Watervliet City School District

Financial Condition and Internal Controls Over Selected Financial Activities
Executive Summary

The Watervliet City School District (District) is governed by the Board of Education (Board) which comprises five 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 responsibility for effective financial planning and management of the District rests with the Board and the Superintendent. The Business Manager also plays a role in the financial management of the District by maintaining accounting records and reporting financial information to the Board. The District has also adopted a procurement policy to address those purchases not subject to the competitive bidding requirements.

Scope and Objectives

The objectives of our audit were to review the District’s financial condition and determine if internal controls over selected financial activities were appropriately designed and operating effectively for the period July 1, 2005 to April 9, 2007. However, in certain instances, we extended the scope of our audit period to prior periods for the purpose of accumulating historical financial information. Our audit addressed the following related questions:

• Are records of fund balances, revenues and expenditures maintained accurately and in a timely manner and are cash flows maintained at levels sufficient to finance current operations?
• Are internal controls over selected payroll processes appropriately designed and operating effectively to adequately safeguard District assets?
• Are internal controls over selected cash disbursements processes appropriately designed and operating effectively to adequately safeguard District assets?
• Are internal controls over selected purchasing processes appropriately designed and operating effectively to adequately safeguard District assets?
• Are internal controls over computer data and equipment appropriately designed?

Audit Results

The District’s audited financial statements show that general fund unreserved fund balance deteriorated from a positive balance of over $993,000 on June 30, 2004 to a fund deficit of over $1.4 million on June 30, 2006. However, the deficit was actually about $293,000 greater at June 30, 2006 as a result of general fund loans to the school lunch and special aid funds. The District incurred a general fund operating deficit of over $1.6 million for the fiscal year ended June 30, 2006 and an operating deficit of over $487,000 for the preceding fiscal year. In each of the years, the operating deficits resulted from the over expenditure of appropriations primarily in Programs for Handicapped Children, Employee Benefits, and Pupil Transportation.

Because of the general fund deficits, the District did not have sufficient cash to meet operating costs. In December 2006, the District issued Revenue Anticipation Notes (RANs) for $2.35 million in anticipation of State aid to be received in the 2006-07 fiscal year. The RANs were intended to temporarily finance its general fund deficit and address ongoing cash flow problems. The District does not have sufficient plans to repay the RANs within the timeframes allowed by law.

Our audit identified weaknesses in internal controls over payroll, cash disbursements and purchasing. We also found that the District is not properly securing its computer data. As a result of these weaknesses, District officials do not have adequate assurance that District assets are properly safeguarded.

The former Superintendent’s severance payment may have been overstated by as much as $20,000 in excess of what was allowed in her employment contract. Excess vacation days, sick leave, personal leave and unauthorized compensatory leave may have been accumulated by the Superintendent and contributed to the overpayments. In addition, during the last two years of her tenure (2003-04 and 2004-05), the former Superintendent charged 26 days to conference attendance according to District time and attendance records. There was no documentation on file to support the former Superintendent’s attendance at these conferences.

The Business Manager’s responsibilities include several duties that are incompatible. He records cash receipts and disbursements, prepares journal entries, transfers cash between bank accounts, reconciles all bank accounts and has the authority to sign all checks, either electronically or manually. He also has complete control over all phases of the manually-processed Federal grant expenditures. The Board also has not formally designated a purchasing agent. Instead, the Business Manager serves in this capacity. As the Business Manager he is responsible for auditing each claim and for approving each purchase. These functions are incompatible with his other duties as Business Manager. As a result of these internal control weaknesses, inappropriate cash disbursements could occur and go undetected and uncorrected.

In addition, the Board has not appointed a claims auditor nor audits the vendor claims themselves, as required by State Education Law. Without a claims auditor, the District runs the risk that that it may improperly expend taxpayer dollars. For the fiscal year ended June 30, 2006, the Board paid over $7.7 million of general fund claims without the benefit of an adequate claims audit.

Our review also disclosed that the District has not consistently complied with competitive bidding laws or their own procurement policy, and the Board has not properly authorized contracts. For example, the Board did not authorize four of the five contracts we reviewed, a contract for natural gas was not bid, and the District failed to solicit the requests for proposals or verbal quotes for contracts tested. Failure to comply with procurement laws and regulations means the District may not be obtaining goods and services in the most economical manner.

Finally, District officials have not established a formal disaster recovery plan for the District’s computer system. In addition, although non-financial computer data is backed up weekly onto tape drives, these backups are not stored off-site. As a result, District data is not sufficiently protected from loss.

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 the District planned to initiate corrective action.