Module 1: Safeguarding District Resources: Roles & Responsibilities

Transcription

1 Module 1: Safeguarding District Resources: Roles & Responsibilities Presenter: Jamie P. McPherson Leadership Development Manager

2 New School Board Member Mandated Training Day Two: Fiscal Oversight Training Module 1: Safeguarding District Resources: Roles & Responsibilities Module 2: Building School District Fiscal Fitness Module 3: Managing School District Fiscal Fitness Module 4: Monitoring School District Fiscal Fitness

3 What is Fiscal Oversight? Fiscal Oversight: The supervision of a school district s financial practice & policy implementation, as well as the review & monitoring of financial transactions & reports School Boards: Stewards of public s tax dollars Fiduciary Responsibility: Ensure public monies are properly accounted for & protected

4 Fiscal Management Overview Key Responsibilities: Annually adopt a fiscally responsible budget Annually adopt a tax rate sufficient to fund the budget (2% tax levy cap) Ensure expenditures do not exceed approved budget Review & monitor district finances on an ongoing basis Audit all claims & approve all district purchases, or, appoint claims auditor

5 Fiscal Management Overview Adopt & implement policies & procedures that protect & properly account for school district funds & assets Appoint treasurer, tax collector, audit committee, internal auditor & external auditor Ensure the district undergoes an annual, independent audit Designate purchasing agent & to certify payroll Publish & file financial statements & reports with state

6 Public Education in New York State Fiscal Snapshot

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8 Public Education in New York State 210,616 Teachers Total Salary Cost: $18,920,991,119 (Billion) Source: NYSED 14,917 Administrators Total Salary Cost: $631,400,824 (Million) 691 School Districts 37 BOCES 4,768 Schools 259 Approved Charter Schools (state cap 406)

9 Where Does the Money Come From? New York State P 12 Education: A $58 Billion Enterprise: Total State Revenue $23,630,308,837 Total Expenditures $58,280,268,889 Average Expenditure Per Pupil $21,118 Average Revenue Per Pupil $8,563

10 Where Does The Money Go? New York State average school district expenditures Source: Office of the State Comptroller

11 The Five Point Plan

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13 How did We Get Here? Road to the 5 Point Plan : An investigation & audit of Roslyn revealed the largest embezzlement scandal in public education s history ($11 Million) 2005 State Legislature mandated OSC to conduct audits on all school districts & BOCES in NY 2009 OSC completed the audits Source: NY Office of the State Comptroller

14 State Audit Findings Audit Report (733 audits of school districts & BOCES): 19 districts identified in outright fraud or theft $615.4 million excess funds unnecessarily tied up in reserve funds $7.7 in inappropriate or wasteful expenditures $49.4 million in contracts awarded without competitive bid process Source: NY Office of the State Comptroller

15 2005 Legislation - The 5 Point Plan Mandated Fiscal Oversight Training Strengthened Claims /Deputy Claims Auditor Function /Deputy Claims Auditor Audit Oversight Committee More Rigorous External Audit Requirements Internal Auditor Requirement

16 The Claims Auditor Claims Auditor / Deputy Claims Auditor Audit: ensure all expenditure vouchers are properly itemized & documented before payments are made by treasurer Voucher Packet: contains all documentation for purchases & transactions Two Options for Auditing Claims 1. School board can audit each voucher packet 2. School board can create claims auditor position through resolution

17 The Claims Auditor Option 1. School Board as Claims Auditor Each board member board must audit every voucher & be familiar with auditing process Cannot delegate auditing responsibility to single member, rotate through different members, or a sub-committee Option 2. Appointing the Claims Auditor Once auditor is appointed, board loses authority to audit & approve district bills Cannot split duty between board & auditor

18 The Claims Auditor Union Free, Central & Small City Districts with enrollment of 10,000 or more & Large City Districts board may adopt a resolution to utilize a risk based or sampling methodology of auditing claims (Expires 07/01/14) - Methodology must reasonably assure all claims in sample represent proper charges - Comptroller will review effectiveness of methodology to ensure accountability & issue report 1/15/14

19 The Claims Auditor Who Can and Cannot be Appointed? Prohibited from position School board members Clerk or treasurer of the board Superintendent Any district official responsible for business management Employee under direct supervision of superintendent District s purchasing agent Can hold position Residents or non-residents of the school district District employees who are not specifically prohibited Inter-municipal cooperative agreements Shared services Independent contractors

20 The Claims Auditor s Responsibilities Audit each claim for payment against the district, verifying that: The purchase is in compliance with law, regulation & district policy All requisite forms in voucher packet are present & complete All required authorization & signatures were obtained In short: Auditor verifies claim is true & accurate & informs treasurer to issue payment

21 Auditing & Approving Claims Is the claim for a valid & legal purpose? Was the purchase authorized & approved? Are there sufficient budget appropriations to pay the claim? Is the claim sufficiently itemized? Does the claim meet the legal & policy requirements in the district s procurement policy? Does the approved purchase order match the goods or services received? Were the goods or services actually received?

22 Fiscal Accountability- The 5 Point Plan Mandated Fiscal Oversight Training Strengthened Claims /Deputy Claims Auditor Function Audit Oversight Committee More Rigorous External Audit Requirements Internal Auditor Requirement

23 The Audit Committee Education law requires every school district, except those employing less than eight teachers, to establish an audit committee with at least three members Role of Audit Committee: An advisory committee that reviews & advises the board on issues relating to the district s external & internal audit functions.

24 Audit Committee Composition Prohibited from position School Employees Any person holding a position appointed by the board Vendors or service providers Non-board members with close or immediate family members who are district employees or service providers Can hold position Board Members - All, Some, or None 3 members minimal who are financially literate Do not have to be district resident

25 Audit Committee Charter Charter is required & must be board approved Establishes guidelines, procedures & requirements to allow committee to operate effectively Reviewed annually Charter Should Outline & Specify Purpose/Mission Duties/Responsibilities Membership & frequency of meetings Reporting requirements Self-evaluation requirements

26 The Audit Committee s Responsibilities External Audit Focus: Provide recommendations to the board regarding appointment of the external auditor Meet with external auditor prior to audit Review engagement letter Review & discuss risk assessment of district s fiscal operations Receive & review the draft annual audit report & draft management letter, including external auditors assessment of internal controls

27 The Audit Committee s Responsibilities External Audit Focus: Recommend acceptance of audit report & management letter Review corrective action plan developed in response to audit report & assist with implementation of plan Assist board in interpreting documents

28 The Audit Committee s Responsibilities Internal Audit Focus: Recommend appointment of internal auditor Review & discuss annual audit plan to ensure high risk areas & key control activities are periodically tested & evaluated Review all reports & findings of internal auditor Monitor district s implementation of internal auditor s recommendations to strengthen internal controls Monitor performance of internal audit function

29 Audit Committee Meetings & Reporting Meetings Recommended to meet quarterly (minimum is annually) Subject to Open Meetings Law Can enter executive session as defined by law & commissioners regulations Also enter executive session for reasons pertaining to external audit Meet with external auditor prior to audit Review external auditor s risk assessment Receive & review the draft annual report & management letter

30 Audit Committee Meetings & Reporting Reporting: Duty & responsibility to report to the board Scope & breadth of committee activities reflective in minutes or a summary of meetings Committee s review of draft annual report and accompanying management letter Suspected fraud, waste, or abuse, or significant findings of internal control function Significant non-compliances with laws or district policies Other matters committee believes should be reported

31 Audit Committee Self-Evaluation Areas of Focus: Working relationship with management, auditors & board Participation & contribution levels of members Appropriate skill level of members Committee size & number of meetings Encourage & help establish Tone at the Top Evaluation of internal auditor Review of significant control deficiencies identified by internal / external auditors & management s corrective action plan to address recommendations

32 2005 Legislation - The 5 Point Plan Mandated Fiscal Oversight Training Strengthened Claims /Deputy Claims Auditor Function Audit Oversight Committee More Rigorous External Audit Requirements Internal Auditor Requirement

33 Internal Audit Mandate Relief Amended: Subdivision 2 of section 2116-b of the Education Law School districts with actual enrollment of less than 1,500 students in previous years enrollment have option to be exempt from internal audit requirement Actual enrollment is reflected on annual Property Tax Report Card Took effect July 1, 2013

34 Internal Audit School accountability law requires an internal audit function unless the district has Less than eight teachers General fund expenditures less than $5 million in previous school year Actual enrollment is less than 1,500 students in previous school year Purpose: Objective 3 rd party that assists the board in ensuring financial risks are identified & appropriate internal controls are in place to address risks

35 Internal Audit - Duties Duties Fall into Two Broad Categories: 1. Perform a Risk Assessment: Includes review of financial policies & procedures, as well as testing & evaluating internal controls Risk assessment must be reviewed & updated annually 2. Report to the Board of Education: Make recommendations for improvements in controls & provides board with estimated time frame to implement recommendations

36 Internal Audit Risk Assessment Risk Assessment Process: Annual test & evaluation of one or more of district s internal controls to identify risks that could allow fraud and / or error to occur Analyze / evaluate likelihood risk will result in fraud or error & level of risk Determine appropriate method & cost to eliminate or control identified risks Report to board findings of risk assessment & recommend changes to strengthen internal controls

37 Internal Audit Focus Areas Internal audit risk assessment may focus on areas such as Payroll Purchasing Food service Fixed asset policy Extra-curricular activities fund Budget transfers Bank statements

38 Internal Auditor Prohibited from position Anyone who does not meet professional auditing standards **Employee of the district associated with business operations **Employee, officer, or contractor providing goods or services to district **Anyone with any contractual interest with district ** Includes close or immediate family Can hold position District employee who meets professional auditing independence standards Inter-municipal or shared services Independent Contractor BOCES employees (some exceptions) Resident or non-resident Note: person or firm should have experience school district financial operations

39 Evaluating the Internal Auditor Focus Areas: Experience level Scope of internal audit Meeting & relationship with audit committee & management Frequency of reports & significant findings to ensure effective action by management & audit committee

40 2005 Legislation - The 5 Point Plan Mandated Fiscal Oversight Training Strengthened Claims /Deputy Claims Auditor Function Audit Oversight Committee More Rigorous External Audit Requirements Internal Auditor Requirement

41 External Audit Laws & regulations require each school district employing eight or more teachers to secure an annual audit by an independent auditor Purpose: Audit school district financial statements to render an opinion on adherence to Generally Accepted Accounting Principles (GAAP) Ensure financial statements reflect accurate picture of financial picture of district

42 External Audit Provide guidance on internal controls & audit testing, including specific types of testing Audit report is presented to board Draft is sent to audit committee Based on findings, management has 90 days to prepare a corrective action plan which will be implemented the next fiscal year (July 1)

43 Appointing your External Auditor Must use RFP (Request for Competitive Proposal) to hire external auditor Lowest responsible bidder Engagement cannot exceed five years After engagement, new RFP Can use same firm if they win bid, but recommended to use different partner

44 External Auditor Qualifications MUST be a financial professional Registered & licensed public accountant in NY Meet required qualifications including at least 80 hours of completed professional education every two years Have appropriate internal control quality system & undergo an external quality review at least once every three years

45 External Auditor Qualifications Have experience in audits of governmental entities & federal single audits Possess sufficient staff to complete a through audit in a timely manner Be independent in fact & appearance

46 Comptroller's Audit Report

47 Comptroller s Audit Report Office of State Comptroller audited all school districts & BOCES in NY Focus: Internal controls, policies, practices & operations to ensure adequate protection against fraud, waste, & abuse Today: OSC conducts audits based on a risk-assessment process that may include Investigations of alleged improprieties Previous audit findings Other financial indicators

48 Comptroller Findings Financial Condition Problems Inadequate reporting & recording of financial data Prevented boards from monitoring fiscal condition in a timely manner Over-expending appropriations & fund balances deteriorated, often to deficit Payroll Issues Separation Payments: Lack of oversight regarding leave balances or payments for unused time were in accordance with contract

49 Comptroller Findings Payroll Issues - continued Payment for personal services without contracts Poor internal controls & lack of oversight over policies & payroll Allowed individuals to receive salary & unused leave time payments they were not entitled to Claims Auditor Deficiencies: Incompatible business functions (authorize transaction & approve payment) Approved claims without proper documentation or approval Reported to management instead of board

50 Comptroller Findings Information Technology (IT) No acceptable-use standards for computers, internet, or No safeguards for data anti-virus, password security, remote or physical access controls, or data backup systems Access to financial software above job duties No audit logs to identify or track individuals who accessed the system or the transactions they processed (no segregation of duties)

51 Preventing Fraud, 5 Waste Minute & Abuse Break

52 Fraud, Waste & Abuse Occupational Fraud: The use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets Waste: Not acquiring, protecting, or using resources in the most productive manner to achieve program objectives Abuse: Improper or questionable practice that violates the public trust Source: Association of Certified Fraud Examiners

53 National Fraud Statistics Source: ACFE 2014 Report to the Nations Typical organization loses 5% of its revenues each year to fraud in U.S. $652 billion Median fraud loss was $140,000 - more than 1/5 of cases resulted in a loss of more than $1 million On average, fraud occurred 18 months before being detected 49% of victims did not recover any money from perpetrator

54 OSC Facts about Fraud Summary of Fraud, Waste & Abuse Source: Office of State Comptroller Division of Local Government Audits 1994 June 2015 Class of Government Number of Cases Amount % of Total Counties 16 $ 3,150,622 5% Cities 7 $ 1,329,153 2% Villages 50 $ 1,490,350 17% Towns 142 $ 3,760,995 49% School Districts 27 $ 18,922,320 9% Fire Entities 40 $ 2,379,079 14% Other 11 $ 3,896,067 4% Totals 293 $ 34,928, %

55 Fraud Perpetrator Profile

56 Who is most likely to commit the highest amount of fraud?

57 Fraud Perpetrator Profile 61% of fraud cases committed by men (higher among older men) 41.2% of fraud committed by employees Median loss for fraud committed by executives 3X more than employees 40% fraud committed by two or more people 87.9% fraud perpetrators have never been charged or convicted of a crime Source: Red Flags for Fraud ; NY Office of State Comptroller

58 Why Does Fraud Occur? The Fraud Triangle Elements of Committing Fraud Pressure: Some financial pressure that motivates individual to commit illegal act Opportunity: Low risk of getting caught Rationalization: Justifies the crime in a way that makes it acceptable - Do not view themselves or their actions as criminal Source: Donald R. Cressey, Other People's Money

59 Fraud, Waste & Abuse Factors Contributing to Fraud: Poor internal controls Management override of internal controls Collusion between employees Collusion between employees & third parties Fraud Myths: Internal or external audits catch most fraud Usually caused by individuals who have committed a previous crime Only happens in large organizations

60 National Fraud Statistics 2014

61 Areas Most Susceptible to Fraud Areas involving cash/assets (purchasing, cash receipts) Payroll & benefits Information Technology (IT) Financial reporting Credit cards, cell phones, travel & conferences

62 The Board s Role in Preventing Fraud, Waste & Abuse Boards should: Set the tone at the top Ensures policies exist, are up-to-date, & followed Develop & receive recommendations for strengthening internal controls & policies Communicate with audit committee Read & understand reports Oversight through observation & analysis (Red Flags)

63 The Role of Policy: Preventing Fraud, Waste & Abuse Use policy to set the tone at the top: Clearly communicates board s purpose & direction Segregates, identifies, & explains fiscal duties (who does what) Provides a time & method for periodic board monitoring Is widely disseminated Consistently reviewed & updated

64 The Policy Role Policies required by law: Code of Ethics: Standards of conduct expected of all board members & employees of the district Investment Policy: Details district s policies, procedures, & instructions for investing, monitoring & securing funds, as well as reporting investments Procurement Policy: Policies & procedures for procurement of goods & services not subject to competitive bid

65 The Policy Role Recommended Policies: Wire Transfer & Online Banking Budget Transfers Travel & Conference Reimbursement Credit Card Computer Use District Cell Phone Capital Asset Control Claims / Internal / Eternal Auditor Conflict of Interest Whistleblower

66 Top Ten Fraud Risk Indicators 1. Key documents missing 2. No separation of financial duties 3. Accounting system in disarray 4. Lack of policies that establish controls 5. Inadequate monitoring to ensure internal controls work as intended 6. Ineffective accounting, information technology or Internal Audit Staff 7. Documentation that is photocopied or lacking essential information 8. Unusual employee behavior Source: Internal Controls NY Office of State Comptroller 9. Tips or complaints about fraud 10. Lack of established code of ethical conduct

67 Financial Red Flags Payments made on non-business days Out of season payments Rounded payments Excessive transactions, esp. to one vendor Vendor & employee addresses match Purchases without shipping documents, or that bypass normal procedures Incomplete or untimely bank reconciliation Accepting invoice duplicates for payment Excessive number of year-end transactions Source: Red Flags for Fraud ; NY Office of State Comptroller

68 Organizational Red Flags Weak or lax internal control environment Lack of tone at the top Too much trust in key employees Lack of proper authorization procedures Lack of separation of duties Lack of physical security and/or key control Weak links in chain of controls & accountability Lax management style Inadequate training Source: Red Flags for Fraud ; NY Office of State Comptroller

69 Detecting Fraud - Red Flags Source: ACFE 2014 Report to the Nations Behavioral Red Flags of Perpetrators Behavioral Red Flags Behavior % of Cases Reported Living Beyond Means 35.6% Financial Difficulties 27.1% Unusually Close Association with Vendor 19.2% Wheeler-Dealer Attitude 14.8% Irritable, Suspicious or Defensive 12.6% Addiction Problems 8.4% Refusal to Take Vacations 6.5% Family / Peer Pressure for Success 4.7%

70 If Fraud is Suspected Did You Know: 44% of fraud is detected by tip Action Steps: Ensure district has a Whistleblower Policy & is clearly communicated to all employees Employees should be able to make tips without fearing for their safety or job Monitor district finances & ensure claims auditor, internal auditor & audit committee are properly trained to detect red flags

71 If Fraud is Suspected Action Steps: Do not ignore red flags take action (What are the consequences if you don t?) Follow the chain of command If suspect is within the chain contact another source (OSC, school attorney, State Ed, etc) All reported cases of fraud, waste, or abuse should be investigated by proper authority Remember, sometimes an error is just an error

72 Summary of the Board s Role in Financial Oversight Monitoring Reviewing & Managing Control Systems Control Activities Risk Assessment Procedures & Activities to Eliminate or Minimize Risks Identification & Analysis of Relevant Risks Control Environment Setting the Tone at the Top Establish & Disseminate Policies Source: COSO Internal Controls Pyramid

73 Presenter: Jamie P. McPherson Leadership Development Manager Phone: (518)