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Document Sample
OFFICE OF THE NEW YORK STATE COMPTROLLER
D IVISION OF LOCAL GOVERNMENT
& SCHOOL ACCOUNTABILITY
Maine-Endwell
Central School District
Internal Controls Over Selected
Financial Activities
Report of Examination
Period Covered:
July 1, 2007 — December 11, 2008
2009M-120
Thomas P. DiNapoli
Table of Contents
Page
AUTHORITY LETTER 2
EXECUTIVE SUMMARY 3
INTRODUCTION 5
Background 5
Objective 5
Scope and Methodology 6
Comments of District Officials and Corrective Action 6
FINANCIAL REPORTING 7
Accrued Liabilities 8
Compensated Absences Payable 8
Unemployment Insurance Reserve 9
Employee Benefit Accrued Liability Reserve 10
Recommendations 11
TREASURER’S DUTIES 13
Cash Receipts 13
Cash Disbursements 15
Recommendations 16
CLAIMS AUDITOR 17
Recommendations 18
RETIREE HEALTH INSURANCE 19
Recommendation 20
COMPUTERIZED DATA AND ASSETS 21
District-wide Security Plan 21
Disaster Recovery Plan 22
Recommendations 22
APPENDIX A Response From District Officials 23
APPENDIX B Audit Methodology and Standards 28
APPENDIX C How to Obtain Additional Copies of the Report 32
APPENDIX D Local Regional Office Listing 33
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 Maine-Endwell Central School District, entitled Internal
Control Over Selected Financial Activities. 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
State of New York
Office of the State Comptroller
EXECUTIVE SUMMARY
The Maine-Endwell Central School District (District) is located in the Towns of Maine, Nanticoke,
Union, Newark Valley, and Owego, in Broome and Tioga Counties. 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.
Each year it is the Board’s responsibility to present to the public audited financial statements that
present fairly the financial position and results of financial operations of the District’s funds and
accounting groups. The District contracts with a certified public accounting (CPA) firm to annually
audit their financial statements and to assist with filing the District’s annual report.
Scope and Objective
The objective of our audit was to examine the internal controls over selected financial operations
including information technology for the period July 1, 2007 to December 11, 2008. Our audit addressed
the following related questions:
• Did District officials properly account for and report financial information and use the
unemployment insurance reserve and the employee benefit accrued liability reserve (EBALR)
for appropriate purposes?
• Did District officials design appropriate internal controls over the District’s treasury function?
• Did the Board appoint a claims auditor in accordance with New York State Education
Department (SED) regulations?
• Did District officials design adequate internal controls over retiree health insurance payments?
• Did District officials provide for adequate protection of the District’s information technology
system?
Audit Results
Our audit identified nearly $6.7 million in funds that have been tied up due to accounting errors or
in unnecessary reserves that the District could use to benefit the taxpayers. For example, we found
that District officials made incorrect adjustments to the District’s accounting records at the end of the
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 3
3
year resulting in the Board and administrators believing that they had approximately $1.6 million of
unreserved fund balance in the general fund at June 30, 2008 when, in fact, they had over $5.3 million.
These adjustments were proposed by District officials and reviewed by the District’s external auditor.
The District also had a balance of nearly $1 million in the unemployment insurance reserve which
was sufficient to pay for the District’s average unemployment claims1 for over 100 years, and District
officials did not use the unemployment insurance reserve or their employee benefit accrued liability
reserve (EBALR), with a balance of almost $2 million, to pay for appropriate reserve expenditures.
We also found instances where the Board had not established critical controls, or controls that
had been established were not implemented or operating effectively. As a result the District
is vulnerable to errors and/or improprieties occurring and not being detected. For example, the
Treasurer’s duties were not sufficiently segregated in relation to the cash receipt function and there
was a lack of controls over the Treasurer’s computerized signature and manual checks. As a result of
these control weaknesses, there is an increased risk that the Treasurer or the Deputy Treasurer could
misappropriate District funds without detection by District officials. Furthermore, it would be difficult
to identify the responsible person if there were any misappropriations.
We also found that the Board appointed a claims auditor who was also involved in the purchasing
process. The claims auditor initiated 430 requisitions totaling $292,000 which she also approved as
claims auditor. While we did not find any discrepancies, there is an increased risk that inappropriate
purchases could be made by having the claims auditor involved in the purchasing process.
We also found that the District expended a total of $37,000 to pay health insurance premiums for two
retirees after they were deceased. After we brought this to the attention of District officials, the two
individuals were removed from the District’s health insurance policy. The health insurance carrier
credited the District with 100 percent of their overpayments.
The Board and District officials did not establish adequate policies and procedures to effectively
safeguard the District’s computer systems and data. They did not develop a formal disaster recovery
and District-wide security plan. Without a well-developed, written, District-wide security plan, areas
that could be at risk may have been overlooked, and the policies and procedures that were put into
place to control risk may not be effective. Finally, the lack of a disaster recovery plan could lead to the
loss of important financial data and serious interruptions to District operations.
Comments of District Officials
The results of our audit and recommendations have been discussed with District officials and their
comments, which appear in Appendix A, have been considered in preparing this report. District
officials generally agreed with our recommendations and indicated they planned to initiate corrective
action.
1
Based on the past six and a half years of actual expenditures
4 OFFICE OF THE NEW YORK STATE COMPTROLLER
Introduction
Background The Maine-Endwell Central School District (District) is located in the
Towns of Maine, Nanticoke, Union, Newark Valley, and Owego, in
Broome and Tioga Counties. 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 are four schools in operation within the District, with
approximately 2,650 students and 540 employees. The District’s
general fund expenditures for the 2007-08 fiscal year were $41
million, which were funded primarily with State aid, real property
taxes, and grants.
Each year it is the Board’s responsibility to present to the public
audited financial statements that present fairly the financial position
and results of the District’s financial operations. The District contracts
with a certified public accounting (CPA) firm to annually audit their
financial statements and to assist with filing the District’s annual
report.
The District’s Information Technology (IT) Department consists of an
IT Director and several IT staff. The IT Department is responsible for
managing the District’s computerized data and assets and overseeing
the District’s network.
Objective The objective of our audit was to examine the internal controls over
selected financial operations and information technology. Our audit
addressed the following related questions:
• Did District officials properly account for and report financial
information and use the unemployment insurance reserve and
the employee benefit accrued liability reserve (EBALR) for
appropriate purposes?
• Did District officials design appropriate internal controls over
the District’s treasury function?
• Did the Board appoint a claims auditor in accordance with
New York State Education Department (SED) regulations?
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 5
5
• Did District officials design adequate internal controls over
retiree health insurance payments?
• Did District officials provide for adequate protection of the
District’s information technology system?
Scope and We examined the District’s internal controls over selected financial
Methodology activities and information technology for the period July 1,
2007 to December 11, 2008. Our audit disclosed areas in need of
improvement concerning information technology controls. Because
of the sensitivity of this information, certain vulnerabilities are not
discussed in this report but have been communicated to District
officials so they could take corrective action.
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 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 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.
6 OFFICE OF THE NEW YORK STATE COMPTROLLER
Financial Reporting
A school district’s financial reports must present fairly the financial
position and results of financial operations of all funds and
accounting groups in conformity with generally accepted accounting
principles. Unreserved, unappropriated general fund balance is a
key indicator of a school district’s financial position. The general
fund balance is the cumulative difference between revenues and
expenditures as well as the difference between current assets and
current liabilities at any given point in time. The reserved portion
of fund balance represents monies that the District may only use for
specific purposes, and therefore is not available to fund programs in
the subsequent year’s budget. The unreserved portion of fund balance
is uncommitted, and therefore is available to fund programs in the
next year’s budget. Accurate reporting of fund balance is integral
for financial planning, because using available fund balance as a
financing source prevents the unnecessary levy of real property taxes.
Moreover, school districts are required to use any available fund
balance, in excess of three percent2 of the following years planned
expenditures, to reduce real property taxes.
We found that District officials made incorrect adjustments to the
District’s accounting records at the end of the year which resulted
in an inaccurate presentation of the District’s financial condition.
These adjustments were proposed by District officials and reviewed
by the District’s external auditor. The incorrect adjustments resulted
in the Board and administrators believing that they had approximately
$1.6 million of unreserved fund balance in the general fund at June
30, 2008 when, in fact, they had over $5.3 million. This represents
approximately 12.8 percent of the $42.1 million total appropriations
for the 2008-09 fiscal year and over $3.7 million more than the amount
allowed by law.
The District also had a balance of $992,324 in the unemployment
insurance reserve which was sufficient to pay for the District’s
average unemployment claims3 for over 100 years. In addition,
District officials did not use the unemployment insurance reserve
or their employee benefit accrued liability reserve (EBALR),
with a balance of almost $2 million, to pay for appropriate reserve
expenditures. Therefore, we question the necessity of the District
maintaining these reserve funds. As a result, our audit identified
nearly $6.7 million in funds that have been tied up due to accounting
2
The limit for available fund balance is three percent for the 2007-08 fiscal year
and four percent for the 2008-2009 fiscal year.
3
Based on the past six and a half years of actual expenditures
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 7
7
errors or in unnecessary reserves that the District could use to benefit
the taxpayers.
Accrued Liabilities Amounts recorded in the District’s accrued liabilities general ledger
account include expenditures that have been incurred in the current
year but not yet paid. Typically, the amounts reported in this account
at year end include the portion of payroll from the current fiscal year
that will not be paid until the beginning of the ensuing fiscal year.
This occurs when the fiscal year end falls in the middle of a pay
period. Accrued liabilities should only include expenditures that are
chargeable to the current fiscal year.
The amounts recorded as of June 30, 2007 and June 30, 2008
as accrued liabilities in the District’s accounting records were
$2,794,065 and $2,984,240 respectively. We reviewed support
provided by District officials and the District’s external auditors
and found that these amounts represented other post employment
benefits (OPEB), which included the District’s ensuing year’s
portion of retiree health insurance premiums. There is no authority to
accumulate funds for OPEB. Also, because the ensuing year’s retiree
health insurance premiums are not attributable to the current year
and there are no other current liabilities, there should be no accrued
liabilities reported.
Representatives of the external audit firm indicated that there was
unclear guidance on the proper accounting for these costs at the
time District officials started recording these liabilities in 2004.
Each year, District officials adjust the amount reported to reflect
the ensuing year’s health insurance cost based on health insurance
billing information obtained from the health insurance provider. The
adjusting journal entries are first reviewed by the District’s external
auditor.
As a result of over reporting liabilities, the accrued liabilities general
ledger account was over stated by $2.8 million and $3 million as of
June 30, 2007 and June 30, 2008, respectively. The overstatement of
these liabilities contributed to a significant understatement of fund
balance.
Compensated Absences Compensated absences payable should include liabilities for the
Payable monetary value of accrued leave (e.g., vacation and holidays), for
which the District expects employees will be paid because of some
obligating event (i.e., employees’ separation from district service).
Those employees that separate from District service must put in a
notice of separation to the District before year end and must receive
their payments for unused leave time soon after the close of the
fiscal year. Compensated absences payable should not include an
8 OFFICE OF THE NEW YORK STATE COMPTROLLER
allowance for liabilities that are not expected to be paid shortly. For
example, the account should not include reserve for potential future
payments for such things as severance or termination pay, post-
retirement benefits, deferred compensation or other long-term fringe
benefits, such as group insurance and long-term disability pay.
The District’s accounting records and external audit report each
include a compensated absences payable balance of $1,816,394
and $718,253 as of June 30, 2007 and June 30, 2008, respectively.
The District’s external auditors provided support for these amounts.
We found that the calculation was not based only on accrued leave
payments owed to individuals at year end who have put in a notice
of separation. Instead, the compensated absences payable amount
included the total amount of accrued vacation and sick days expected
to be used and anticipated sick leave incentive4 for all employees for
the entire year. Each year the Treasurer posts adjusting entries that are
first reviewed by the District’s external auditor.
We reviewed separation dates and retirement notification dates for
individuals that retired from the District from 2006 to 2008 and found
that there were no compensated absences liabilities as of June 30,
2008. As a result of these errors, the compensated absences payable
was overstated by $718,253 at June 30, 2008. The overstatement of
these liabilities contributed to a significant understatement of fund
balance.
Unemployment Insurance The amounts reported and set aside in the unemployment insurance
Reserve reserve should be enough to reasonably cover unemployment claims
and the Board should have a policy providing guidance on the
accumulation and use of reserve fund monies. Further, reserve funds
must be used to pay the claims for which they are established. If the
Board annually budgets for unemployment insurance reimbursements
in the general fund and does not appropriate any funds from the
unemployment insurance reserve to pay for these expenditures, the
result will be additional tax levies.
The unemployment insurance reserve was established to reimburse
the State Unemployment Insurance Fund based on actual claims. The
balance in this reserve was $992,324, as of June 30, 2008. The Board
annually budgets for unemployment insurance reimbursements in
the general fund. Therefore, District officials did not appropriate
any funds from the unemployment insurance reserve to pay for these
expenditures. The District’s average annual unemployment insurance
expenditures over the past six and a half years were approximately
4
Employee contracts authorize a retirement incentive to eligible employees that is
calculated using employee’s pay rates and sick leave balances at retirement date.
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 9
9
$9,900. Therefore, the District has enough in the reserve to pay these
average expenditures for over 100 years.
According to District officials this reserve was increased in
2003 when they expected a significant number of layoffs, which
never occurred. Officials also informed us the previous Assistant
Superintendent for Business maintained large reserve balances and
did not use certain reserves to pay for qualified reserve expenditures.
District officials became accustomed to this practice. However, they
indicated that they are planning to use the unemployment insurance
reserve to pay for unemployment expenditures and also are planning
to take appropriate action to reduce the balance in the reserve to a
reasonable amount.
Because the Board has not used the monies in the unemployment
insurance reserve to pay for unemployment costs and the Board has no
policy for accumulating or using monies in this reserve, we question
why the Board is continuing to hold a balance in this reserve. We
believe the Board can improve accountability for District finances
by including this reserve as a funding source when preparing the
District’s annual budget. Alternately, the Board can discontinue this
reserve if it determines the reserve is unnecessary.
Employee Benefit Accrued An EBALR is a mechanism for school districts to set aside resources
Liability Reserve to satisfy their liability for future payments of the cash value of
certain compensated absences. More specifically, school districts can
establish a reserve fund to finance certain accrued “employee benefit”5
payments due to an employee upon termination of the employee’s
service. Therefore, liabilities for which resources can be accumulated
in an EBALR include the liability for the cash value of compensated
absences such as accrued and accumulated but unused vacation,
sick leave, and comparable types of compensated absences (such as
personal leave, holiday leave) that are payable to employees upon
separation from service. Payments that are not based on accrued and
unused time (vacation days, sick days, and personal days), payable
upon termination of service, cannot be made using EBALR monies.
If the Board decides to reduce or eliminate the reserve, the Board
may transfer the funds only to another properly established reserve
account.
5
The term “employee benefits” for purposes of an EBALR is defined to mean “the
cash payment of the monetary value of accrued and accumulated but unused and
unpaid sick leave, personal leave, holiday leave, vacation time, time allowances
granted in lieu of overtime compensation and any other forms of payment for
accrued but un-liquidated time” earned by and payable to municipal employees
upon termination of service, as authorized by certain local enactments or collective
bargaining agreements.
10 OFFICE OF THE NEW YORK STATE COMPTROLLER
The District maintains an EBALR fund with an approximately $2
million balance. The District has incurred compensated absence
expenditures that could have been paid for with EBALR funds but
were instead paid for using monies raised by real property taxes.
The District incurred compensated absence expenditures of $65,000,
$52,000, and $6,000 in 2006-07, 2007-08 and 2008-09,6 respectively.
This is a total of $123,000 of compensated absence expenditures that
could have been paid for using EBALR funds. However, the District
budgets for these expenditures in the general fund, and therefore
levies taxes to pay for them. Therefore, monies from this reserve are
not appropriated as a funding source in the annual budget.
The Board did not have a policy for the use of the EBALR fund.
Rather, District officials indicated that it was a practice of the previous
Assistant Superintendent for Business to maintain large reserve
balances and not use certain reserves to pay for qualified reserve
expenditures. Current District officials became accustomed to this
practice but are planning to use the money in the EBALR to pay for
future compensated absences expenditures and also are investigating
appropriate actions to lower the reserve to a reasonable amount.
Because the Board has not used the monies in the EBALR reserve
to pay for compensated absence costs, we question why the Board
is continuing to maintain a balance in this reserve. We believe the
Board can improve accountability for District finances by including
this reserve as a funding source for qualified EBALR expenses when
preparing the District’s annual budget. Alternately, the Board can
discontinue this reserve if it determines the reserve is unnecessary.
Monies from the discontinued reserve can be transferred only to
another legal reserve, as authorized by the General Municipal Law
(GML) or Education Law.
Recommendations 1. District officials should determine the correct balances and adjust
the liabilities and reserve accounts to reflect the actual amounts
that should be reported and verify the amount of reserved and
unreserved fund balance.
2. District officials should gain an understanding of what should be
reported in the liability accounts and ensure that only appropriate
amounts are recorded.
3. The Board should adopt a policy establishing guidance for the use
of reserve funds.
6
The amount for the 2008-09 year is not for a full year. The amount represents the
expenditures accumulated as of December 2008.
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 11
11
4. District officials should use the surplus fund balance identified in
this report in a manner that benefits District taxpayers. Such uses
could include, but are not limited to:
• Increasing necessary reserves
• Paying off debt
• Financing one-time expenditures
• Reducing District property taxes.
5. District officials should transfer excess reserve funds to District
operating funds or to other legal reserves, as authorized by GML.
6. District officials should ensure that reserve funds are used to pay
applicable reserve fund expenditures.
12 OFFICE OF THE NEW YORK STATE COMPTROLLER
Treasurer’s Duties
A main component of the District’s financial operations is the
Treasurer’s office. The Treasurer is the District’s Chief Accounting
Officer and is appointed each year by the Board at the organizational
meeting. The Treasurer is the custodian of all District moneys. As
such, she is responsible for the custody, receipt and disbursement of
District moneys. The Board is responsible for adopting policies and
establishing procedures to provide for a system of internal controls
over the Treasurer’s duties. 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 to
ensure that cash is disbursed only upon proper authorization and is
properly collected, accounted for, and deposited.
Internal controls over the District’s treasury function are not
appropriately designed. The Treasurer performs various duties in the
Business Office such as recording and depositing all monies received
by the District and signing all checks for District disbursements.
District officials did not appropriately segregate the duties over the
cash receipt function nor did they establish sufficient compensating
controls. In addition, we found weaknesses in the controls over
manual checks and the Treasurer’s computerized signature. As a
result of these control weaknesses, there is an increased risk that the
Treasurer could misappropriate District funds without detection by
District officials.
Cash Receipts The Board is responsible for adopting policies and establishing
procedures to provide for a system of internal controls regarding the
collection, accounting and deposit of cash. An effective system of
internal controls over cash receipts requires the separation of duties
so that no one individual controls most or all phases of a transaction.
The work of one employee should be independently verified in the
course of another employee’s regular duties. Concentration of key
financial activities with one individual – for example, receiving and
depositing cash, updating the accounting records, and reconciling bank
statements – weakens internal controls and significantly increases
the risk that errors or irregularities may occur and go undetected.
If adequate segregation of duties is not feasible, compensating
controls should be implemented. Examples include having a separate
individual outside of the collection and depositing functions review
cash receipt records with validated deposit slips or bank statements or
by having an individual outside of the cash receipt process perform
bank reconciliations.
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 13
13
The Board has not adopted policies regarding the collection,
accounting, depositing, and reconciling of cash. Therefore, a lack
of segregation of duties exists in the cash receipts process because
the Treasurer deposits and records receipts, and reconciles the bank
statements. The Deputy Treasurer located at the District offices
collects cash and records these receipts in a cash receipt log and
then issues a duplicate receipt to the individuals she receives money
from. The Deputy Treasurer then turns over the cash to a secretary
who prepares the deposit. The secretary turns the deposit over to
the Treasurer who records the receipts in the accounting records,
deposits the money into the bank, and reconciles the bank statements.
Even though separate individuals collect cash and prepare deposits,
no one compares the cash receipts log maintained by the Deputy
Treasurer to the bank statements or accounting records, and no one
reviews the deposits prepared by the secretary. The Treasurer could
misappropriate deposits by never depositing them into bank accounts
and not recording the receipts in the accounting records. Because the
Treasurer also completes bank reconciliations, without any oversight,
the misappropriation could go undetected. In addition, the secretary
could misappropriate cash by not including amounts in the deposits
that she prepares for the Treasurer. Because no one compares the cash
receipt log to bank statements or a reviews the deposits prepared by
the secretary, this could also go undetected.
The Treasurer indicated that District officials did properly segregate
the duties in regards to the collecting, preparing, and depositing
functions. However, they were unaware that this was inadequate.
After we brought the segregation of duties issue to their attention,
they implemented another step in their cash receipt process. The
secretary now compares validated deposit slips to her records
of prepared deposits to verify that all the money was deposited
into District bank accounts. Even though District officials have
implemented another control in their cash receipt process, the process
could be further improved by a comparison of the original cash
receipts collected to the actual deposits into the bank to ensure that all
collections are deposited.
Based on the lack of segregation of cash receipt duties, we reviewed
43 receipts totaling $10.7 million, and all entries made in the
December 2007, March 2008, and September 2008 cash receipt logs
to ensure that all receipts were properly deposited and recorded. Our
review of the District’s cash receipts did not disclose any errors or
discrepancies. However, assigning key duties to the same individual
when there are no compensating controls in place increases the risk
that errors and/or irregularities might occur and go undetected, and
not be corrected in a timely manner.
14 OFFICE OF THE NEW YORK STATE COMPTROLLER
Cash Disbursements In general, the objectives of internal controls over cash disbursements
are to ensure that cash is disbursed only upon proper authorization,
when supported by the appropriate documentation, for valid business
purposes, and is properly recorded. Effective control over the
disbursement of cash is vital to prevent unauthorized payments and
the misuse of District funds. The Treasurer is the custodian of all
District moneys and has the authority to sign all checks on behalf of
the District. As the District official responsible for signing checks,
the Treasurer plays a critical role in the cash disbursement process.
The Treasurer must ensure that his/her signature is not used to make
payments that have not been approved. The Treasurer’s actual or
facsimile signature must be affixed to District checks by the Treasurer
or affixed under the Treasurer’s direct supervision. In addition, it is
important for proper controls to be in place to ensure that manual
checks are only issued when authorized. Accordingly, the Treasurer
should maintain a manual check log to document the sequence of
all manual checks issued. The person responsible for reconciling
the bank accounts needs to review this log to ensure that all manual
checks are accounted for.
The District contracts with the Broome-Tioga BOCES Central
Business Office (CBO) for accounts payable and payroll services. The
Board appointed two Deputy Treasurers. One Deputy is located at the
CBO and the other Deputy is a secretary at the District’s Business
Office. Payroll and accounts payable checks are computer generated
with the Treasurer’s signature imprinted on them. Manual check
stock is kept in a locked filing cabinet at the Business Office to which
the Treasurer and Deputy have keys. Manual check request forms are
reviewed and approved by the Assistant Superintendent for Business
before manual checks are signed and issued. After manual checks are
entered into the accounting system the Treasurer receives a manual
check warrant from the CBO which details the check number, date,
amount, and payee. The Treasurer then reviews these warrants and
verifies that all manual checks are accounted for. However, there
is no warrant produced or manual check log maintained for manual
checks written out of the trust and agency fund. Between July 1,
2007 and October 31, 2008, the District issued nine manual checks
totaling approximately $11,500 from the trust and agency fund.
Internal controls over the cash disbursements process were not
appropriately designed. The Treasurer did not maintain adequate
control over her computerized signature and sufficient controls were
not in place over the issuance of manual checks. The Treasurer did
not apply her own signature to checks. Instead, the Treasurer sent
an e-mail to an accounts payable clerk at the CBO that authorized
the CBO Deputy to print the checks. The CBO Deputy used his
own username and password to print checks with the Treasurer’s
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 15
15
computerized signature. Even though the Treasurer authorized the
Deputy to the print the checks, the Deputy could also print checks
without the authorization. Finally, the Treasurer does not review the
printed checks to ensure that they are all authorized.
The Treasurer and the Deputy at the Business Office have the ability
to access and sign manual checks. The Treasurer does not maintain
a manual check log for checks issued from the trust and agency
fund and, therefore, no one can review the manual check number
sequences to ensure that all trust and agency manual checks are
accounted for and have been issued for an appropriate purpose.
The Board appointed a Deputy Treasurer at the CBO so that checks
could be released and printed at the CBO. However, we found that it
was possible for the Treasurer to use her own username and password
to print checks with her signature by releasing her computerized
signature on checks and having them printed at the CBO. District
officials were unaware that the system would allow the Treasurer to
release her own signature through the computerized system. After this
was brought to their attention, District officials, in conjunction with
the CBO, were able to give the Treasurer the ability to input her own
password in order to release her computerized signature for checks.
District officials were also unaware that they should account for all
manual checks.
We reviewed and analyzed computerized disbursements, manual
check number sequences, and manual disbursements in order to
determine if there were any unauthorized disbursements made. We
found no errors or discrepancies. The lack of adequate internal
controls over the cash disbursements process exposes the District to
the risk that District funds could be used for inappropriate purposes
and not be detected and addressed in a timely manner.
Recommendations 7. The Board should update policies and procedures to address
segregation of duties. The Assistant Superintendent for Business
should ensure that there is adequate segregation of duties over
the recording, depositing, and reconciling functions in the cash
receipts process or implement sufficient compensating controls.
8. The Treasurer should maintain a manual check log or receive a
manual check warrant for the trust and agency fund to document
the sequence of all manual checks issued. The person responsible
for reconciling the bank accounts should review this log to ensure
that all manual checks are accounted for.
16 OFFICE OF THE NEW YORK STATE COMPTROLLER
Claims Auditor
An effective internal control system includes the appointment of
an eligible person to the position of claims auditor. This individual
is responsible for auditing and approving claims prior to payment
to ensure they are for proper District purposes. SED’s guidance on
interpreting regulations states which individuals can and cannot be
appointed to the claims auditor position. Any clerical or professional
personnel directly involved in accounting or purchasing functions
can not be appointed as the claims auditor.
The District uses a computerized requisition and purchase order
system to process accounts payable. Different buildings and
departments have users who are assigned access rights to the
computer system to submit requisitions.
The Board did not appoint a claims auditor in accordance with SED
regulations. Instead, the Board appointed a high school secretary
who was directly involved in the purchasing function because she
was also responsible for initiating purchase requisitions for the high
school. Because the secretary is directly involved in the purchasing
process, her appointment to the claims auditor position was improper.
District officials were not aware that the claims auditor could not
be involved in the purchasing process. Also, because the secretary
is only allowed to submit requisitions, they believed that the
requisitions submitted by her would go through appropriate checks
and balances because her requisitions would be reviewed by the
purchasing agent, accounts payable clerk and the Treasurer.
As a result, we reviewed 430 requisitions, totaling $292,314, that
were submitted and subsequently audited by the claims auditor to
determine if any approved purchase orders were for inappropriate
expenditures. While we did not find any discrepancies, there is an
increased risk that inappropriate purchases could be made by having
the claims auditor involved in the purchasing process.
We also found that the claims auditor did not audit seven claims,
totaling $4,200, that were paid from the trust and agency account
using manual checks. These disbursements were for health insurance
reimbursements, graduation dinner expenditures, and replacement
checks for donations to the hiking club. We determined that they
were all for legitimate purposes.7 District officials were unaware
7
The replacement checks to the hiking club were donations from organizations.
They were deposited into the trust and agency account and a manual check was
issued to the club.
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 17
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that manual check disbursements made from the trust and agency
account should be audited by the claims auditor. As a result, there
is an increased risk that disbursements could be made for other than
District purposes.
Recommendations 9. The Board should appoint a claims auditor in accordance with
SED guidelines.
10. The claims auditor should audit all District claims, including
manual disbursements from the trust and agency account.
18 OFFICE OF THE NEW YORK STATE COMPTROLLER
Retiree Health Insurance
The Assistant Superintendent for Business is responsible for
designing controls to ensure that all payments to health insurance
providers are supported and accurate. These controls should include
a process to determine the eligibility status of retirees and dependent
spouses prior to paying related health insurance premiums. Good
internal controls involve monitoring the eligibility status of retirees
through continued communication. This monitoring would include
processes to verify the eligibility status of retirees, either by personal
contact or some correspondence that would determine eligibility
status (e.g., postcards, letters).
Controls over retiree health insurance payments were not properly
designed. The Assistant Superintendent for Business and Deputy
Treasurer determine the eligibility status of retirees by reviewing
obituaries, receiving notices from retirement agencies or family
members, and sending out an annual credibility letter that requested
retirees to update personal information. The Deputy Treasurer would
also follow up with individuals who did not pay their health insurance
contributions. However, the Assistant Superintendent for Business
or the Deputy Treasurer did not follow up when they did not receive
a credibility letter back from retirees. Therefore, it would be difficult
to determine the eligibility for retirees that did not have to contribute
to their health insurance premiums. If they did not receive notice of
an individual’s death from obituaries, family members, or retirement
agencies, the District could pay for deceased retirees that remain on
health insurance bills.
The Deputy Treasurer stated that they usually received a notice
through family members, obituaries, retirement agencies, or word
of mouth that an individual was deceased and were confident that
this process would identify most deceased individuals. The Assistant
Superintendent for Business and Deputy Treasurer did not have a
procedure in place to identify and follow up on individuals who did
not return their credibility letter.
We reviewed the social security numbers of all individuals receiving
health insurance from the District against the Social Security
Administration Database to determine if any individuals were
deceased. We identified two individuals who were being reported
on the District’s health insurance bill who were deceased. One
individual passed away on March 14, 2002 and the other on January
14, 2008. The District paid approximately $37,000 in health
insurance premiums for these two deceased individuals. After we
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 19
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notified District officials of this, they contacted their health insurance
provider who credited the District for 100 percent of the premiums
paid for those deceased individuals. Even though the health insurance
provider credited the premiums paid to the District, there is a risk that
the District could pay health insurance premiums for future deceased
retirees that go undetected. The Assistant Superintendent for Business
stated that, in the future, they will include a pre-stamped envelope or
postcard along with their credibility letters to encourage retirees to
send them back to the District.
Recommendation 11. The Assistant Superintendent for Business and Deputy Treasurer
should include in their verification procedures a process that
allows for the periodic identification and follow up of individuals
who do not return credibility letters to the District.
20 OFFICE OF THE NEW YORK STATE COMPTROLLER
Computerized Data and Assets
District management relies on its IT system to maintain financial
and student data, process financial transactions, provide computer
education, access the Internet, communicate by electronic mail
(e-mail), and to report to State and Federal agencies and the general
public. The potential consequences of a system failure can range
from inconvenient to severe; even small disruptions in processing can
require extensive time and effort to evaluate and repair. Computerized
personal data can also be a potential liability to the District if it is lost
or improperly disclosed. Accordingly, the IT Department and District
officials are responsible for establishing a District-wide security plan
and disaster recovery plan to help prevent the loss of computerized
equipment and data.
The Board and District officials did not provide for adequate protection
of the District’s IT system by establishing adequate policies and
procedures to effectively safeguard the District’s computer systems
and data. Specifically, our audit disclosed that a formal District-wide
security plan and disaster recovery plan has not been developed. As a
result, there is an increased risk that the security measures that are in
place may not be effective or followed, the District may not be able
to quickly restore operations if a disaster occurred, and the security
of the District’s computer system and sensitive, confidential data may
be compromised. While our tests did not identify any occurrences of
unauthorized activity, District officials need to promptly correct the
weaknesses we identified to reduce the risk that sensitive or mission-
critical data may be lost or compromised, or that systems could be
damaged or disrupted.
District-wide District officials are responsible for developing a formal, written
Security Plan District-wide security plan to document the process for evaluating
security risks, to identify and prioritize the more dangerous issues,
and to document the process for discussing and determining solutions.
The plan should establish a framework and continuing process to
identify areas of risk, and to develop the policies and procedures
to control the risk and monitor the effectiveness of the policies and
procedures that were developed.
The District has no formal security plan that documents the processes
that are followed or the policies and procedures that were put into
place. However, they have informal security procedures. The IT
Director informed us that the IT Department has been working on
developing a security plan. They have determined areas of risk
and are working on completing the security plan so that it can be
reviewed and approved by the Board. Without a well-developed,
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 21
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written, District-wide security plan, areas that could be at risk may
have been overlooked, and the policies and procedures that were put
into place to control risk may not be effective. In addition, employees
may not be aware of or may misinterpret the policies and procedures
that were developed.
Disaster Recovery Plan The District’s IT system – including equipment, software, and data
– is a critical resource that must be protected against loss, damage or
misuse. A disaster recovery plan describes how an organization should
deal with potential disasters. An effective internal control system
for IT requires that a formal disaster recovery plan be developed,
which includes the precautions to be taken (e.g., the routine backup
of software and data) to minimize the effects of a disaster, and the
procedures necessary for the District to either maintain or quickly
resume mission-critical functions. In addition, the disaster recovery
plan must be updated periodically to address changing conditions.
Typically, disaster recovery planning involves an analysis of business
processes and continuity needs, and may also include a focus on
disaster prevention.
The Board has not established a disaster recovery plan to ensure
computer data is adequately protected from loss. However, the
IT Department has been working on a disaster recovery plan for
the District. In the event of a disaster, District personnel have no
guidelines or plan to follow to prevent the loss of equipment and
data or procedures for data recovery. The lack of a disaster recovery
plan could lead to the loss of important financial data and serious
interruptions to District operations, such as not being able to process
checks to pay vendors or employees.
Recommendations 12. The Board should ensure that a formal, written, District-wide
security plan is developed.
13. District officials should ensure that a comprehensive disaster
recovery plan is developed that provides the guidance necessary
to maintain District operations, or restore them as quickly as
possible, during and following a disaster.
22 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.
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 23
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24 OFFICE OF THE NEW YORK STATE COMPTROLLER
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 25
25
26 OFFICE OF THE NEW YORK STATE COMPTROLLER
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 27
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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 objectives and scope by selecting for
audit those areas most at risk. We selected financial reporting, the Treasurer’s duties, the claims auditor,
retiree health insurance, and computer data and assets for further audit testing.
To accomplish the objectives of this audit, we performed the following audit procedures:
For Financial Reporting:
• We reviewed calculations, journal entries, and spreadsheets that supported the District’s 2007
and 2008 annual reports provided by District officials and the District’s external auditors
to determine the appropriateness of amounts reported for accrued liabilities, compensated
absences payable, unemployment insurance reserve, and EBALR.
• We interviewed District officials and representatives from the District’s external audit firm
to determine the reasoning and support behind amounts reported for the accrued liabilities,
compensated absences payable, unemployment insurance reserve, and EBALR.
• We reviewed the District’s retiree listings, payroll reports, and leave payout sheets for 2007
and 2008 to determine the correct amount of compensated absences payable.
• We reviewed retirement listing and payroll records for 2007 and 2008 to determine the total
amount of payments made by the District that qualify to be paid from the EBALR.
• We reviewed State unemployment benefit claims and compared them to amounts in the
unemployment insurance reserve to determine its reasonableness.
28 OFFICE OF THE NEW YORK STATE COMPTROLLER
• We reviewed all bank statements and account detail histories during our audit period for
the unemployment insurance reserve account and the EBALR account to determine if any
inappropriate disbursements were made from these reserve funds.
• We recalculated the District’s fund balance for 2007 and 2008 based on correctly reporting
accrued liabilities and compensated absences payable, lowering the unemployment insurance
reserve to more reasonable amounts, and properly paying for unemployment insurance reserve
and EBALR expenditures with reserve monies, to determine if the District’s fund balance
appeared to be excessive.
For Treasurer’s Duties:
• We reviewed 38 disbursements totaling $109,000 to determine if they were legitimate District
expenditures and that supporting documentation was accurate and approved properly.
• We reviewed all 16 manual check sequence gaps in our audit period to determine if these check
gaps were issued or voided.
• We reviewed all bank statements, for all funds, for the months of December 2007, March
2008, and September 2008 for withdrawals and bank transfers to determine if they were for
legitimate purposes. We also accounted for each page of the bank statements.
• We reviewed 15 manual check disbursements, totaling $34,000, to determine if manual checks
had proper approval and were for legitimate District expenditures.
• We traced 90 receipt entries, totaling $1.8 million, from December 2007, March 2008, and
September 2008 cash receipt logs to accounting records and District bank accounts in order to
determine that all receipts collected were properly recorded and deposited.
• We traced 43 receipts, totaling $10.6 million, from State Aid payment records and the District’s
high school cash collection records to cash receipt logs, accounting records, and bank accounts
to verify that all receipts are accounted for and being recorded and deposited.
For Claims Auditor:
• We reviewed 30 requisitions initiated by the claims auditor, totaling $98,000, to determine if
requisitions submitted by the claims auditor were properly approved, had proper supporting
documentation, and were for legitimate District expenditures.
• We reviewed the cancelled check images for disbursements issued for the 30 requisitions
reviewed above to ensure that all information matched and that checks were not disbursed to
inappropriate parties.
• We reviewed all 10 manual checks issued from the trust and agency fund during our audit
period to determine which disbursements should have been audited by the claims auditor and
to determine if they were legitimate District expenditures.
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 29
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• We accounted for the check sequence for all trust and agency fund manual checks.
For Retiree Health Insurance:
• We obtained social security numbers for all individuals reported on the District’s health
insurance policy to test against the Social Security Administration’s database to determine if
there were any deceased or fictitious individuals being reported.
• We verified with the NYS Teachers’ Retirement System that the individuals reported as
deceased from the previous test were actually deceased.
• We reviewed health insurance bills and historic health insurance premiums from the 2001-02
fiscal year to the 2008-09 fiscal year, paid by the District, in order to calculate the amount paid
by the District for health insurance for deceased individuals.
• We reviewed all health insurance bills from July 2007 to October 2008 to ensure that health
insurance bills were paid in full and were recorded accurately in the accounting records.
• We compared the District’s health insurance participant listings to health insurance bills from
July 2007 to December 2008 to determine if the District reported and recorded a higher
liability than it was charged. We compared the total number of members reported on health
insurance bills to the number reported on District records to ensure that the number of health
insurance participants was accurate.
For Computer Data and Assets:
• We interviewed the IT Director and IT staff to determine if the District had a formal disaster
recovery plan and a District-wide security plan.
• We compared the attendance records of 14 District officials (one Superintendent, two Assistant
Superintendents, four Principals, five Assistant Principals, the District Treasurer, and the
School Lunch Director) during the month of October 2008 with their internet usage records to
determine if there was any unauthorized user access.
• We surveyed five employees who worked in the District offices to determine how long they
have had the same network passwords, the number of times their passwords were changed, and
if they had knowledge of their passwords or user accounts being compromised.
• We obtained sample user names and passwords for student, staff, and administrative user
access, tested passwords for complexity requirements and reviewed unsuccessful log-in
attempts.
• We logged onto a District computer using a user account provided by the District to determine
if there was an automatic lock-out for periods of inactivity.
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,
30 OFFICE OF THE NEW YORK STATE COMPTROLLER
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 31
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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/
32 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 33
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