Local Government and School Accountability
Cost-Saving Ideas: School District Auditing - Roles, Responsibilities and Resources
Introduction
School taxes are a major expense for New Yorkers. When citizens vote on their local school budget, they must have confidence that their district is well managed.
School district financial accountability was strengthened substantially by 2005 legislation known informally as the Five Point Plan, which set forth a number of enhanced training and auditing requirements for school districts. These requirements help ensure a prudent use of taxpayer dollars, provide a sound internal control structure and safeguard district assets, for the benefit of our children and our communities.
The brochure [pdf] is designed to serve as a quick reference to the different audit roles and responsibilities instituted by this accountability reform, including audit committees, internal auditor, and external auditor and claims auditors. It also provides a brief description of some of the guidance and tools available to school district officials. It is not intended as a comprehensive guide to school district auditing requirements. We urge school district and BOCES offi cials to explore the resources referenced in the brochure [pdf].
Getting the Right Person for the Job: Some Considerations for Hiring Auditors and Selecting Audit Committee Members
There are four overriding factors that a board of education (board) should consider when selecting an audit committee member or hiring an auditor, be it a claims auditor, deputy claims auditor, internal auditor or external auditor.
1. What is the underlying rationale for having this position?
Each of the four types of audit functions are separate and distinct, and it is important to understand the intended protection each is meant to provide:
External Auditor - Audits financial statements to render an opinion on whether they are adhere to Generally Accepted Accounting Principles (GAAP).
Internal Auditor - Performs risk assessments and helps the board in developing internal controls to reduce financial risk.
Claims Auditor/Deputy Claims Auditor1 - Ensures that all expenditure vouchers are properly itemized and documented before payments are made by the treasurer.
Audit Committee - Assists the board of education with matters related to both internal and external audits, including input on the hiring of internal and external auditors and reviewing reports and recommendations.
2. What type of experience does the person need?
External Auditor - Qualifications are most specific for the external auditor, who must be either a Certified Public Accountant (CPA) or independent Public Accountant (PA). A CPA is required to successfully fulfill rigorous educational, experience and examination requirements. PAs are licensed, based solely on experience. The board should ensure that the person or firm being hired has the proper experience needed to conduct a school district audit. The board should obtain information about the education and experience of the audit staff, outcomes of any peer reviews, reputation of the firm and the firm’s familiarity with school district auditing.
Internal Auditor - Although a professional certification is not mandatory, SED regulations require that internal auditors adhere to professional auditing standards, which include, but are not limited to, independence, objectivity and specific auditing skills. A link to the professional auditing standards can be found below in the Audit Resources section. An internal auditor should have or be able to obtain expertise in school district finances and should have experience in risk assessment.
Claims Auditor/Deputy Claims Auditor - Requirements for claims auditors/deputy claims auditors are less stringent. The individual(s) or firm(s) selected should have or be able to obtain expertise in school district finances, and have expertise with purchasing policies.
Auditing Committee Member - Members must have a basic understanding of financial reporting and school district finances, and should have a good understanding of the benefits of the various types of audits and be able to communicate that understanding to the entire board. Committee members should also develop knowledge about the particular school district, including the scope and complexity of its operations, its specific areas of risk and its internal structure. No licensing or certification is required.
3. How do I avoid conflicts of interest?
There are some restrictions that help you avoid a conflict of interest, including prohibitions against hiring or appointing immediate or close family members. These are defined as a parent, sibling, non-dependent child, spouse/spouse equivalent, or dependent (related or not) of a school board member, district employee or contractor. In addition to legal restrictions, a school district is advised to use good judgment by not appointing other relatives, such as in-laws, to auditing positions.
4. Is an RFP required? If so, what should it contain?
The Five Point Plan requires the external auditor be a Certified Public Accountant or an independent Public Accountant, and mandates that a request for proposal (RFP) be utilized in filling this position. However, an RFP is not required when hiring claims auditors.
The RFP is a detailed document that contains a description of the services requested and information about the school district. It outlines the scope of the audit, including which financial statements will be audited and the applicable time period to be audited. It should specify expectations for entrance/exit conferences, work products and reports. Contract terms and conditions should be part of the RFP. The document should also specify the precise information the accounting firm must include in the proposal.
SED has posted a model RFP template on its website and the link can be found below in the Audit Resources section. It should be modified to suit each school district’s needs.
1 Education Law was amended in 2011 to establish the position of deputy claims auditor. The deputy claims auditor shall serve in the absence or inability of the claims auditor or during such time as there is a vacancy in the office of claims auditor.
Who's Who in School District Auditing: An Overview of Roles and Responsibilities
Audit Committee:
What is its role?
Advisory. Assists and advises the board of education on issues relating to the district’s internal and external audits.
Is the position required by statute?
Yes, except for school districts with fewer than eight teachers. The Committee must have at least three members and is required
to develop and operate under a charter.
Who can hold this position?
- Board members, nonmembers as a separate advisory committee or a combination of the two
- Committee members can reside within or outside the district
Who CANNOT hold this position?
- School employees
- Persons connected with district
- Vendors or service providers
- Non-board members with close or immediate family members who are district employees or service providers
What are the necessary qualifications and skills?
Members should collectively possess knowledge in accounting, auditing, financial reporting and school district finance.
Internal Auditor:
What is its role?
Develops a risk assessment and ensures proper internal controls are in place and working. Performs an annual update of the risk assessment. Periodically tests and evaluates one or more areas of the district’s operations. Prepares reports analyzing risk assessment findings and recommends changes for strengthening internal controls and reducing identified risks.
Is the position required by statute?
Yes, except for school districts with fewer than eight teachers, expenditures of less than $5 million in the previous year, or enrollment of fewer than 300 students (fewer than 1,500 students as of April 1, 2013).
Who can hold this position?
- A district employee who meets professional auditing independence standards
- A person hired via inter-municipal or shared service agreements
- An independent contractor
- BOCES employees - only if the BOCES does not provide significant and material services to the district
- District resident or nonresident
- Reports directly to the board
Who CANNOT hold this position?
- Employees with responsibilities for other business operations in the district
- Close or immediate family members of an employee, officer or vendor
- The district's claim auditor
- The district’s deputy claims auditor
- The district's external auditor
What are the necessary qualifications and skills?
Has expertise in school district financial operations, pertinent statutes, regulations, purchasing policies, accounting systems/ procedures, and other related areas
External Auditor:
What is its role?
Performs the legally required financial statement audit and renders an opinion on whether the financial statements are in accordance with Generally Accepted Accounting Principles (GAAP).
Is the position required by statute?
Yes, except for school districts and BOCES with fewer than eight teachers. The district must use a request for proposals (RFP) process to hire the external auditor on a 5 year basis/term.
Who can hold this position?
- Required to be a Certified Public Accountant (CPA) or independent Public Accountant (PA)
- The individual or firm should be able to provide an affirmative statement that it is independent of the school district as defined by Generally Accepted Government Auditing Standards (GAGAS)
- Auditor rotation is not required, but boards are encouraged to consider changing the audit firm to ensure independence and fresh prospective
Who CANNOT hold this position?
- The district’s claims auditor
- The district’s deputy claims auditor
- The district’s internal auditor
- Any firm or individual whose hiring would result in a conflict of interest
What are the neccessary qualifications and skills?
CPA or PA registered and licensed to practice in New York State, and has or can develop expertise in school district financial operations, pertinent statutes and regulations, purchasing policies, accounting systems and procedures.
Claims/Deputy Claims Auditor:
What is its role?
Approves vouchers and invoices submitted to the school district or BOCES prior to their payment. Ensures proper documentation and itemization are provided and that payment is for proper school district purposes.2
Is the position required by statute?
No. The board may establish these positions by resolution or must assume responsibility for auditing all district claims itself.
Who can hold this position?
- A district employee
- A person hired via an inter-municipal or shared service agreement
- An outside contractor, if no conflict of interest results
- A BOCES so long as the board is responsible for auditing all claims from the BOCES providing the delegated function either directly or through a delegation to a different independent entity
- District resident or nonresident
- Exempt from Civil Service classification (however, employees currently classified under civil service do not lose this classification)
- Reports directly to board and serves at the pleasure of board.
Who CANNOT hold this position?
- A member of the district board
- A clerk or treasurer of the board
- The superintendent
- Any district official responsible for business management
- An employee under direct supervision of the superintendent
- The district’s purchasing agent
What are the necessary qualifications and skills?
Has or can develop expertise in school district financial operations, purchasing policies, accounting systems and procedures, and other
areas deemed necessary.
2 Education Law was amended in 2011 to allow any school district with actual enrollment of more than 10,000 students in the previous school year to audit a statistically representative sample of claims in lieu of auditing individual claims separately so long as it is determined by resolution of the board that the methodology for choosing the sample provides reasonable assurance that all claims are represented.
Exemptions from Requirements:
Certain small districts are exempt from some of these audit requirements. School districts with less than eight teachers are not required to engage either an internal or external auditor, nor are they required to set up an audit committee. The internal audit function is not required if a school district had expenditures of less than $5 million in the previous year or had an enrollment of fewer than 300 students (fewer than 1,500 students as of April 1, 2013). However, qualifying small schools are still required to annually certify to the Commissioner of Education that they are exempt from internal audit function requirements. More information on the certification requirements can be obtained from the NYSED Office of Educational Management’s website or by phone at (518) 474-6541.
Cost-saving Tip:
Investigate the feasibility of entering into an inter-municipal or shared service agreement with other school districts when obtaining internal and claims auditing services. Additional information on cooperative agreements can be obtained by contacting the OSC regional office serving your school district or by emailing us.
Auditing Resources:
Claims Auditors:
“Claims Auditor, Internal Audit Function & Audit Committee,” Mary Ellen Clark and William J. Klohck, August 2006 (Look under the “Auditing” header for the above noted topic.)
“School District Accountability: Claims Auditor,” State Education Department, August 2006
“Sample Format for Claims Auditor Report to Board of Education,” State Education Department
“Improving the Effectiveness of Your Claims Auditing Process [pdf],” Office of the State Comptroller
Audit Committees:
“Audit Committee Charter Guidance [pdf],” Office of the State Comptroller (includes audit committee charter template)
Internal Auditors:
“Guidance on Internal Audit Functions,” State Education Department
“Getting the Most Out of Your Internal Audit Function [pdf],” Office of the State Comptroller
“Standards and Guidance – International Professional Practices Framework,” The Institute of Internal Auditors
External Auditors:
“External Audit Guidance for School Districts [pdf],” - Office of the State Comptroller
“Sample Request for Proposals (RFP) for External Auditor,” - State Education Department (Look under the “Auditing” header for the above noted topic.)
Office of the State Comptroller Auditors:
Understanding the Audit Process [pdf]"
For Further Information:
- New York State Education Department
- New York State Education Department Office of Professions’
- New York State School Boards Association
- New York State Council of School Superintendents
- New York State Association of School Business Officials
- Government Accountability Office Auditing and Financial Management
You may contact the OSC Regional Office serving your area or email questions to LGSA.