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1.                  Audit of the Financial Statements of New York State including the State Education Department
2.                  Department Actions Regarding the Wyandanch Union Free School District
3.                  Status of School District Financial Accountability Regulations and Guidance
The information is provided to assist the Subcommittee in carrying out its oversight responsibilities related to audits of financial and reporting practices; performance audits or reviews; ethical conduct issues arising from audits; internal controls; and compliance with laws, regulations, and policies.
Audit of the Financial Statements of New York State including the State Education Department – The Department’s revenues and expenses are not audited separately, but are included in the audit of New York State.  The independent auditors provided an unqualified opinion on the 2004-05 financial statements for New York State.  This means the financial statements present fairly, in all material respects, the financial position of New York State.  The report can be used to assist the Board of Regents in helping fulfill its oversight responsibilities for the Department’s financial and reporting practices.
Department Actions Regarding the Wyandanch Union Free School District – Department staff will brief the Subcommittee members on the actions taken to help the District address its fiscal and student performance issues.
Status of School District Financial Accountability Regulations and Guidance – Guidance documents have been made available by the Department and OSC.  The draft regulations have been provided to various groups for discussion and comments.  The questions and answers are being worked on.
Completed Audits – Reports are provided on the State’s audited financial statements, three districts’ administrative costs, audits of two CPA firms’ work, audit of the Archives Partnership Trust, two private special education providers, and a district’s collection and reporting process for free and reduced-price lunch data.
For items one (the State’s Audited Financial Statements), two (Actions Regarding Wyandanch UFSD), and three (School District Accountability), the advice and guidance of the Members of the Audit Subcommittee are sought.
For item four (completed audits), no further action is recommended.
The following materials are attached:
·              Minutes of the October Meeting (Attachment I)
·              Audit Report Abstracts (Attachment II)
Audit of the Financial Statements of New York State including the State Education Department
Department Actions Regarding the Wyandanch Union Free School District
Status of School District Financial Accountability Regulations and Guidance
MEETING OF THE REGENTS SUBCOMMITTEE ON AUDITS
Regent Geraldine D. Chapey, Chair
Regent Arnold B. Gardner, Vice Chair
Regent Harry Phillips, 3rd
Regent Chapey opened the meeting by welcoming everyone and reminding the Members that the Comptroller's reform agenda has kept fiscal accountability and auditing in the spotlight. The New York Times had recently done an article on the scandal in the Roslyn School District.
Follow-up From the Previous Meeting
Staff informed the Members that a summary of all recent audit reports of Department operations has been provided to all members of the Board of Regents. Regent Cofield requested this information at last month’s meeting.
The Subcommittee Members approved the minutes of the prior meeting.
Development of School District Financial Accountability Regulations
Staff informed the Subcommittee that draft regulations have been prepared and were under review by Counsel's Office. Once Counsel's Office approves the language, the regulations will be shared with the various constituent groups. The draft regulations will be provided to the Subcommittee Members.
Staff was available to answer questions on the following audits:
Central Islip Union Free School District S8-5-11
North Shore Central School District S8-5-32
Hempstead Union Free School District 2005M-62
Syracuse City School District Health, Dental and Vision Claims 2005M-1
The Greenburgh, Valhalla and Eastchester School Districts and the Town of Eastchester Acquisition of Athletic Fields 2005-MR-8
State Education Department, New York City Department of Education, and Erie County Administration of Payments for Preschool Related Services and Special Education Itinerant Teachers (SEIT) 2003-S-39
Compliance with Section 3602 Subdivision 26 of the State Education Law - Follow-up 2004-F-01.
Implementation of the RESCUE Program 2004-F-30
Wyandanch Union Free School District ED-OIG/A02-E0031
Financial Management Review of the New York Department of Education Child Nutrition Program A-02-02-01029
The Regents asked that staff from the Office of Elementary, Middle, Secondary and Continuing Education attend a future meeting to brief the Subcommittee on efforts to improve performance in the Wyandanch Union Free School District. There was a discussion of the root cause of the irregularities that are being identified. Regent Chapey suggested that more training for the Superintendents might be useful.
Staff informed the Subcommittee of the process used by the Office of Audit Services to follow-up on the status of recommendations 90 days after the issuance of the final audit report. The response of the Hempstead Union Free School District was used as an example to illustrate the process.
Regents Subcommittee on Audits
Office of the State Comptroller
East Bronx Day Care Center
This audit examined the costs and enrollment information reported by the East Bronx Day Care Center (Center) for its Pre-School Center Based program and the Pre-School Integrated program.
The audit found the Executive Director's salary was not appropriately charged and disallowed a portion of the salary. Other staff salaries were similarly disallowed.
The audit also disallowed various other than personal service costs that were either ineligible for reimbursement or inadequately documented. Some examples are $54,820 paid to a financial consultant, $4,679 for a Christmas dinner cruise, fines, flowers, and unsupported auto lease expenses.
The report also found the School did not appropriately calculate student enrollment in some cases.
1 to the Department
The report recommends the Department review the adjustments, recompute the rate, and take appropriate action to recover any overpayments.
Department officials agree with the recommendation.
The Department’s Rate Setting Unit is reviewing the audit in order to adjust the tuition rate and assess the effect on subsequent years’ tuition rates.
The report recommends the Center document, at least annually, the methodology used to allocate administrative costs and ensure this method is used when preparing the CFR.
Center officials did not respond to the report.
Manhattan Center for Early Learning Compliance with Reimbursable Cost Manual for Year Ended June 30, 2002
The report examined the reported cost and enrollment for two programs, a full-day Pre-School Center Based and a half-day Pre-School Center Based.
The audit found errors in the data reported to the Department resulting in adjustments totaling $617,109. The adjustments were in both personal service costs reported, as well as other than personal service cost.
The School inaccurately allocated salary costs for some staff, included employees working on a fee-based program in the costs and included some inappropriate salary costs.
The School included personal apartment rental expenses, travel expenses unrelated to the programs, and advertising expenses unrelated to the program. The School also claimed some undocumented costs.
1 to the Department
The report recommends the Department recover the adjusted program costs.
Department officials agree with the recommendation. The Rate Setting Unit will make the appropriate adjustments.
The report recommends the School establish an appropriate salary allocation methodology and ensure costs are eligible and correctly reported.
The recommendations to the School are to establish a methodology to appropriately allocate salary costs, ensure all costs are correctly reported on the CFR as either direct or indirect care, and ensure that all other than personal service costs are eligible and adequately documented.
School officials disagree with the recommendations and believe the allocation methodology used complies with the Reimbursable Cost Manual and that the disallowances are greatly overstated.
The Archives Partnership Trust Internal Controls over Financial Operations
The audit found that the Trust has internal controls in place to provide adequate assurance that it achieved its goals and objectives.
The Trust could improve controls by adding guidelines on the need for collateral, standards for diversification of investments, and the qualifications of investment bankers, brokers, agents, dealers, and other investment advisors. Two of the Trust's corporate bonds did not have a rating of A or better as required by guidelines, and the Trust uses an Investment Committee resolution rather than written instructions prior to investing as required by the guidelines.
The Trust did not always follow its procurement guidelines. A $65,000 contract was awarded without using competitive procure-ment procedures and there was no documentation to support the basis for contractor selection.
The Trust did not conduct physical inventories and four items of equipment were not on the SED inventory lists.
The report recommends the Trust enhance its investment guidelines, assess any investments not currently permitted, and comply with guidelines which require signed written instructions. The report also recommends that procurement guidelines be followed, searches be conducted for minority and women owned businesses when seeking vendors, and be documented. Finally, the report recommends the enhancement of equipment inventory controls.
Trust officials fully agree with six of the recommendations. They partially agree with the need to require written instructions to enter into a transaction. The Trust will have the Board consider amending its by-laws to allow making investment decisions on its own motion with a super-majority of the Committee and comply with or change its Investment Guidelines.
Lawrence Union Free School District - Independent Audit Services
The audit found that the District’s written purchasing policy and regulation applicable to procuring professional services is not adequate. Requests for proposals (RFPs) were not available to show that the contract for audit services had been awarded to the firm that submitted the lowest proposal.
The audit also found the annual audit of the District did not meet several professional standards for such an audit. For example, the CPA firm did not fully comply with auditing standard requirements relating to the consideration of fraud.
There was no indication that the CPA firm had formulated an audit response to the risk of District management overriding controls. The CPA firm did not comply with the second standard of field work which states that a sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. The report specifically cites a lack of understanding of information technology controls.
Finally, the CPA firm’s audit programs and work papers supporting testing of expenditures and fixed assets were not properly designed and executed to enable the CPA firm to obtain sufficient and competent evidential matter on District expenditures.
The recommendations are for the Board to provide more specific guidance on soliciting and reviewing RFPs for professional services, issue a RFP at least every five years, and maintain documentation of the process. The report also recommends District officials and Board members educate themselves on the scope and limitations of the annual independent audit. Finally, the report recommends the Board establish a committee to provide timely oversight of audits, participate in the selection of auditors, ensure the audits are performed in accordance with government auditing standards, review the District's financial statements, and monitor District corrective action plans.
District officials did not directly respond to the report. The District’s CPA firm responded. There is significant disagreement over many of the findings in the report.
Buffalo City School District – Free and Reduced-Price Lunch Program Data Collection and Reporting
The audit found weaknesses in internal controls over the free and reduced-price lunch data collection and reporting process and the lack of monitoring of the program by District officials.  The audit reports that the District received approximately $780,000 less in Extraordinary Need Aid (ENA) than the District should have received. Furthermore, failure to take corrective action could result in the District not receiving approximately $2.2 million in ENA in the current fiscal year.
Although the District has established policies and proce-dures for data collection and reporting, they are not consistently applied throughout the District. The District does not have adequate policies concerning the reporting of its student population that moves between schools.
Communication between the various departments involved in the free and reduced-price lunch program is woefully inadequate. Further, there were no indications that the various departments worked in a cohesive manner to create an efficient and effective process.
The report recommends the District recover any ENA that may be available, annually verify the accuracy of BEDS data, establish and communicate policies concerning application counts, and periodically monitor the data collection and reporting process.
The report also recommends that managers understand the requirements and importance of the data collection and reporting process, the various offices work together to improve communications and controls, consideration be given to implementing a districtwide database to assist cafeteria managers in assessing eligibility, and District officials work with the NYS Office of Temporary and Disability Assistance regarding direct certifications.
District officials generally agreed with the recommendations.
East Islip Union Free School District
The audit found the District is generally managing administrative expenses well, but paid some managers extra without proper Board authorization and lacked formal policies governing spending. In addition, the District's CPA firm inappropriately served as its internal and external auditor at the same time.
The audit also found credit card charges were managed relatively well, travel policies were in place, cell phone usage was monitored, and meal costs were managed.
The audit reported that the CPA firm served as the internal claims auditor and the external auditor which is a violation of the generally accepted government auditing standards (GAGAS).  In effect, the CPA firm was auditing its own work, which is an impairment of independence. The District took steps to fix the problem and engaged a different CPA firm to serve as internal auditor in January 2005.
The District compensated some managers for working overtime or on special assignments without proper authorization from the Board. For example, the Director of Special Education was paid $28,106 over her regular salary and the Business and Finance Administrator was paid $10,000 above his salary, both without Board approval.
The audit recommended the District not engage the same CPA firm to serve as both the Internal Claims Auditor and external auditor, authorize all compensation for employees prior to payment, adopt written policies for meals and district credit card usage, and establish reasonable rates for lodging when District officials travel.
District officials generally agreed with the recommendations.
Windham-Ashland-Jewett Central School District – Financial Accounting Operations
The report found that the District’s procurement policy did not address the need to solicit requests for proposals for professional services as required by General Municipal Law and the District’s Policy Manual. The District neglected to obtain requests for proposals for auditing services and architectural and engineering services.
The District also failed to obtain written or verbal quotes in 16 of 17 transactions tested and overspent budgetary accounts in 20 instances.
The Board had not established written procedures for the audit of claims and had not stated the responsibilities of the Internal Claims Auditor. In 19 of the 49 claims tested there were no supporting requisitions, 7 of 60 claims tested were not supported by purchase orders and 22 of 57 paid claims tested did not have supporting documentation signed by a District officer or employee acknowledging receipt of the goods or services.
The Board had not issued a comprehensive written investment policy.  The Business Manager bypassed the Internal Claims Auditor by submitting claims not audited, and the District did not maintain a capital assets inventory.
The report recommends that the Board ensure compliance with District procurement policy, establish adequate control over budget transfers, ensure claims are properly processed and, along with the Superintendent, establish proce-dures to properly monitor the budget.
The report also recommends the Board adopt a written investment policy, ensure no claims are paid out without the review and approval of the Internal claims Auditor, and ensure compliance with District policy on capital assets.
District officials generally agree with the recommendations and have taken actions to implement them.
Manhasset Union Free School District – Internal Controls
The report found instances where the Board had either not established critical internal controls or controls were improperly designed or operating ineffectively. There are several significant control weaknesses related to computer operations including lack of written procedures, weak or non-existent controls over access and nothing to prohibit altering previously entered information.
Certain duties of several employees in the Treasurer's office were not properly segregated, some accounting transactions were not individually approved or reviewed, journal entries were made by the District’s independent auditors, and cafeteria receipts were deposited by a contractor.
The audit also found security over cash was weak, a second signature was sometimes not obtained, bonding insurance was inadequate, and the District Treasurer's signature can be produced by the computer system.
The audit also found instances where the District Treasurer signed the claims warrant. The "claims package" assembled for the Internal Claims Auditor included signed checks. The Board's policy for travel and meal expense reimbursement is vague and non-specific. Finally the audit found the Capital Assets Accounting policy was not strictly adhered to.
The report recommends the District conduct a comprehensive review of computer operations, address CPA firms responsibility for understanding information technology systems in any future contracts, formally approve and document changes made to the accounting data, only generate checks from the computer system, and consecutively number cash receipts. The Board should review duties within the Treasurer's office and institute controls to ensure segregation of duties.
The report also recommends that only District staff make deposits and journal entries, bank signature cards are up-to-date, the amount of bonding insurance be increased, improving controls over the Treasurer's signature, not preparing checks until audited by the Internal Claims Auditor, retaining all canceled and voided checks, eliminating the use of blank check stock, accurately maintaining accounting records, maintaining core financial reports, and periodically reconciling cash.
The report recommends the Board consider establishing maximum per diem rates for lodging and meals, address the issue of providing food at District meetings, review the use of master purchase orders and, ensure all purchases are supported by a purchase order. The report recommends the Treasurer not pay a claim unless approved by the Internal Claims Auditor.
The report also recommends maintaining a control account for fixed assets and periodically reconciling it with supporting records, maintaining a consumable goods inventory, conducting periodic physical inventories, and ensuring inventory tags are issued in sequential order.
Finally, the report recommends the Board review its policies and ensure they accurately reflect the Board's intentions.
District officials generally agree with the recommendations and indicated they intend to take corrective actions.
Manhasset Union Free School District - Independent Audit Services
The District did not comply with its own policies to obtain requests for proposals for professional audit services. Instead, the District contracted with the same CPA firm each year, for more than ten years, without seeking competitive offers from other firms.
The annual audit of the District did not meet many of the required professional standards for such an audit. The audit was significantly deficient in planning and execution. In addition, the report found that the CPA firm that performed the audit was not independent. Two partners each had an ownership interest in a software company that provided financial accounting software to the District.
The report revealed compliance problems with 10 of the 22 (45 percent) 1994 standards for the 2002-03 fiscal year audit and 9 of the 22 (41 percent) 2003 standards for the 2003-04 fiscal year audit. The audit cites numerous instances where the CPA firm did not meet professional standards when planning the audits. For example, the audit planning did not assess the possibility of fraud or illegal acts and plan audit tests accordingly.
The CPA firm’s testing was also significantly deficient. For example, although the CPA firm’s audit program calls for a test of budgetary controls, the test was not documented. The most fundamental deficiency in the CPA firm’s audit was in its testing of disbursements. There was no examination of canceled checks and although many problems were identified in the work papers there was no additional work undertaken as a result.
The report recommends the District prepare a well-planned written request for proposals, retain any proposals received, and consider periodically changing audit firms.
The report also recommends the District improve the quality of audit services by more specifically describing expectations.
The report recommends the Board ensure its audit committee has sufficient expertise, define its responsibilities, and ensure the CPA firm reports directly to the committee.
The report further recommends the Board communicate directly with its CPA firm, increase its knowledge and educate themselves on the scope and limitations of the annual independent audit.
District officials generally agreed with the recommendations and plan to initiate corrective action.
Audited 2004-05 Financial Statements of the State of New York
The independent auditors issued an unqualified opinion on the 2004-05 financial statements of the State of New York.  This means the financial statements present fairly, in all material respects, the financial position of New York State.  The information shows total revenue of $98.7 billion and total expenditures and transfers of $96.6 billion for the State.  The revenues and expenditures of the Department were included within the scope of this audit.
The report did not include any recommendations, but it did note as a significant fact the status of the Campaign for Fiscal Equity lawsuit.