Comprehensive Report on School District Financial Accountability

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Comprehensive Report on School District Financial Accountability
52 Audits Complete, 71 in Progress or Beginning Soon;
Five Criminal Referrals; 5,000 School Officials Trained
New York State Comptroller Alan G. Hevesi today released a report on the efforts to improve oversight of fiscal practices at schools statewide. The 2005 Annual Report on the School Accountability Initiative summarizes the findings of 52 school audits and the Comptroller’s audit plans for 2006, as well as provides practical advice for school districts as they review their internal controls. The Comptroller is required by law to report annually on this initiative, and the report released today is the first of those annual updates.

“When questionable spending and actions came to light in several school districts on Long Island in 2004, it quickly became apparent that key safeguards to protect public money failed. If these scandals were not handled properly, there was a real risk of losing the public’s trust in our schools,” Hevesi said. “This report reflects the successful partnership that developed between school boards and administrators, the Legislature, Governor Pataki, the State Education Department, the law enforcement and accounting communities, and the State Comptroller’s Office to quickly and effectively address this problem with practical solutions. We have already seen widespread change in our schools from the efforts of this partnership and from our audits.”

“The legislation we enacted, together with the additional funding provided to the Comptroller, ensures greater accountability, and in turn, focuses funding where it belongs - on the education of students, while protecting taxpayers,” said State Senate Education Committee Chair Stephen M. Saland (R/C-Poughkeepsie).

“Comptroller Hevesi’s report on school accountability highlights the need for checks and balances to safe-guard our taxpayers across New York State from the abuses we have seen from a handful of mismanaged school districts,” stated Assemblyman Thomas P. DiNapoli (D-Great Neck). “I commend Comptroller Hevesi and his staff for the countless hours they have spent working with local school districts, officials and administrators to ensure the credibility of this process,” DiNapoli continued.

“School boards are determined that their communities will know and trust that their tax funds are being used responsibly and effectively. The Comptroller’s leadership and continuing efforts have helped us maintain this vital public confidence. From the outset he has been a trusted and reasonable partner in addressing the need for increased school fiscal accountability. We look forward to continuing our close working relationship in the coming year as the new law is implemented and fine tuned through regulations,” said Timothy G. Kremer, executive director of the New York State School Boards Association.

“We commend the Comptroller’s office on the rapid and effective response to the school district crisis,” Lou Grumet, executive director of the New York State Society of CPAs said. “An incredible amount of work was accomplished before additional resources have fully kicked in. This proactive initiative has provided New Yorkers with the foundation upon which to build the checks and balances needed to make sure tax dollars are channeled to the education of the State’s children.”

“For more than a year, the New York State Council of School Superintendents has worked with Comptroller Hevesi to uphold public trust in the public schools,” said Dr. Thomas Rogers, executive director of the Council. “Superintendents across the State reacted with outrage when the massive thefts of school funds from the Roslyn school district were uncovered. Theft from a school is a theft from children. It denies them benefits and resources voters determined they need and should have. We applaud Comptroller Hevesi’s leadership and are pleased to have worked with his office to ensure this will not occur elsewhere.”

“NYASBO welcomes the continued opportunity to work with the State Comptroller’s Office and the Education Department in strengthening school districts financial control procedures outlined in the Comptroller’s School District Accountability Initiative. The respective agencies willingness to seek input into drafted legislative reforms and the regulations being promulgated to implement these reforms makes for sound, enforceable public policy. NYASBO will continue to participate in the development and presentation of programs designed to deter and prevent fraud so taxpayer confidence extended to public schools will continue,” said Terrance K. Schruers, president, New York State Association of School Business Officials and assistant superintendent, White Plains City School District.

Hevesi, in response to these scandals where officials at six school districts and one Board of Cooperation Educational Services (BOCES) have been arrested or charged to date, redirected more than $2.1 million in existing Comptroller’s resources to audit 23 school districts on Long Island and to conduct in-depth training for school officials around the State.

Hevesi also asked for additional resources from the Governor and the Legislature to hire 89 staff members to audit districts statewide. OSC received $2.9 million to initiate the effort and agreed to audit all of the State’s 821 school districts, BOCES and charters schools by March 31, 2010.

The report findings:

Audit Activity
Auditors completed 52 school audits in 2005, covering financial operations, budgets and issue-specific audits including acquisition of athletic fields, free and reduced lunch programs, Medicaid reimbursement, energy costs and employee benefits. Of these 52 audits, 30 audits covering 27 school districts looked at current financial practices and internal controls as required by legislation. All of the audits were completed with existing staff resources.

Some districts had strong internal controls systems, while auditors found weaknesses in internal controls in other school districts that required corrective action plans. Fraudulent activity was only found at a few school districts. In total, OSC referred five audits reports for the Roslyn, Hempstead and Central Islip school districts to the appropriate law enforcement officials and continues to provide investigative support.

At Roslyn, auditors reviewed 57,000 checks dating back eight years, tens of thousands of computer records, and identified $11.2 million that was used by 29 school employees, their friends and families for personal benefit. Five of these individuals have been criminally charged or convicted. Some senior employees even had the School District pay their personal credit card bills, which included more than $1 million in cash advances withdrawn from automatic teller machines, and pay for mortgages on luxury homes, personal automobiles and much more.

“Most school districts are run by hardworking professionals who are dedicated to the children. Our audits are clear on this point,” Hevesi said. “Many districts show signs of financial weaknesses. These weaknesses may seem small to some, but the public demands action be taken. And, a few districts have been run in a corrupt manner. When we find wrongdoing, we work with law enforcement officials to hold individuals accountable.”

Audit Plans for 2006
OSC plans to conduct about 160 audits per year after the 89 new staff are hired - about a third of these new positions have been filled. Those districts, BOCES and charter schools that will be audited will be selected based on a number of factors including taxpayer complaints, allegations of impropriety, financial indicators, staffing availability or the determination that an entity has significant issues and could benefit from an audit.

Currently, 42 schools audits are underway around the State and another 29 will begin shortly. The report also provides extensive detail on the general design of the audits and how the audit process works.

Five-Point Plan Implementation
OSC forged a coalition with the New York State School Boards Association, the New York State Council of School Superintendents, the New York State Association of School Business Officials and the New York State Society of CPAs. In consultation with SED, the coalition developed a five-point plan for helping every school district strengthen its ability to prevent or find fraud. This plan was passed by the Legislature and was signed into law by the Governor.

Many school districts did not wait for the five-point plan to become law to start implementing the changes right away. Currently, many districts are working to establish audit committees by the January 1, 2006 deadline. This committee can include board members, as well as individuals from the public.

School board members have sought training in high numbers, even though the new law only requires training for board members elected or appointed on or after July 1, 2005. So far, OSC has provided training for more than 5,000 school officials on how to identify and prevent fraud and implement strong internal controls. Many other educational associations have also provided training all over the State.

“Public education is a $41 billion enterprise in New York State - and it continues to grow. It is the key to New York State’s economic future and to the future of all of our children,” Hevesi said. “While much has already been done to improve the fiscal operations of districts that work is far from over. The increased burdens from increased oversight are a necessary part of doing business. I am grateful for the continued support from almost every quarter of the educational community as we try to improve public confidence in the financial management of our schools.”
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Summary of Audit Findings Related to the Special School District Legislation


Fraudulent Activity
Indications of fraud were found in the following audits and were referred to local law enforcement agencies. The Office of the State Comptroller (OSC) found pervasive weaknesses in internal controls in the areas audited that led to the fraudulent activity occurring and not being detected in a timely manner.

Roslyn Union Free School District – Anatomy of a Scandal (Report No. 2005M-21)
Roslyn Union Free School District – Independent Audit Services (2004M-84)
Hempstead Union Free School District (2005M-62)
Manhasset Union Free School District – Independent Audit Services (2004M-89)
Serious Internal Control Deficiencies
Serious internal control deficiencies were identified in the following audits that could easily lead to theft and misappropriations of taxpayer assets. OSC found pervasive weaknesses in internal controls in the areas audited.

Plainedge Union Free School District (S8-4-129)
Central Islip Union Free School District (S8-5-11)
Lawrence Union Free School District (2005M-38)
Westbury Union Free School District (S8-5-4)
Manhasset Union Free School District – Internal Controls (2005M-33)
Internal Controls in Need of Improvement
Various internal control procedures needed improvements in the following audits, including establishing clear and effective policies for various expenses. While internal controls could be improved at these schools, our testing of numerous payments, transactions and other aspects of the districts’ operations did not reveal any significant wrongdoing.

Baldwin Union Free School District (S8-4-128)
East Islip Union Free School (S8-5-45)
East Meadow Union Free School District (S8-5-6)
Massapequa Union Free School District (S8-5-5)
Syosset Central School District (S8-5-7)
Windham-Ashland-Jewett Central School District (2005M-55)
Wyandanch Union Free School District (S8-5-46)
Some Schools Are Well-Managed
The following audits identified schools that were generally well-managed. District officials had taken practical steps to address various issues. Internal control systems were generally well-designed and operating as intended to provide reasonable assurance that district-established policies and procedures were being followed. However, these audits did identify some areas that could still be improved.

Elmont Union Free School District (S8-5-9)
Locust Valley Central School District (S8-5-44)
Miller Place Union Free School District (S8-5-10)
North Shore Central School District (S8-5-32)
Riverhead School District (S8-5-8)
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