Background

The Hopevale Union Free School District (District) was created by a special act of the State Legislature, with its facilities located in the Town of Hamburg in Erie County. The District is governed by the Board of Education (Board) which comprises seven appointed members, five appointed by Hopevale Inc. (HI) and the remaining two appointed by the State Education Commissioner. Normally, a school district is governed by a Board that is elected by the residents of the area that the district encompasses. In addition, those residents vote on the district’s annual budget. However, this is not the case in this District. Its budget is not voted upon by the public and real property taxes are not raised to fund its operations. The costs incurred by the District are reimbursed by the students’ home school districts and the State on the basis of tuition reimbursement rates calculated by the State Education Department and approved by the Division of Budget. 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’s facilities are located on the grounds of a private residential housing facility to provide education for the residents of HI, which is a not-for-profit corporation. In addition, about a third of the District’s students are bused each day from area school districts. The District offers school programming for students in grades 7 through 12 who have emotional disabilities. The District operates one school building with approximately 136 students and 73 employees. Budgeted general fund expenditures for the 2005-06 fiscal year were approximately $3.7 million, funded primarily by charges for services, sales tax, State aid and grants. Expenditures for other than personal services, employee benefits, debt service and interfund transfers totaled approximately $570,000 for the fiscal year ending June 30, 2005.

We commenced this audit after being contacted by the Superintendent concerning alleged financial improprieties committed by the former Business Manager, Kenneth Mangione. District officials suspended him and referred the matter to the Erie County District Attorney. The District’s annual financial statements are audited each year by independent auditors. Our examination of the quality of the District’s annual financial audits is the subject of a separate audit report. The District also hired its independent auditor to quantify the extent of the financial improprieties for insurance recovery purposes.¹

Mangione was the only District employee that worked in the business office. In addition to his role as Business Manager, he was appointed the District’s Treasurer and purchasing agent and designated to be responsible for certifying payrolls. The District contracts with HI for the balance of its business functions. Mangione was also the HI Business Manager; dividing his time between the District and HI. As such he supervised HI business office employees who aided in the maintenance of the District’s financial accounting records and reports, and processed cash receipts and disbursements, purchasing, accounts payable, payroll and personnel transactions. Computerized software is utilized by the District to record financial activity. At least six users have access to the District’s computerized financial system that comprises the accounting, budgeting, and payroll modules within the software package. The District’s financial statements are audited annually by Fox and Company, LLP.

The District has written employment contracts with its teachers and certain administrative staff that stipulate the compensation and leave benefits that will be provided. Other District employees’ salaries are generally authorized by Board resolution. District officials indicated that these employees are provided other benefits, such as leave accrual and usage, as if they were covered under the teachers’ employment contracts.

Objective

Our efforts were initially focused on determining the amount of unauthorized payments made to or for Mangione. We subsequently refined our objective in order to determine the manner in which he was able to obtain these unauthorized payments. Therefore, the objective of our audit was to determine if the internal controls over the processing of payroll and claims, information technology and the financial oversight by the Board are appropriately designed and operating effectively. Our audit addressed the following related questions:

• Did the Board exercise its authority and responsibility to ensure that the internal controls over the recording of financial activity and the payment of payroll and claims were appropriately designed and operating effectively?


• Are internal controls for employee payments and compensation appropriately designed and operating effectively?


• Are internal controls over the information technology function relating to financial activity appropriately designed and operating effectively?


• Are internal controls over the claims processing function and related purchasing activities appropriately designed and operating effectively?
  

Scope and Methodology

During this audit we examined internal controls over the processing of payroll and claims, information technology and the financial oversight by the Board for the period July 1, 2004 through October 11, 2006. We extended our testing for certain aspects of the payroll process and information technology back to July 1, 1999.

We conducted our audit in accordance with generally accepted government auditing standards (GAGAS). More information on such standards and the methodology used in performing this audit are included in Appendix C of this report.

Comments of District Officials and Corrective Action

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. District officials generally agreed with our recommendations and indicated that they have initiated corrective action. Appendix B includes our comments regarding issues raised in the District’s response letter.

The Board has the responsibility to initiate corrective action. Pursuant to Section 35 of the General Municipal Law, Section 2116-a (3)(c) of the Education Law and Section 170.12 of the Regulations of the Commissioner of Education, the Board must approve a corrective action plan that addresses the findings in this report, forward the plan to our office within 90 days, forward a copy of the plan to the Commissioner of Education and make the plan available for public review in the District Clerk’s office. For guidance in preparing the plan of action, the Board should refer to applicable sections in the publication issued by the Office of the State Comptroller entitled Local Government Management Guide.

________________________________________

¹ Fox and Company, LLP was also hired by HI to quantify the extent of the financial improprieties within their organization.