Orchard Park Central School District

Internal Controls Over Selected Financial Activities
Executive Summary

The Orchard Park Central School District (District) is located in the Towns of Aurora, Boston, Elma, Hamburg, Orchard Park and West Seneca, all of which are in Erie County. The District is governed by the Board of Education (Board), which comprises seven elected members, and 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 Board direction.

Compensation and benefits provided to District employees and officials are covered by Board-approved collective bargaining unit agreements, individual employment contracts, or employment letters. The District has also established a Flexible Fringe Benefits Program for non-union educational administrators to which the District contributes funds that participants can use to pay for eligible expenses.

Certain District administrators perform multiple tasks for the District. The Director of Information Technology served as the claims auditor.¹ The Assistant Superintendent for Business serves as purchasing agent and administrator of payroll. The Assistant Superintendent of Personnel is responsible for all personnel matters and employee benefits coordination, timesheet recordkeeping, as well as managing the District’s Flexible Fringe Benefits Program.

District officials indicate that insurance coverage is procured based on recommendations from a District Insurance Advisory Committee. The District routinely uses wire transfers to transfer monies to and from District accounts.

Scope and Objective

The objective of our audit was to evaluate internal controls over selected financial activities for the period July 1, 2004 through December 29, 2006. Our audit addressed the following related questions:

• Are internal controls for employee compensation and benefits appropriately designed and operating effectively?
• Are internal controls for the Flexible Fringe Benefits Program appropriately designed and operating effectively?
• Has the Board established adequate procedures to ensure the procurement of insurance is made in the best interest of taxpayers?
• Are internal controls over claims processing designed appropriately and operating effectively?
• Are internal controls over wire transfers designed appropriately and operating effectively?

Audit Results

The Board did not create an appropriate control environment to adequately safeguard District assets. The Board, together with District administrative staff, fostered an environment of entitlement for District administrators who left District employment. A lack of oversight and monitoring facilitated the many improper, unsubstantiated and unitemized payments made to employees and vendors, the improper use of the Flexible Fringe Benefits Program, and the inappropriate deferral of insurance procurement decisions to an Insurance Advisory Committee, whose members benefited from those decisions.

We found that District employees were improperly paid separation payment benefits and special assignment pay totaling $265,104. These improper payments occurred because the Board did not have monitoring controls in place to ensure that compensation was based on properly authorized and clearly defined contracts or agreements, and that payments were consistent with applicable policies, contracts and reporting requirements. In addition, the Personnel Office did not have timesheets to support 2004-05 payroll payments to the Treasurer, the District Clerk/Secretary to the Superintendent and eight support staff totaling $376,572.

We also determined that the Board has not developed adequate procedures to govern its Flexible Fringe Benefits Program (Program) for District administrators, which provides a Health Reimbursement Arrangement (HRA). The way the District’s Program is currently operating is inconsistent with Internal Revenue Service (IRS) regulations for HRAs in a number of ways. The District allowed reimbursement for ineligible expenses, and did not verify that submitted expenses are supported by documentation, such as receipts from providers. In addition, the District allowed certain former administrators to divert income to their HRA accounts on a pre-tax basis to avoid jeopardizing their pension income from New York State Teachers’ Retirement System, or simply to avoid taxes. IRS regulations strictly prohibit employee contributions to HRAs. As a result, the District may be subject to the imposition of fines and penalties by the IRS and the State in addition to taxes on the amounts deposited in the Program.

The District’s procurement policy does not require the District officials to obtain competitive quotations when procuring insurance. The Superintendent has not complied with the Board’s policy on insurance, which requires the Superintendent, annually, to review the District’s insurance program and make recommendations to the Board if more suitable coverage is required. We found the Insurance Advisory Committee makes recommendations to District officials on a number of matters, including renewals of the District’s insurance policies, but no evidence of the Committee having sought competitive quotations with respect to the annual renewals or having advised the District to do so. We also found that the members of the Committee or their firms shared fees or commissions arising from the District’s renewal of certain insurance policies. During our audit period the District made payments for coverage totaling more than $1.3 million to the firm of one of the members of the Committee, and from the amount paid to that firm, the other members of the Committee or their firms received fees or commissions totaling $45,371.

The Board and District officials have not properly segregated duties to ensure an independent review of claims, communicated clear expectations to the claims auditor or provided adequate oversight for this important internal control function. As a result, the District paid for certain inappropriate costs, and is at significant risk of paying for excessive or unauthorized expenses. Our tests of 70 judgmentally selected claims identified numerous problematic payments, including 23 claims for costs that were not proper District expenses, 26 claims whose expenses were not itemized, and nine claims that were initiated and approved by the same person – the department head who served as claims auditor. Three payments totaling $117,785 had no evidence of claims auditor review or approval.

There was no authorization indicating approval by the Assistant Superintendent of Business for any of the outgoing wire transfers we audited, totaling more than $1.4 million. In addition, District officials did not adequately monitor the activities of the business office to ensure there was sufficient segregation of duties. The Treasurer, who is responsible for making the wire transfers, is also responsible for reconciling bank accounts. She was not required to obtain authorization prior to transferring funds, and there was no limit set on the amount of funds that could be transferred. There is no evidence that the District mitigated this risk through supervisory review or approval by the Assistant Superintendent of Business.

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 indicated that they have taken or plan to initiate corrective action.