Hauppauge Union Free School District

Financial Condition and Internal Controls Over Financial Operations - EXECUTIVE SUMMARY

The Hauppauge Union Free School District (District) is governed by the Board of Education (Board), which comprises seven 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.

District managers are responsible for establishing a system of internal controls designed to provide reasonable assurance that District assets are properly safeguarded, financial reporting is accurate, purchases are made in accordance with District policy, and payrolls are accurate. A good system of internal controls should also provide for the timely identification of errors and/or irregularities which may have occurred so that corrective action can be taken. Once established, District managers are responsible for monitoring controls to ensure that they are operating properly.

Scope and Objective

The objectives of our audit were to determine if sufficient controls were in place to assist the Board in determining the District’s financial condition and to examine the control environment over basic financial operations. We reviewed the internal controls over purchasing, payroll, cash receipts and disbursements and information technology systems for the period July 1, 2004 through April 30, 2006. In some instances, we reported on transactions, activities, and internal controls for periods before July 1, 2004 and after April 30, 2006 to provide perspective relating to the District’s budgeting practices. Our audit addressed the following related questions:

• Did the Board exercise its oversight responsibilities to ensure that policies and procedures were in place to confirm the accuracy of financial reports (budget status reports and fund balance projections)?
• Has the District established adequate internal controls to protect and account for District assets?

Audit Results

We found that the Board did not exercise its oversight responsibilities to ensure that policies and procedures were in place to confirm the accuracy of financial reports or provide for the adequate protection of District assets. The Board did not require District officials to prepare and submit the necessary financial reports and as a result, the Board did not anticipate an operating surplus of $5.2 million for the 2004-05 fiscal year. We found that the former Assistant Superintendent for Business prepared the 2005-06 budget based on incomplete fund balance projections. As a result, the Board and District taxpayers were not provided with accurate financial condition information, taxes levied for the 2005-06 year were higher than necessary and District programs were unnecessarily cut.

In addition, District officials overstated the amount of fund balance needed to cover the cost of encumbrances for fiscal years 2002-03, 2003-04 and 2004-05. As a result, District officials were able to conceal the fact that the District’s unreserved fund balance exceeded the Real Property Tax Law statutory limit of 2 percent. ¹ The District could have ultimately reduced the tax levy, by about $1 million, in any of these fiscal years, if the proper amount of money had been reserved for encumbrances.

We also identified other weaknesses in the oversight of the District’s financial operations. These include the absence of policies and procedures that establish control and direction over the day-to-day operations of payroll, personnel, and cash receipts and disbursements. For example, the Board has not addressed 28 of the 52 findings and/or recommendations made during five different audits. In addition, the Board hired a firm to serve as both the claims auditor and the internal auditor, which diminished the effectiveness of both of these important functions.

We noted several weaknesses in the District’s financial operations including the lack of segregation of duties in the cash receipts and disbursements, payroll and purchasing processes. We also found that payments made to professional service providers were not in accordance with their Board-approved contracts. As a result, one vendor was paid $67,830 for services that were not included in the contract.

We also found that controls over the District’s financial computer operations need to be improved. Internal control weaknesses led to some users having full or nearly full access to all areas within the District’s financial accounting software. Some users have two user accounts assigned to them and other user accounts were not disabled after the employees no longer worked for the District. For example, the former purchasing agent’s user account was still active and being used in June 2006 even though he left the District in September 2005. We also found that the District’s vendor master file contains vendors with more than one account and there were no procedures to deactivate vendors that are no longer used. Finally, we found that the District has no disaster recovery plan for its computer system in the event of an emergency. Unless the District reduces these risks and implements enhanced controls, unauthorized users may be able to access applications and make unauthorized changes to data that are not detected.

Comments of District Officials

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

¹ In July 2007, legislation was enacted to change the Real Property Tax Law statutory limit of unappropriated fund balance to 3 percent of the 2007-08 fiscal year's budget and 4 percent of the 2008-09 fiscal year's budget.