1. APA School District Examinations David Pitts Auditor of Public Accounts (502) 564-5841

2. APA Role in School Districts Education work is an initiative and commitment of Auditor Edelen State Auditor is the statutory chair of the State Committee for School District Audits (KRS 156.265(1)) APA works on an annual project with KDE to review school district audits for technical purposes To date, the APA has completed 20 examinations of school districts since the fall of 2012 Audits have been conducted in all parts of the state, and have included reviews of school districts of all sizes Also, completed school finance officer study

3. APA Special Examinations Largely began as complaint driven examinations, no “fishing expeditions” Performed by auditors trained in both special examinations and financial audits Some areas are outside the scope of an annual financial audit; however, some findings indicate need for greater scrutiny and communication during annual audits

4. APA Special Examinations Procedures we consider performing: We request and examine certain District records for the examination period, including, but not limited to ◦ Board meeting minutes, ◦ salary schedules, ◦ staff salaries, ◦ Board members’ and selected staff’s travel and expense reimbursements, ◦ vendor payments, ◦ certain District employee contracts, and ◦ UNIS user access rights. ◦ Discussions and interviews with numerous Board members, District staff, contractors, and both the former and current Superintendents.

5. Special Examinations Results have led to indictments of two former superintendents due to abuse of public trust and theft. Example district: District had 85% of students on free and reduced lunch Superintendent refused to let sports groups travel due to budgetary constraints Superintendent double, triple and quadruple-dipped in travel reimbursements (credit card use, fuel from bus garage, travel reimbursement, and reimbursed by external associations) In total, Superintendent’s restitution to the district was ordered at more than $400,000. Why it’s important: Protection of taxpayer dollars is our mission, but beyond that education dollars lost to waste, fraud, or abuse impacts the students.

6. Examination Results Payroll/Personnel related problems ◦ Salary adjustments without board approval and/or without contract modifications ◦ Benefits paid in excess of contracts (fuel from bus garage, car allowances, pay-outs of accumulated vacation days, etc) ◦ Overpayment of wages ◦ Modified school calendar to omit instructional days, leading to payment for days not actually worked.

7. Examination Results Payroll/Personnel related problems (Continued) ◦ Potential Fraud in excess of half-million dollars as a result of lax controls over payroll (segregation of duties, control over entire payroll process including ability to make manual adjustments without approval, failure to have monitoring tools in place that would alert of potential fraud), including IT controls.

8. Examination Results Travel costs not in line with board policies ◦ Nonessential/unauthorized staff or spouses and other non-staff individuals attending conferences ◦ Reimbursements for personal expenditures on travel vouchers (extended trips, snacks, car rentals for extended days, alcohol charges, etc) ◦ Fraud/abuse in travel reimbursements (double dipping and more) ◦ Excessive expenditures, problematic when there is no per diem limits and district reimburses actual cost ◦ No receipts or obscured receipts Travel policies should be clearly communicated and included in Board Policies. And be applied to employees, board personnel and Superintendents.

9. Examination Results Procurement problems ◦ Failure to follow MPC when adopted ◦ Failure to bid contracts when required Conflicts of interest ◦ Awarding scholarships to relatives ◦ Inappropriate vendor “gifts” (conferences, etc) ◦ Utilizing district assets (food, facilities, supplies) for personal businesses

10. Examination Results Federal grant noncompliance ◦ Moving funds around, obscuring expenditure details ◦ Using federal grants for unallowed purposes Misuse of activity funds – funds must be used for the benefit of students; should comply with Red Book requirements. ◦ Sweet 16 expenses of almost $36k, 40 people, most not related to athletics program, some were not employees of the district ◦ Building projects (equipment shed, etc)

11. Examination Results Budgetary Issues ◦ Mismanagement of the district’s budget and finances may contribute to financial instability. Lack of consistent budget policy for creating annual budget, as well as errors and misrepresentations in the budget process over several years may weaken the district’s ability to address budget imbalances in the current year.

12. Finance Officer Report Performed to assess issues raised in House Bill 154 (KRS 160.431) (Passed in 2014 session) HB 154, in part, would require finance officers to obtain a minimum number of hours in finance training annually (12 hours with experience of 8 year or less, 8 hours with 8 years or more) Gives the state board the legal authority to promulgate regulations establishing minimum qualifications for district finance officers; and reporting requirements

13. Finance Officer Report Two audit reports identified weaknesses in accounting personnel lacking expertise to detect/correct errors One-third of finance officers did not have educational backgrounds in accounting of finance (58 school districts) 33 districts had finance officers with backgrounds in non-accounting fields (former teachers, principals, superintendents) – having no experience in accounting/finance

14. Finance Officer Report 7% of school districts did not have adequately detailed job descriptions for finance officers Training records were insufficient to verify training in 24% of districts 49% of finance officers held professional certifications – which have continuing education requirements.

15. What can you do? Consider Internal Controls, including IT controls ◦ Consider segregation of duties. Pay particular attention to superintendent contracts, payments and benefits ◦ Ensure all personnel costs and fringe benefits comply with the employee’s contract and have board approval ◦ Review contract/board minutes to ensure all salary levels, days paid, and raises agree to the approved amounts (see budget) ◦ Ensure fringe benefits agree to those approved. Additional fringe benefits may include:  Fuel reimbursement  Vehicle lease/allowance (be sure to know if fuel/maintenance is included in the allowance so as not to double pay)  Additional health care payments  Meal reimbursement different than board policy for others Compare salary and benefit adjustments for other employees to board minutes Determine whether budget concerns impact financial stability. Perform a good assessment of finance officer knowledge and expertise. Communicate honestly to the board if you have concerns regarding culture or cooperation Communicate weaknesses in expense reimbursements, weak or unclear board policies, or other internal controls Single audits – consider transfers of expenditures in/out of grant funds to be a high risk area Offer additional training for board members to improve financial literacy Make sure the board is clear about areas not included in your scope Contact the APA or KDE if you need help brainstorming or identify a red flag that you aren’t sure how to approach