Hudson Falls Central School District

Internal Controls Over Selected Financial Operations -
EXECUTIVE SUMMARY

The Hudson Falls 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.

Scope and Objective

The objective of our audit was to assess the adequacy of the District’s internal controls over information technology, payroll, purchasing, and claims processing during the period July 1, 2005 to February 8, 2007. Our audit addressed the following related questions:

• Are the internal controls over the information technology system’s user rights adequately designed?
• Are the internal controls over payroll and purchasing appropriately designed and operating effectively to provide adequate segregation of duties?
• Are the internal controls over claims processing appropriately designed and operating effectively in compliance with District purchasing policies and procedures?
  

Audit Results

We found deficiencies in the assignment of user rights to the software system, which enabled the current and former District Treasurers, the senior payroll clerk, and the business office staff to perform functions outside those required for their job duties. The current Treasurer (Treasurer) was also the District’s system administrator and therefore could add new users to the system, update an individual’s access rights, and perform other administrative functions including management overrides of the system. With such complete access, the Treasurer could conceivably initiate and conceal transactions. Similarly, the user rights assigned to business office staff allowed them access to elements of the accounting system that were not required for their job duties. For example, the senior payroll clerk could edit cash disbursement schedules, change vendor entries on purchase orders, add or delete vendors, and change employee earnings. Although we found no exceptions in transaction processing on the software system, internal controls are compromised when user rights are not properly assigned to limit users’ access to only those areas necessary to do their jobs. As a result, the District incurs the risk that errors, irregularities, or fraudulent activity could occur and not be detected and corrected in a timely manner.

District officials had not provided adequate segregation of duties over the payroll and purchasing processes. The District’s payroll procedures, which were handled entirely by the payroll clerk, did not provide for sufficient segregation of duties. The Treasurer’s accounts payable signature disk was not adequately secured, allowing the accounts payable clerk to control both the check signing and the check printing functions. Although our audit did not find any material exceptions in payroll and purchasing, District officials should segregate payroll and purchasing duties, or increase management oversight, to reduce the risk that errors and irregularities could occur in the future.

There were also significant deficiencies in the design of the internal controls over the claims process. Because there were no written procedures for the audit of claims, claims were not properly audited, including 77 payments totaling $937,143 that were not approved for payment by the claims auditor. As a result, there is an increased risk that the District could incur unnecessary expenses and that fraud, abuse, and professional misconduct could occur and go undetected and uncorrected in a timely manner.

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. District officials generally agreed with our recommendations and have initiated, or indicated they planned to initiate, corrective action.