The Peekskill City 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. The Board has designated the Assistant Superintendent for Business to be the District’s payroll certifying agent.

There are six schools in operation within the District, with approximately 3,000 students and 658 employees. The District’s expenditures for the 2005-06 fiscal year were $53.7 million funded primarily with Federal and State aid, real property taxes and grants. The District reported about $42 million in payroll and related fringe benefits costs for the year ended June 30, 2006.

Scope and Objective

The objective of our audit was to examine the District’s internal controls over payroll, budget transfers, and claims processing for the period July 1, 2005 through January 2, 2007. Our audit addressed the following related questions:

• Are internal controls over payroll appropriately designed and operating effectively to adequately safeguard district assets?
  
  
• Are budget transfers made in accordance with Board’s authorization?
  
  
• Did the claims auditor report directly to the Board in accordance with the established law?

Audit Results

We found that the Board has not established and implemented adequate internal controls over payroll, budget transfers, and claims processing. These deficiencies increased the risk that errors and/or irregularities could occur or District assets could be misappropriated or wasted without detection.

Our audit disclosed significant internal control weakness relating to the policies and procedures designed to prevent and detect unauthorized and inaccurate budget transfers. We reviewed 33 budget transfers, totaling $607,292, made during the 2005-06 fiscal year and found seven instances where the actual transfers were different from the Board-authorized amounts. For example, on October 19, 2005, a District official submitted a request to the Board to make a budget transfer of $285,000 from the “Social Security” account to 17 different accounts. According to the Board’s minutes dated November 1, 2005, the Board modified the budget transfer request and authorized a total of $204,000 to be transferred from the ”Social Security” account to 16 different line item accounts. In addition, the Board did not authorize a transfer request of $100,000 to the “Special Education Tuition” account. However, we found that District officials disregarded the Board’s authorization (and changes) and actually transferred the requested amount of $285,000 to the 17 different line item accounts and the $100,000 the Board did not authorize. Furthermore, 10 of 17 line item amounts in the transfer were different from the amounts authorized by the Board on November 1, 2005. Due to the lack of supervision and independent verification, the Board and District officials were unaware of the budget transfer discrepancies. The internal control weakness increases the risk of errors and/or irregularities occurring without being detected.

The Board and District officials did not adopt formal policies and procedures for processing payroll, particularly for adding and removing substitute teachers from the payroll system. In the absence of written policies and procedures, payroll department staff developed and followed an informal system for processing payroll. We found that seven Board-appointed substitute teachers never reported to work for the District during the 2005-06 fiscal year. However, payroll department staff did not remove the names of the substitute teachers from the payroll system at the end of the year. Leaving the substitute teachers in the payroll system increases the risk that unauthorized payroll checks could be generated and not detected.

Our review and analysis of 127 separate payments made to five substitute teachers showed that 66 of the payments (52 percent) were incorrect. During the audit period, the District paid salaries totaling $338,982 to substitute teachers. The Assistant Superintendent for Business informed us that the errors in payments were largely the result of payroll clerks manually computing substitute teachers’ salaries using the District’s multifaceted rate structure. As a result, substitute teachers were not always paid the proper amount.

We found that the claims auditor has not reported to the Board at any time during her eight-year tenure, in conflict with the law. The claims auditor was not aware that she was required to report to the Board. Moreover, the Board did not require any reporting from the claims auditor. This deficiency prevents the Board from addressing potentially serious issues that may affect the District. Subsequent to our field work, District officials informed us that the claims auditor is now reporting to the Board on a monthly basis.

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. Except as specified in Appendix A, District officials generally agreed with our recommendations and indicated they planned to take corrective action. Appendix B includes our comment on the issue raised in the District’s response letter.