The Silver Creek 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. The Superintendent and Business Manager, who is also the Treasurer, were both appointed as purchasing agents responsible for authorizing purchases. The District’s part-time accountant is also the claims auditor.

Scope and Objectives

The objectives of our audit were to evaluate internal controls over former Superintendent James Mills’ (Mills) employment benefits and the claims processing functions for the period July 1, 2004 through April 4, 2006. However, we expanded our scope back to January 1, 2001, to review information pertinent to Mills’ split-dollar life insurance policy. Our audit addressed the following related questions:

• Were internal controls over Mills’ employment benefits appropriately designed and operating effectively?
  
  
• Were internal controls over the claims processing function appropriately designed and operating effectively?

Audit Results

The Board did not adequately monitor an employee benefit provided to Mills. His employment contract required that the District would provide a split-dollar life insurance policy and pay the applicable premiums. Premiums paid by the District for these policies are actually loans to the employee. However, he did not collaterally assign the policy back to the District. Without such an assignment, the District will not receive the $17,814 it has already paid for the Mills’ policy. This changes the arrangement from a loan, where the District would at some point receive its money back, to an improper payment of District funds to his benefit.

Subsequent to our audit identifying this issue, and after initially refusing to do so, Mills fulfilled his contractual obligation and assigned the rights in the policy to the District on December 6, 2006. The Board has not established adequately designed internal controls over the audit, processing and payment of claims. The District has not taken the necessary steps to ensure that claims are adequately audited before they are paid. The claims audit process should verify that vendor claims authorized for payment include only documented, itemized expenses that represent appropriate District costs. Our review of 67 claims and 86 credit card transactions, aggregating over $1.4 million, disclosed deficiencies in the reviews and approvals of the claims auditor, purchasing agent and departments, as well as receiving and other supporting documentation and itemization.

Finally, the Board did not adequately segregate the duties of the claims auditor from the District’s business and purchasing functions. The Board-appointed claims auditor is also employed by the District as a part-time accountant, which is not in accordance with Education Law or District policy. The Board adopted policies associated with purchasing and the claims auditor position do not adequately address the processing of claim vouchers, purchase orders or credit cards bills.

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 they planned to initiate corrective action.