment.

     Physicians — The District has employed the same two physicians
     (father and son) for more than 10 years to perform school physicals
     and approve students to return to school or sports after an illness or
     injury. The physicians were not members of the Retirement System
     and did not receive any benefits from the District, such as health
     insurance. Although there was an annual salary notice that addressed
     compensation, it failed to describe the working hours or any other
     expectations for these positions, and there was no benefit agreement
     defining the compensation and fringe benefits to which they were
     entitled.

     In addition, the two physicians were paid equally on a biweekly basis
     to provide physician services. However, for at least the past seven
     years, only one of the physicians has been providing the majority of
     the services. For example, there were eight school visits during 2007-
     08, all of which were performed by the same physician, who also
     reviewed the doctors’ notes that were provided to him electronically.
     The Superintendent, Business Manager and Board members were
     aware that they were paying for two physicians even though only one
     was providing services and told us that the two physicians were priced
     as a unit. However, this is consistent with contracting for services
     from an independent contractor, rather than obtaining services from
     employees through the payroll process. District officials should
     make a specific determination as to whether physician services will
     be obtained from an independent contractor or from employees and
     follow the appropriate procedures to define expectations and provide
     compensation.




DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                   7
                                                                         7
Recommendations          1. The Board should ensure that benefit agreements clearly define the
                            compensation guidelines and fringe benefits to which employees
                            are entitled and the necessary documentation required to obtain
                            fringe benefits.

                         2. District officials should ensure that fringe benefits are provided to
                            employees only in strict accordance with the terms of the Board-
                            approved benefit agreements.

                         3. The Board should revise the benefit agreement for full-time bus
                            drivers to address the ambiguous language relative to required
                            work hours and compensation for other bus runs.

                         4. The Board should make a specific determination as to whether
                            physician services will be obtained from an independent
                            contractor or from employees through the payroll process. If
                            the Board chooses to obtain services from an independent
                            contractor, the Board should enter into a written contract to
                            outline the expectations and compensation to be paid, and pay
                            for these services through the accounts payable process. If the
                            Board chooses to obtain these services from employees, the
                            Board should ensure that benefit agreements are in place to define
                            the compensation guidelines and fringe benefits to which the
                            employees are entitled.




  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 pages. In addition, the
District’s response letter refers to page numbers that appeared in the draft report. The page numbers
may have changed during the formatting of this final report.




                          DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                9
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10   OFFICE OF THE NEW YORK STATE COMPTROLLER
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY   11
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12   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. We then decided upon the reported objective and scope by selecting for audit
those areas most at risk. We selected payroll for further audit testing.

We interviewed staff members and reviewed written policies to gain an understanding of the current
payroll procedures and of the duties of the school physicians. We reviewed Board minutes for resolutions
related to the approval of employee compensation, benefit agreements, and physician services. We
also reviewed all 12 non-negotiated “Summary of Benefits and Procedures” agreements to gain a
better understanding of the benefits provided to non-union employees and to determine if the terms of
these agreements were being complied with. We tested 27 payments made in lieu of health insurance
during 2007-08 to determine if the payments were in accordance with the agreements. We used salary
notices to determine rates of pay for 11 employees and time sheets, payroll records, and transportation
summary reports to compare hours paid to hours worked. Finally, we reviewed monthly reports to
the Retirement System to determine the number of hours worked that were reported as service credit.

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.




                           DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                   13
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                                           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/




  14        OFFICE OF THE NEW YORK STATE COMPTROLLER
                                                    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



                                  DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                            15
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