Independent Audit Finds Multiple Problems With Albany School Finances

Every year, the district is required to hire an external auditor to review the district's finances to ensure the district is in compliance with all relevant accounting standards, state, and federal laws. The district has just released its 2013-2014 audit reports, posted to the Board of Education website under the (perhaps intentionally) undescriptive names Financials1 - Financials4.  This year, the auditing firm, Bonadio & Co., found significant problems with some of the district's financial practices. The Board will be discussing these reports at tonight's Board of Education meeting - 7:00 PM at Sheridan Preparatory Academy.

For those who aren't interested in reading all 77 pages of the reports, here's the Cliff Notes version:

I. At Least Two “Significant Deficiencies” in District’s Internal Control Over Federal Grant Funds

A. No Oversight of Consultant Spending

1. At Least $15,000 in Inappropriate Consultant Payments Identified

The district spent approximately $15,000 from a School Improvement Grant (awarded by NYSED using federal Race-to-the-Top funds) on “expenditures from a consultant that could not be supported by adequate documentation” due to an “inadequate review process over invoices associated with a significant multi-year consulting contract.”

Auditor recommends the district “implement policies and procedures over their invoice review with respect to invoices associated with significant multi-year vendor contracts to ensure the reviewer(s) have the proper understanding of the contract terms prior to reviewing the related invoices.”

District response: it “has already reviewed its procedures regarding consultant contracts and payments. A new process has been developed, documented, and presented to the Board of Education. It is anticipated that the new process will be implemented shortly.”

Source: Bonadio & Co., City School District of the City of Albany: Financial Statements and Required Reports Under OMB Circular A-133 as of June 30, 2014, Schedule of Findings and Questioned Costs, page 58, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials2.pdf (page 64 of PDF)

2. District’s Current Claims Auditing Process Is Inadequate

“It does not appear there is adequate time allotted to the Claims Auditor position for the volume of invoices that are required to be reviewed each week. In addition, there is a checklist to be used as part of the review process, but it is not referred to during weekly reviews. There also does not appear to be a contract review process integrated into the auditing procedures….The District should review the claims audit process to determine if the proper policies and procedures are in place and determine the proper amount of time required to perform a comprehensive review of all invoices, especially more complicated invoices associated with multi-year vendor contracts.”

Source: Letter from Bonadio & Co. to Albany Board of Education, page 1, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials4.pdf

B. Inadequate Records of Employee Time Spent on Grant-Funded Programs

Employees who work less than full time on federal programs must prepare monthly time and effort certifications. However, auditors discovered that the district “did not obtain the proper documentation on the time and effort certifications for employees who were allocated to” special education and magnet school programs funded by federal grant money. “There were instances of missing or inaccurate time and effort certifications for both programs.”

District response: it “has had procedures in place for several years to assure compliance with reporting requirements relating to grants. In light of recent findings, the District will review the procedures, make adjustments as necessary, and provide training as necessary.”

Source: Bonadio & Co., City School District of the City of Albany: Financial Statements and Required Reports Under OMB Circular A-133 as of June 30, 2014, Schedule of Findings and Questioned Costs, page 57, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials2.pdf (page 64 of PDF)

C. Additional Internal Control Problems May Exist

“Our consideration of internal control over compliance was for [a] limited purpose…and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We consider the deficiencies in internal control over compliance described [as summarized in A and B, above]…to be significant deficiencies.”

Source: Bonadio & Co., City School District of the City of Albany: Financial Statements and Required Reports Under OMB Circular A-133 as of June 30, 2014, Schedule of Findings and Questioned Costs, page 52, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials2.pdf (page 58 of PDF)

II. Other Issues

A. District Continually Exceeds 4% Fund Balance Limit

1. Current Balance Is Over Limit

The unrestricted fund balance in the district’s General Fund exceeds 4% of its subsequent year’s expenditures budget, in violation of section 1318 of the New York State Real Property Tax Law.

District response: “The District is over the limitation by less than 1%, or .65%. As a matter of practice, the District allocates excess fund balance to reduce the financial burden on taxpayers in future budget cycles. In fiscal year 2014, the District planned to reduce fund balance but could not do so as a result of revenues generated from the sale of two buildings and improved collections of past due school taxes by the County. The timing of these events was highly unpredictable. The District will plan to use the excess fund balance in the next budget cycle.”

Source: Bonadio & Co., City School District of the City of Albany: Financial Statements and Required Reports Under OMB Circular A-133 as of June 30, 2014, Schedule of Findings and Questioned Costs, page 57, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials2.pdf (page 64 of PDF)

2. District Has History of Noncompliance

Despite the district’s claim that its excessive fund balance this year was due to “highly unpredictable” events outside its control, this is a chronic problem. The unrestricted fund balance also exceeded the 4% limit in the 2012-13 school year.

Source: Bonadio & Co., City School District of the City of Albany: Financial Statements and Required Reports Under OMB Circular A-133 as of June 30, 2014, Schedule of Prior Audit Findings, page 55, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials2.pdf (page 61 of PDF)

When the district’s prior violation of the 4% limit was discussed at the October 3, 2013 Board meeting at which the 2012-13 audit report was presented, “Mr. Hogan noted that would be resolved in the 2013-2014 budget.”

Source: Minutes from October 3, 2013 workshop meeting, page 2, available at http://www.albanyschools.org/district/board/Minutes/2013-14/10-03-13.pdf

District also exceeded the 4% limit in 2010-11.

Source: Minutes from October 6, 2013 meeting, page 2, available at http://www.albanyschools.org/district/board/Minutes/2011-12/10-6-11.pdf

B. Scholarship Funds Not Invested Correctly

Certain non-compliant investments held in the scholarship fund no longer meet the definition of an authorized investment instrument in accordance with State Law.

Source: Letter from Bonadio & Co. to Albany Board of Education, page 1, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials4.pdf

C. Extracurricular Activity Funds Mismanaged

1. Insufficient Records Kept

“Insufficient accounting controls are exercised over cash receipts at the point of collection to the time of submission to the Central Treasurer. Accordingly, we were unable to obtain sufficient audit evidence over such receipts beyond the amounts recorded.”

Source: Bonadio & Co., City School District of the City of Albany: Extraclassroom Activity Funds Statements as of June 30, 2014 Together with Independent Auditor’s Report, page 6, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials1.pdf (page 7 of PDF)

2. Nonstandard Accounting Methods Used

Extracurricular activity funds reported “on a cash basis, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. The cash basis of accounting, therefore, does not recognize receivables and payables, inventories, long lived assets, and accrued income and expenses, which would be recognized under accounting principles generally accepted in the United States of America.

Source: Bonadio & Co., City School District of the City of Albany: Extraclassroom Activity Funds Statements as of June 30, 2014 Together with Independent Auditor’s Report, page 2, available at http://www.albanyschools.org/district/board/2014-15/10-2/2013-14_Financials1.pdf (page 3 of PDF)