During this review of the district s cost control systems, the significant areas of concern included:

Transcription

1 12 Cost Control Systems The district s cost control systems include internal auditing, financial auditing, asset management, risk management, financial management, purchasing, and information systems. Improvements are needed in all areas reviewed. Conclusion During this review of the district s cost control systems, the significant areas of concern included: the automated accounting system; staffing levels and vacancies in key positions going unfilled for long periods of time; the structure and organization of an internal audit function; weaknesses in accounting procedures; and weaknesses in internal controls. Overall, MGT reached the conclusions listed in Exhibit Exhibit 12-1 MGT Came to Numerous Conclusions Regarding the District s Cost Control Systems Review Area Internal Auditing Financial Auditing MGT s Conclusions The district has not established an internal audit function with its primary mission to (1) provide assurance that the internal control processes in the organization are adequately designed and functioning effectively, and (2) where appropriate, offer recommendations and counsel to management that improves its performance. (page 12-7) The district obtains an external audit in accordance with government auditing standards. (page 12-15) The district does not always provide for timely follow-up to findings identified in the external audit. (page 12-15) MGT of America, Inc. 12-1

2 Cost Control System Exhibit 12-1 (Continued) MGT Came to Numerous Conclusions Regarding the District s Cost Control Systems Review Area Asset Management Risk Management Financial Management MGT s Conclusions Segregation of Duties: The district segregates responsibilities for custody of assets from recordkeeping responsibilities for those assets. (page 12-25) Authorization Controls: The district has established controls that provide for proper authorization of asset acquisitions. (page 12-28) Project Accounting: The district has established records that accumulate project costs and other relevant data to facilitate reporting construction and maintenance activities to the board, public, and grantors. (page 12-30) Asset Accountability: The district does not provide recorded accountability for capitalized assets. (page 12-31) General: The district does not have an adequate process to set objectives for risk management activities, identify and evaluate risks, and design a comprehensive program to protect the district at a reasonable cost. (page 12-35) Commercial Coverage: The district does have comprehensive policies and procedures relating to purchasing and reviewing insurance coverage. (page 12-37) Self-Insurance Programs: The district does not monitor and evaluate its selfinsurance program to ensure the feasibility of its self-insured coverages. (page 12-38) Management Control Methods: District management does not always communicate its commitment and support of strong internal controls. (page 12-42) Financial Accounting System: The district records and reports financial transactions in accordance with prescribed standards. (page 12-47) Financial Reporting Procedures: The district does not always prepare and distribute its financial reports timely. (page 12-49) Budget Practices: The district does not have a financial plan serving as an estimate of and control over operations and expenditures. (page 12-50) Cash Management: The district does not have adequate controls to provide recorded accountability for cash resources. (page 12-54) Investment Practices: The district has an investment plan that includes investment objectives and performance criteria, and specifies the types of financial products approved for investment. (page 12-57) Receivables: The district has not established controls for recording, collecting, adjusting, and reporting receivables. (page 12-57) Salary and Benefits Costs: The district has established controls that provide accountability for employees compensation and benefits pursuant to an approved compensation plan. (page 12-59) Debt Financing: The district has procedures for analyzing, evaluating, monitoring, and reporting debt financing alternatives. (page 12-59) Grant and Entitlement Monitoring: The district does not adequately monitor and report grants activities. (page 12-60) MGT of America, Inc. 12-2

3 Cost Control Systems Exhibit 12-1 (Continued) MGT Came to Numerous Conclusions Regarding the District s Cost Control Systems Review Area Purchasing Information Systems Source: MGT. MGT s Conclusions Segregation of Duties: The district segregates purchasing responsibilities from the requisitioning, authorizing, and receiving functions. (page 12-62) Requisitioning: The district has established controls for authorizing purchase requisitions. (page 12-63) Purchasing: The district has established authorization controls to ensure that goods and services are acquired at prices that are fair, competitive, and reasonably consistent with acceptable quality and performance. (page 12-64) Receiving: The district has established controls to ensure that goods are received and meet quality standards. (page 12-68) Invoice Processing: The district has established controls for processing invoices to ensure that quantities, prices, and terms coincide with purchase orders and receiving reports. (page 12-69) Disbursements: The district has established controls to ensure disbursements are properly authorized, documented, and recorded. (page 12-70) Accounts Payable Encumbrances or Obligations: The district has established controls to ensure payables/encumbrances (obligations) are properly authorized, documented, and recorded. (page 12-70) Segregation of Duties: The district segregates duties to prevent unauthorized transactions by appropriately limiting access to data systems processes and functions. (page 12-72) User Controls: The district s user controls do ensure authorization prior to processing transactions and do not ensure all output represents authorized and valid transactions. (page 12-74) Application Controls: The district has established appropriate data controls between the user and the Data System Department. (page 12-76) General Controls: The district has not established general controls designed to provide physical security over terminals, limit access to data programs and data files, and to control risk in systems development and maintenance. (page 12-76) Fiscal Impact of Recommendations As can be seen in Exhibit 12-2, the district will expend a net additional $126,300 annually implementing the recommendations of this chapter. MGT of America, Inc. 12-3

4 Cost Control System Exhibit 12-2 Implementing the Recommendations for Cost Control Systems Will Have a Net Annual Fiscal Impact of $126,300 Recommendation Improve asset management. Improve management control methods. Improve cash management. Document and develop procedures for grant monitoring and accounting, and develop a system of accountability. Improve MIS general controls. Source: MGT. Fiscal Impact Hiring one additional property records clerk will cost approximately $30,000 annually. Contracting with an independent firm for a fraud hotline will cost approximately $30,000 annually. Hiring a staff accountant will cost $45,000 annually. Improving earning potential on excess funds should provide an interest income of $50,000 annually. Improving monitoring of grant funds should result in the district fully expending grant monies, which it has previously not done. Improved monitoring should result in additional grant funds of $75,000 per year. Hiring additional staff two Systems Analysts and one Junior Programmer will cost $146,300 annually. Background This chapter reviews cost control functions in seven subsections: Internal Auditing Financial Auditing Asset Management Risk Management Financial Management Purchasing Information Systems The majority of the functions discussed in this chapter fall under direction of the Associate Superintendent of Financial Services. Internal auditing, as discussed in this chapter, refers to internal audit functions that the district has contracted out to an independent auditing firm. The independent auditing firm contracted to perform internal audit functions should officially report to the School Board through an audit advisory committee. The district also has a department called Internal Audit that performs no true internal audit functions and should not be confused with the topic of internal auditing as presented in this chapter. Financial auditing is performed by the Auditor General of the State of Florida and other external auditing firms. The responsibility for coordinating and managing the financial auditing function falls under the direction of the Associate Superintendent of Financial Services and the Director of Accounting Services. The asset management functions in the district, which comprise property control, cash management, and internal controls, are handled in various departments under the purview of the Office of Financial Services. The Internal Audit Department is responsible for property control, and the Accounting Services Department is responsible for cash management and internal controls. Risk management responsibilities fall under the Risk Management Department, and financial management responsibilities are handled in the MGT of America, Inc. 12-4

5 Accounting Services Department and the Budget, FTE and Cost Accounting Department. Purchasing Cost Control Systems functions are the responsibility of the Purchasing and Warehouse Services Department. The functions associated with information systems fall under the Office of Management Information Services which reports directly to the Superintendent. Exhibit 12-3 presents a high-level overview of the organizational structure of these functions in the district. As necessary, sections of this chapter present more detailed organizational charts showing staffing levels and positions. Exhibit 12-3 Overview of the Organization of Brevard County s Cost Control Functions 1 Brevard County Citizens Superintendent School Board Audit Committee Internal Auditors 1 Management Information Services Services Chief Information Officer/Director perintendent st Accounting house Services Source: Brevard County Public Schools, As discussed in the Internal Audit section of this Chapter, the district has contracted with an independent audit firm to provide internal audit services. This is separate and apart from the Internal Audit Department whose primary responsibilities include reviewing cafeteria operations, supporting school bookkeepers, and maintaining property inventory records. MGT of America, Inc. 12-5

6 Cost Control System The school board, as provided in section (2) of Florida Statutes (F.S.), is required to operate, control, and supervise all free public schools in the district. Laws, rules, regulations, and grantor restrictions applicable to the district s activities define, among other matters, the purposes for which resources may be used and the manner in which authorized uses shall be accomplished and documented. Section (3), F.S., provides that the responsibility for the administration of the schools and for the supervision of instruction in the district is vested with the Superintendent as the secretary and executive officer of the board, as provided by law. To ensure the efficient and effective operation of the district in accordance with good business practices and with applicable legal and contractual requirements, effective cost control systems must be established and maintained. The Superintendent is responsible for establishing and maintaining effective and efficient cost control systems. The objective of effective and efficient cost control systems is to: provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition; ensure that transactions are executed in accordance with the board s authorization; ensure that transactions are recorded properly to promote reliable financial data; ensure that restricted assets are managed in compliance with applicable laws, regulations, and contracts; and within the constraints established by applicable laws and regulations, ensure that operating policies and procedures promote cost-effective and efficient methods of operation. Are Best Practices for Internal Auditing Being Observed? Goal: The district has an adequate internal auditing function. Background Section 11.45(3)(a)1., F.S. permits school districts to employ internal auditors to perform ongoing financial verification of the financial records of a school district and requires that internal auditors hired pursuant to this law must report directly to the board or its designee. Internal auditors employed in this manner, if effectively used, can be considered to be meeting this best practice. The internal audit function is a major element of management and internal control. The purposes of an internal audit function within a school system are to provide assurance that the internal control processes in the organization are adequately designed and functioning effectively and to evaluate the manner in which district organizational units comply with board and administrative policies and procedures, as well as state and federal guidelines. In addition, an internal audit function can provide a district with an effective internal performance and evaluation system. In addition to funds received at the district level, the individual schools also receive funds for club and class activities. These funds are deposited into the school s accounts, which are commonly identified as school internal funds. State Board of Education Rule 6A-1.087, Florida Administrative Code (F.A.C.) requires school districts to provide for annual audits of the school internal funds. Internal auditors may also be assigned the responsibility for auditing school internal funds. MGT of America, Inc. 12-6

7 Cost Control Systems 1 The district has not established an internal audit function. The district has not established an internal audit function with its primary mission to provide assurance that the internal control processes in the organization are adequately designed and functioning effectively. The district has recognized the insufficient level of internal audit resources and has employed an internal audit function through privatization, in response to the needs of management for independent and objective reviews of district operations. The two approaches to providing internal auditing services, whether the resources are achieved through placement of internal auditors within the district or through privatization, are both valid. The District is in the Process of Implementing an Internal Audit Function Through Privatization The district is in the initial stages of implementing an internal audit function through outsourcing by securing the services of the CPA firm of Bray, Beck & Koetter. This firm currently audits the school board s internal accounts pursuant to State Board of Education rules 6A In October 1998, the School Board voted to form an audit committee and implement an independent internal audit function. An organizational chart is provided to illustrate the internal audit structure in Exhibit Exhibit 12-4 Internal Audit Function Outsourced by the District The time line for the initial year of the program pursuant to the letter of proposal approved by the board is October 1998 through October Work by Bray, Beck & Koetter, CPAs, is reported to not have commenced until February The firm has reported to be in the initial phases of evaluating internal controls within the school district operations as shown by the contract time line in Exhibit Although the district has privatized the internal audit function, certain enhancements as a result of full implementation of the internal audit function would improve the effectiveness of this function s operations. MGT of America, Inc. 12-7

8 Cost Control System Exhibit 12-5 The Time Line For the Outsourced Internal Audit Function Runs From October 1998 to October 1999 Projected Completion Date Internal Auditing Activities To Be Performed October 1998 Initial organization of program Adoption of program objectives November 1998 Establish structure of committee October 1998 February 1999 Organize committee Perform initial study of the internal control system Agree with committee on critical areas January 1999 Design and write audit plan and procedures August 1999 Perform first series of audit programs Periodic (TBD) Identify and assess program results Meet with controller s office representatives Meet with audit committee June August 1999 Establish critical control elements jointly with audit committee September October 1999 Adopt continuous review policy Finalize first year s audit Establish rotation schedule Report to audit committee Source: Bray, Beck & Koetter, CPAs, P.A. Letter of Proposal/Contract. The District s Decisions to Privatize the Internal Audit Function Was Not Supported By a Formal Cost/Benefit Analysis District staff completed an informal cost/benefit analysis before a decision was made to privatize the internal audit function. While the cost/benefit analysis was not formally documented, the costs were found to be essentially the same for privatization in comparison with the costs for providing an internal audit function within the district s employ. Pursuant to F.S.11.45(3)(a)1, the managing director of the firm awarded the internal audit contract reports directly to an audit committee that reports to the board. This audit committee was formed subsequent to the board s acceptance of the sole source proposal by Bray, Beck & Koetter, CPAs to provide internal auditing services effective October 1998, for an annual cost not to exceed $100,000 to $125,000. The hourly rate is stated in the proposal to range from a rate of $45 to $160 for a level of services ranging from administrative assistant to managing director, respectively. The proposal does not provide a work plan essential to identify the products and services to be received by the board. The work plan only identifies the tasks to be performed, the staffing level who is to perform specific tasks, the number of hours and staffing levels to be used for performing tasks, and the hourly fees associated with tasks. MGT interviewed board members regarding this privatization. At least one board member was unaware of discussions regarding privatization of the internal audit function and how other districts address the internal auditing issue. Two board members who voted for the privatization effort indicated they may not have been fully informed about the issue. MGT of America, Inc. 12-8

9 Cost Control Systems MGT estimates the cost to employ an internal audit staff of two, including salary and benefits, totals approximately $146,300 as shown in Exhibit Conservative estimates for professional training and travel for a staff of two totals $4,000. The total estimated cost for salary and training of $150,300 would provide the district with approximately 3,328 audit hours or 2,080 per auditor at 80 percent estimated hours available for utilization. Based on the benefits stated for privatization by the district and a comparison of the firm s charge of approximately $100,000 to $125,000, the district may be in a position to save $46,300 to $21,300. The cost of services for two internal auditors from Bray, Beck & Koetter, using an average rate of $100 (manager at $105 and senior at $95), the value of 3,328 audit hours totals $332,800. Although Bray, Beck & Koetter is in a position to provide the district with resources in excess of two persons if needed under emergency situations as requested by management, the absence of a work plan to specify the number of hours to be provided by the firm prevents a true comparison of cost. The associated benefits should also be disclosed. Therefore, a comprehensive cost/benefit analysis should be undertaken by the district. Exhibit 12-6 An Internal Audit Staff Would Cost Approximately $146,300 in Salary and Benefits 2 Total Salary & Type of Position Estimated Salary Benefits Rate Benefits Internal Audit Manager $70,000 33% $93,100 Junior Auditor $40,000 33% $53,200 Estimated Total Cost $110,000 $146,300 Source: MGT. The Level of Internal Auditing Services Provided To Date Have Been Insufficient To Meet the Internal Auditing Needs of the District The district has not fully implemented the internal audit function using outside resources. At the time of the on-site review, no risk assessment, audit plan, or work plan had been developed. No internal audit reports or other formal reports had been released. Audit plans should include a risk analysis of each area proposed for audit, along with an allocation of hours to be used for each proposed audit. Audit plans should be prioritized and formally adopted by the board to ensure that adequate hours are spent auditing the areas of greatest risk to the district. In addition, special investigations and other unplanned audits are normal, and the audit plan should allocate auditor hours to deal with such issues. Without a risk assessment and an hourly budget, the school board will have difficulty determining whether adequate resources have been assigned to audit activities. The risk assessment should include, but not be limited to: 2 These salary figures were derived by considering the market rate for such positions in other school districts in the state, in addition to market rates paid by some state agencies. It is possible that the Brevard school district would be able to fill internal audit staff positions at lower rates. MGT of America, Inc. 12-9

10 Cost Control System annual budget amounts; liquidity of assets; potential loss and risk; quality of internal control system; political sensitivity and adverse publicity; external audit concerns; major changes in operations, programs, systems and controls; date and result of last audit; extent of government regulations; and management requests. Auditors Are Proceeding Without Audit Committee Guidance Many school districts maintain audit committees for the purpose of reviewing and considering internal as well as external audit matters. Typical audit committees are made up of outside individuals whose primary focus is to assist the school board in carrying out its responsibilities on internal control, financial reporting practices, and accounting policies. In the first year of establishment of the committee, member terms should vary in length so that the three-year terms expire in staggered years. The committee should meet at least quarterly, or more frequently should the need arise. Responsibilities of the Audit Advisory Committee should include: reviewing the Internal Auditor s annual audit plan and making recommendations concerning areas to be emphasized; periodically evaluating the effectiveness of the internal audit plan; reviewing the external auditor s annual management letter recommendations on internal control and accounting procedures; monitoring corrective action agreed to be taken on internal and external audit recommendations; reviewing policies and procedures affecting the financial areas; and participating in the selection of independent auditing firms, determining areas to be emphasized in external audits, reviewing proposals by competing firms, preparing appropriate comments for the governing board to consider, and assisting in the development of audit contracts with firms selected by the governing board. The internal auditors should report to the school board through the Audit Advisory Committee. As of April 1999, there have been no meetings held between Bray, Beck and Koetter, CPAs and the Audit Committee related to internal audit functions or audit feedback. However, the auditors have met twice with the school board during the past six-month period in connection with the contract for internal auditing services. The firm has reported they are not yet at the point of meeting with the Audit Committee. The committee has not yet been formally established since certain committee members have not been selected. However, the firm currently identifies the departments for review and communicates this to the Associate MGT of America, Inc

11 Cost Control Systems Superintendent of Financial Services, who prepares a letter to the department identified. Thus, the auditors have begun work without the guidance of the Audit Committee, bypassing intended controls. The Audit Committee Should Be Restructured An audit committee serves to protect the assets of an organization while maintaining independence. The role of the committee is to safeguard an organization by its authority to question top management regarding the way financial reporting responsibilities are handled, as well as to make sure that corrective actions are taken. Key characteristics for audit committee members are: in-depth knowledge of the organization, experience, and the time to commit to serving the committee s and the organization s best interests. The audit committee needs to review the internal audit function to confirm that it is performing its duties in conformity with the Institute of Internal Auditor s Standards for the Professional Practice of Internal Auditing. The Audit Committee is currently comprised of the following members: Board Chairman Superintendent Area Superintendent (one) Outside Citizen Appointees (two) The proposal is written to state that staff resources, while not voting members of the audit committee, should include key members of management in the following areas: Financial Services Human Resources Facilities Instruction The Associate Superintendent of Financial Services serves as a management liaison between Bray, Beck and Koetter and the audit committee by being available to both for questions regarding internal auditing issues. He is not an active or voting committee member. The audit committee should be restructured. The district should establish specific committee guidelines, including the qualifications of the committee members. For example, the guidelines could require a fivemember committee comprised of the Superintendent, the board chairman, and three appointed members such as an independent certified public account, a community business leader, and a representative from the PTA, PTO, or school advisory councils. Additionally, the district may include in the guidelines the length of time that a member can serve and the process for appointing audit committee members. Internal auditors are to report directly to the audit committee and the board of directors, and should have easy access to and open communication with the committee. According to the Institute of Internal Auditors, the worldwide leader for the profession of internal auditing, the internal auditor should provide a broad range of audit coverage in a variety of areas and should offer adequate findings and recommendations to the audit committee. MGT of America, Inc

12 Cost Control System The District Should Ensure Independence of the Internal Audit Function Operationally, internal auditors should be independent when obtaining evidence in the sense of being free from direction or constraint by the managers of the organization. This independence is enhanced by giving the internal audit function the authority and responsibility to report to a higher level such as the school board or an independent audit committee. Under such a reporting authority, the internal audit function is free of direction or constraint by management of the organization under audit and the internal auditor can be without fear of job or compensation retribution. Independence, in both fact and appearance, is necessary so that the internal auditors are free from any undue influence by management to report findings in a favorable light. The firm of Bray, Beck and Koetter has been awarded three separate contracts during the past four years. The firm was initially awarded the contract for auditing internal accounts under competitive bid. A second contract was awarded without competitive bid for performance contract audits to enhance utility functions. These energy audits addressed new lighting, heating, cooling and other cost-saving systems installed in the district. The third contract, also awarded without competitive bid, was for the internal auditing function. The invoices currently submitted by Bray, Beck and Koetter for payment are reviewed and approved by the Associate Superintendent of Financial Services. The invoices include an accounting of the hours applied to the job by position title and the number of hours applied to the schedule of hourly rates. While the internal auditing function will ultimately report to the audit committee, the auditors report to the Associate Superintendent of Financial Services on an interim basis pending full implementation of the audit committee. Recommendations The district should: prepare a formal cost/benefit analysis to justify privatization of the internal audit function; direct the Audit Committee to prepare a risk assessment and annual and long-term audit plans; meet with the Audit Committee on a periodic basis to provide audit feedback and revise formally approved audit plans as necessary; review the structure of the audit committee; and have invoices reviewed and approved by the Audit Committee and the school board. Action Plan 12-1 provides the steps necessary to implement these recommendations. MGT of America, Inc

13 Cost Control Systems Action Plan 12-1 Improve Internal Auditing Strategy Action Needed Who Is Responsible Time Frame October 1999 Fiscal Impact Strategy Action Needed Who Is Responsible Recommendation 1 Prepare a formal cost/benefit analysis in support of the decision to privatize the internal auditing function for future management decisions. Prepare formal cost benefit analysis. Step 1: Document the estimated cost for an internal audit function using outside sources and the estimated cost to implement an internal audit staff within the district. Step 2: Document the benefits and disadvantages of privatization in support of the management decision. Associate Superintendent of Financial Services This can be implemented with existing resources. Recommendation 2 Establish an annual audit plan and a three or five year audit plan approved by the audit committee and school board supported by a formal risk assessment. Audit committee and board approval of annual audit plan supported by audit plan and risk assessment and work plan. Step 1: Step 2: Step 3: Time Frame October 1999 Fiscal Impact Strategy Action Needed Develop risk assessment. Develop work plan to identify auditable units of priority based on the risk assessment which are to be addressed using the available number of hours available from resources allocated. Prepare a written annual and long-term audit plan for approval by the audit committee and school board. Audit Committee and School Board This can be implemented with existing resources. Recommendation 3 Ensure internal auditors only work from a formally adopted audit plan and are not involved in any other projects without formal approval. Changes to the audit plan should be formally approved by the audit committee and school board prior to the period of change to ensure that the internal auditors only work from a formally adopted audit plan and is not involved in any other projects unless formally approved in advance. Step 1: Identify the auditable units to be addressed in the audit plan as a result of the proposed change. Incorporate changes as requested by the audit committee, when deemed appropriate by the internal audit staff, or based on input from management. MGT of America, Inc

14 Cost Control System Who Is Responsible Time Frame Fiscal Impact Strategy Action Needed Who Is Responsible Step 2: Step 3: Step 4: Make changes to the work plan based on available resources: review resources available for the internal audit function; review hours to be committed to the audit plan as a result of the modification; and review the work plan based on proposed changes. Prepare revised audit plan: identify new components of the audit plan as a result of changes proposed; and include deferrals or deletions of auditable units. Seek approval of the revised audit plan. Audit Committee Ongoing Time Frame September 15, 1999 Fiscal Impact Strategy This can be implemented with existing resources. Recommendation 4 Review structure of Audit Committee to ensure that three members are from the community to include an independent certified public accountant, a community business leader, and a representative from the PTA, PTO, or school advisory councils. Review structure of Audit Committee Step 1: Identify current committee members. Step 2: Review guidelines to include community members. Step 3: Identify appropriate committee members. Step 4: Submit members to the school board for approval. The School Board This can be implemented with existing resources. Recommendation 5 Ensure the internal audit function is free of direction or constraint by management of the organization under audit. Action Needed Step 1: Payment approval of internal audit services should be performed by the audit committee and the school board: have internal auditing firm submit invoices to the audit committee for approval; forward invoices approved by the audit committee to the board for approval; and forward invoices approved by the audit committee and board to the Associate Superintendent of Financial Services for review and processing. Step 2: Payment of invoices should be prepared in the Accounting Department through normal procedures. Step 3: Payment should be released to the firm for payment of services through normal procedures. Who Is Responsible Audit Committee Time Frame Fiscal Impact As invoices are submitted This can be implemented with existing resources. MGT of America, Inc

15 Cost Control Systems Are Best Practices for Financial Auditing Being Observed? Background Goal: The school district ensures that it receives an annual external audit and uses the audit to improve its operations. The provisions of Section 11.45, Florida Statutes require annual independent financial and compliance audits of the district. These audits include the examination of the district s general purpose financial statements, consideration of the district s internal controls, determination of the district s compliance with legal requirements, and presentation of reports of audit findings and recommendations relating to those matters. 1 The district obtains an external audit in accordance with government auditing standards. The district has received annual external audits performed by the Auditor General s Office in accordance with Government Auditing Standards issued by the Comptroller General of the United States. The methodology used to develop the findings in the Auditor General reports include the examination of pertinent records of the district in connection with the application of procedures required by generally accepted auditing standards. 2 The district does not always provide for timely follow-up to findings identified in the external audit. Auditor General Reports issued for the audit of the district for the school years ending June 30, 1995 through 1998 were reviewed to determine if timely follow-up actions were taken to correct the findings in the audit reports. The Audit Report for the period ending June 30, 1998 disclosed repeat audit findings from the Audit Reports ending June 30, 1995, 1996, and 1997, respectively, relating to the monitoring and administration of the budget. A second repeat audit finding from the June 30, 1997 report relates to the monitoring of receivables due the district. Paragraph 10 of the Audit Report for the period ending June 30, 1998, states: We recommend that the board establish policies designed to ensure that any revisions to the budget are made in accordance with the board s directives and are timely approved by the board. Such policies should provide for monitoring of the budget to ensure that expenditures do not exceed available resources and that resources are allocated to programs and activities in accordance with law and board s directives. The district responded by stating: The district continues to review and implement procedures to provide for monitoring of the budget and to insure that all necessary budget amendments are made in accordance MGT of America, Inc

16 Cost Control System with the board s directives and are approved by the board. Additionally, the district reviewed Section , Florida Statutes, and established policies that allowed expenditures to exceed the amount budgeted by function and object provided that the board approves the expenditure and amends the budget within time lines established by board policies. The district added language to the most recent response of the June 30, 1998 findings by stating additionally: Due to circumstances beyond the district s control, budgets were not amended until October 13, 1998 and this inadvertently did not include amendments for those functional areas within the General Fund. Procedures will be implemented to ensure that these oversights do not occur in the future. Paragraph 30 of the June 30, 1998 Audit Report states We recommend that the district strengthen its efforts to timely collect moneys owed to the district. The district responded to the June 30, 1998 and the June 30, 1997 Audit Reports by stating: With respect to the procedures for the monitoring of amounts due the district, staff recognizes that these procedures can be improved. District personnel have been working to not only collect past amounts due the district, but also, to improve upon the existing collection procedures. As Exhibit 12-7 shows, the Auditor General has repeatedly identified problems in the district s budget administration and collection of receivables. Exhibit 12-7 Audit Findings in Auditor General Reports are Repeated School Year of Audit Findings Nature of Audit Finding Budget Administration Repeat Repeat Repeat Receivables N/A 3 Initial Repeat Source: Auditor General Reports. In comparison to its peers, Brevard has more problems with untimely follow-up as Exhibits 12-8 and 12-9 show. 3 Findings relating to receivables were not addressed in this audit period. MGT of America, Inc

17 Cost Control Systems Exhibit 12-8 Brevard has More Untimely Follow-Up of Audit Findings Related to Budget Administration District School Year of Audit Findings Brevard Repeat Repeat Lee No No Orange Repeat No Polk No No Seminole No No Volusia No No Source: Auditor General Reports. Exhibit 12-9 Brevard has More Untimely Follow-Up of Audit Findings Related to Receivables District School Year of Audit Findings Brevard Yes Repeat Lee No No Orange Yes No Polk No No Seminole No No Volusia No No Source: Auditor General Reports. Recommendation The district should respond to Auditor General Report findings in a timely manner to ensure that corrective action is taken prior to the end of the following school year. Ensure that circumstances surrounding the audit findings are resolved during the school year succeeding the period for which the report recommendation was provided and prior to the subsequent audit. Manage the budget and submit in a timely manner. Action Plan 12-2 provides the steps necessary to implement this recommendation. MGT of America, Inc

18 Cost Control System Action Plan 12-2 Ensure That the District Takes Corrective Action in a Timely Manner to Respond to Auditor General Recommendations Recommendation 1 Strategy Address audit findings in a timely manner Action Needed Step 1: Ensure that all audit findings are given attention by submitting them to the Audit Committee. Who Is Responsible Step 2: Step 3: Develop specific corrective action plans to address audit findings, assigning specific responsibility for the task involved in addressing the findings. Report progress on addressing audit findings to the Audit Committee on a regular basis. Audit Committee Time Frame Fiscal Impact September 11, 1999 or as established by the Department of Education. The corrective action can be achieved with existing resources. Are Best Practices for Asset Management Being Observed? Goal: District management has established controls to provide for effective management of capital assets. Background Asset management involves the manner in which assets are purchased and accounted for, and maximizes the disposal of surplus or obsolete equipment so that it is turned back into productive channels. Primary fixed assets in the district consist of items that include the following categories: furniture, fixtures, and equipment buildings land construction in progress Accounting for assets primarily focuses on personal property, since the risk of losing or misplacing an asset falls at this level. That is, the physical safeguarding of buildings, land, and construction in progress are not as significant a concern as it is for smaller items of personal property. The responsibilities for the tagging, tracking, and accounting for fixed assets in the Brevard County School District are shared by various departments in the organization. Property control functions are coordinated through the Internal Audit Department and the Warehouse Services Department. The district maintains two MGT of America, Inc

19 Cost Control Systems positions of Internal Auditor. These positions, however, are not considered true audit positions and should not be confused with the internal audit function discussed previously. Exhibit shows the staffing and organization of the Internal Audit Department and the Warehouse Services Department. Exhibit Organization of Brevard County s Internal Audit and Warehouse Services Departments Source: Brevard County Public Schools, Exhibit summarizes the various fixed asset responsibilities in the district. MGT of America, Inc

20 Cost Control System Exhibit Fixed Asset Responsibilities Are Fulfilled by Various District Departments Function Responsibilities Position Responsible Department Review control account To ensure that all purchases of capitalizable assets are properly recorded to the accounting records Internal Auditor Internal Audit Maintain Fixed Asset Inventory System To ensure that all assets are recorded correctly to the computerized fixed asset system Internal Auditor Internal Audit Issue bar code tags and assign identification numbers To ensure all assets are properly tagged and identified Internal Auditor Internal Audit Maintain bar code system and bar coding equipment To ensure that all software and hardware for the bar coding system are functioning properly Property Records Clerk Internal Audit Train school and departmental personnel to use bar coding equipment To ensure school and departmental personnel use proper procedures when using bar coding equipment to conduct inventory counts Property Records Clerk Internal Audit Affix bar code tags to equipment To ensure that all property items are properly tagged Property Custodian All schools and departments Safeguard equipment To ensure that all property is properly stored and locked up; to ensure that all property on loan has been properly checked out and signed for Property Custodian All schools and departments Conduct physical inventory counts Report stolen/damaged equipment Follow-up on theft/vandalism reports To ensure that all assets are accounted for Property custodian All schools and departments To ensure that all stolen or damaged equipment is recorded and investigated To ensure that all reports of property damage and theft are investigated; to report theft and vandalism incidents to law enforcement authorities Property custodian Safety Specialist All schools and departments Office of Public Safety Reconcile Fixed Asset Inventory System to general ledger To ensure that recorded accountability exists regarding fixed assets Accounting Manager 4 Accounting Services Department Physical transport of assets throughout the district To ensure that assets are properly transferred throughout the district; to ensure proper paperwork has been completed to record transfer of property Surplus Property Clerks Warehouse Services Maintain surplus inventory Dispose of surplus property To safeguard and store surplus property; to report surplus property for school board approval to write off To ensure that surplus property is disposed of through sales or auctions in ways that will generate funds for the district Surplus Property Clerks; Warehouse Coordinator Surplus Property Clerks; Warehouse Coordinator Source: Interviews, organizational charts, procedure manuals, Brevard County School District, Warehouse Services Warehouse Services 4 In the past this has been assigned to the Director of Accounting Services. MGT of America, Inc

21 Cost Control Systems Florida Statutes (F.S.) chapter 274, section.02 defines the word "property" as fixtures and other tangible personal property of a nonconsumable nature, the value of which is $750 or more and the normal expected life of which is one year or more. Chapter 274 further authorizes the Auditor General to prescribe procedures for the accounting and safeguarding of assets. Section provides that: Each item of property which it is practicable to identify by marking shall be marked in the manner required by the Auditor General. Each governmental unit shall maintain an adequate record of its property, which record shall contain such information as shall be required by the Auditor General. Section of the Florida Statutes defines a property custodian as the person to whom the custody of county or district property has been delegated by the governmental unit. The Brevard County School Board, through school board rule 6Gx5-6.02, names school principals as property custodians for all property located at and charged to schools, and similarly assigns the custodian responsibility to department heads for all property assigned or purchased through a department. School board rule 6Gx further allows for each designated custodian to delegate the custodial responsibilities to an employee under their supervision. That is, the principal at a school can name an employee under his or her supervision, such as the school bookkeeper, to be in charge of tagging, tracking, and accounting for property. This function is typically, but not always, delegated to more than one individual at a school site, often a computer technician or computer teacher because of the large volume of computer equipment located in the schools. The rules set out by the Auditor General applicable to the accounting for school-owned property are found in Chapter of the Rules of the Auditor General. The rules governing property include: property records required identification of property disposal of property inventory procedures Applicable sections of the Rules of the Auditor General pertaining to school-owned property are summarized in Exhibit on the next page. MGT of America, Inc

22 Cost Control System Exhibit Chapter of the Rules of the Auditor General Pertain to School- Owned Property Section Section Title Summary Property Records individual records should be maintained for each property Required item Property Identification property records should include: identification number property description location of property name of person responsible for item (asset custodian) name, make, or manufacturer of item year and/or model number manufacturer s serial number; for vehicles, the vehicle identification number date acquired cost or value at acquisition method of acquisition (purchase, donation, etc.); for purchased items, the voucher and check or warrant number date the item was last physically inventoried and item condition at disposition, full circumstances of disposition property records may be maintained by a variety of methods (cards, ledgers, computerized records, etc.) so long as the information is not in an erasable form and can be produced in a readable form manually prepared records must be kept in numeric sequence; electronic records must have the capability of being sorted an entity-wide control account must be used showing the total investment in property depreciation is not to be charged against property values all property should be permanently marked to establish ownership all property should have its identification number marked on the item methods of marking include: bar code labels branding irons electric pencils indelible ink metal tags paint or stencils permanent stamps steel dies exemptions from the marking requirement include items whose value or utility would be significantly impaired by physical marking items should be marked in a consistent manner to facilitate identification of the item MGT of America, Inc

23 Cost Control Systems Exhibit (Continued) Chapter of the Rules of the Auditor General Pertain to School- Owned Property Section Section Title Summary Disposition of property must be disposed of as provided in Sections , Property , and , Florida Statutes Property Inventory Procedures information regarding disposal includes: date of disposition authority for disposition manner of disposition (sale, donation, transfer, cannibalization, scrapped, destroyed, trade, etc.) identity of employee witnessing disposition if cannibalized, scrapped, or destroyed receipt number and dollar amount received if sold value of insurance proceeds for items disposed of as a result of casualty loss property records for items disposed should be transferred to an inactive property file cost or value of disposed property must be removed from control account all property should be physically inventoried in the event of a change in custodian forms used for the inventory process should include the following: identification number of item description of item physical location of item name of person responsible for item name, make, manufacturer year and/or model(s) manufacturer s serial number; if item is a vehicle, vehicle identification number date acquired any unrecorded property found during an inventory count should be added to ownership records custodians may not inventory items for which they are responsible Source: Rules of the Auditor General, Chapter , Local Government-Owned Tangible Personal Property, July 1, The Brevard County School Board maintains a computerized system for accounting and tracking fixed assets. The district s primary computerized accounting system, called Comprehensive Information Management for Schools III (CIMS), contains a module designed for maintaining fixed asset records. This module, or component of the main system, is called the Fixed Asset Inventory System. Information pertaining to district property includes a unique number identifying the asset, a detailed description of the asset including manufacturer and model number, serial number, location including school or department MGT of America, Inc