The Edwards-Knox Central School District (District) is governed by the Board of Education (Board) which comprises nine elected members. The Board is responsible for the general management and control of the District’s financial and educational affairs. The Superintendent of Schools (Superintendent) is the chief executive officer of the District and is responsible, along with other administrative staff, for the day-to-day management of the District under the direction of the Board.

The District employs a Business Manager, one account clerk, and a part-time claims auditor to carry out its business operations. The Business Manager also serves as the District’s Treasurer and purchasing agent. The District disbursed 2,178 non-payroll checks from five bank accounts totaling $4.9 million during the period July 1, 2005 to September 30, 2006.

Scope and Objective

The objective of our audit was to examine the District’s internal controls over selected financial activities for the period July 1, 2005 to September 30, 2006 to determine if they are appropriately designed and operating effectively. Our audit addressed the following related questions:

• Has District management established internal controls over non-payroll cash disbursements that are appropriately designed and operating effectively?
  
  
• Have the Board and District management established internal controls over the audit and approval of claims that are appropriately designed and operating effectively?
  
  
• Do any District officials have prohibited conflicts of interest with vendors or contractors?

Audit Results

Our audit disclosed weaknesses in the District’s control over non-payroll disbursement transactions. The Business Manager/Treasurer has unchecked control over the accounting records for non-payroll cash disbursements, has check writing and wire transfer authority, and controls the bank reconciliations. Furthermore, he has full transaction authority and administrator rights to the District’s computerized accounting system. As a result, the District is vulnerable to undetected losses from misappropriations of cash and/or the payment of improper claims.

Although the Board appointed a claims auditor, it did not implement an adequate internal control system over the auditing, approval, and payment of claims. As a result, claims against District funds were not properly audited before being paid. For example, the Business Manager/Treasurer improperly paid $500,000 for claims that he did not present to anyone else for audit and authorization to pay.

The Board approved District contracts for the purchase of liability insurance coverage through an agent who is the spouse of a Board member. During the period July 1, 2005 to September 30, 2006, the District expended $120,929 pursuant to these contracts. In certain circumstances, General Municipal Law prohibits Board members from having an interest in contracts with the school district they serve. Board members have an interest in a contract with the District when they receive a direct or indirect financial or material benefit. If the Board member’s spouse was paid a commission or other compensation as a result of the District’s insurance contract, and the Board member derived an indirect financial benefit from that payment, then he would have a prohibited interest in the District’s insurance contract. Although the Board member had not publicly disclosed his interest in these contracts, the Board President told us that other Board members were aware of the potential conflict of interest and that he is not permitted to vote on any Board decisions regarding the contract with his spouse’s company.

Comments of District Officials

The results of our audit and recommendations have been discussed with District officials and their comments, which appear in Appendix A, have been considered in preparing this report.