FOR RELEASE:

Comptroller Investigation Finds Poor Financial Oversight,
Questionable Expenses at Katonah-Lewisboro School District

District Has Tightened Internal Controls Following Investigation

State Comptroller investigators have found lax controls, questionable expense claims, and improper credit card purchases at the Katonah-Lewisboro school district, New York State Comptroller Alan G. Hevesi said today.

As detailed in a report released today, investigators found that the district had already taken several steps to improve oversight and strengthen policies prior to the start of the investigation, including the implementation of a new charge card usage policy. The district has also implemented many of the recommendations that stem from the completed investigation.

Investigators found:

• Several thousand dollars worth of equipment, including a copier, printer, fax machine, books and software purchased by the district, was located at the home of a former employee. Some of the equipment was recovered during the course of the investigation, but more than $5,000 in equipment could not be located. Investigators also questioned the business justification for some of these purchases.
• Fifty-seven percent of credit card purchases ($48,129) tested were paid without supporting documentation, and 41 percent ($38,400) were paid without information regarding the business purposes of the expenditure.
• Questionable reimbursement claims, including invoices that were apparently fraudulent, were submitted by at least two employees for several thousand dollars under the Individual Benefits Fund (IBF) — a fund that reimburses employees for health, educational and other expenses.
  Ninety-three percent of expense claims under the IBF were paid without required receipts or proper documentation.

The investigation, which examined activities from July 1998 through June 2005, was initiated in January 2005 in response to complaints regarding credit card misuse and favorable treatment afforded to certain District vendors received by the Comptroller’s Office. The investigation was later expanded to include a review of the district’s employee benefits fund. The investigation was conducted in cooperation with the State Attorney General’s Public Integrity Unit.

“The problems uncovered at the Katonah-Lewisboro school district occurred because those responsible for watching were not doing their jobs. There was virtually no functioning system of controls, and it appears that some took advantage of this,” Hevesi said. “My office has been working with schools around the State to help them implement strong control environments and to set a tone from the top that fraud will be pursued and prosecuted. I am encouraged that the district has already begun to implement many of our recommendations.”

Investigators did not find any credible evidence to support allegations that that any current or former district employees received favorable treatment from any district vendors in exchange for personal benefits, nor did they find any credible evidence of conflicts of interest between district officials and district vendors.

Investigators also examined credit card charges from May 2001 to September 2004 in response to allegations of credit card misuse. The district proactively canceled its credit cards in September 2004 after its external claims auditor raised concerns about the lack of controls. Investigators found that of the $93,918 charged during the period examined, the district paid $48,129, or approximately 57 percent, without the required supporting documentation. In addition, $38,400 of these charges was paid without any supporting documentation or information regarding the business purpose of the expenditure.

The district, which like all school districts in New York State is tax exempt, paid taxes on 75 out of 113 transactions. Investigators found that officials bypassed the district’s procurement process, which required pre-approval and purchase orders before purchases were made, when making credit card purchases. For example, staff purchased nearly $14,000 in office supplies and bypassed the district’s procurement procedures by charging the items. In addition, investigators found that credit card purchases were not properly reviewed to ensure that they were for legitimate school business, and other staff members were allowed to use credit cards that were not assigned to them.

The former director of administrative services, who retired in December 2004 and served as a consultant until June 31, 2005, used his district charge card for 142 of the transactions reviewed, or 32 percent of all district charges tested. Investigators questioned the business purposes behind some of the purchases he made, including a $1,270 software package, photo/sound equipment from a Target Store in Maryland for $190, and an H&R Block e-solutions software package for $40.

Thirty-nine items, including 17 items purchased with the former director’s district credit card such as a copier, printer, fax machine, books and software, were located at his home. District officials were unaware of many of these purchases and did not know that the items were located at the former director’s home. These items were later returned to the district.

In addition, the former director purchased new computers in 2001, 2002 and 2003 for about $7,500 that were either delivered or brought directly to his home. After investigators attempted to locate these computers, he returned the computer purchased in 2003 to the district. Investigators could only locate a monitor from one of the other two computers, which remain unaccounted for and cost the district more than $5,000.

Investigators found that at least two district employees submitted what appeared to be fraudulent invoices for expenses under the IBF. The district’s external auditor identified during the 2003-2004 fiscal-year that some IBF claims had insufficient documentation and suggested that the district require a more detailed explanation of expenses. In response to the external auditor’s findings, the district added another person to review expense claims. The Comptroller’s investigators reviewed these questionable expense claims identified by the external auditor and determined that the receipts submitted appeared to have been altered or were counterfeit. Under the IBF, eligible employees can be reimbursed for up to $4,600 in expenses annually for the employee’s life insurance, eye care, some health care expenses, organizational dues or tuition.
The findings of the investigation relating to the IBF program have been referred to the State Attorney General’s Office, which is continuing to investigate.

Because of irregularities identified, investigators tested a sample of 135 transactions processed under the IBF program and found:

• 125 of 135 claims were reimbursed without required receipts or other proof of payment.
• 116 of 135 claims were reimbursed without original documentation.
• One individual was reimbursed $1,100 for a joint health club membership even though only $550 of the membership was eligible for reimbursement.
• One individual was reimbursed $4,650 for tuition without required pre-approval.

The Comptroller’s Office recommended that the district:

• Seek reimbursement for any IBF reimbursements that were improperly obtained and review the oversight and policies governing the program.
• Improve the district’s internal audit policy and clearly define the role and responsibilities of the internal auditor.
• Review questionable credit card expenses and seek reimbursement where appropriate.
• Require training for school board members on their financial oversight responsibilities.
• Establish an internal audit function to develop an annual risk assessment for fiscal operations, review financial policies and procedures, test internal controls and recommend improvements to strengthen controls and review risk.
• Revise the internal audit policy to better define the duties of the internal auditor and require the internal auditor to report directly to the Board.

Following financial scandals at several Long Island school districts, Hevesi along with a coalition of education and accounting groups developed a five-point plan to help every school district strengthen its ability to prevent and find fraud. This plan was passed by the Legislature and was signed into law by the Governor. Elements of the plan are reflected in the Comptroller’s recommendations to the Katonah-Lewisboro school district.

The Katonah-Lewisboro Union Free School District operates six schools with approximately 3,900 students and has a workforce of about 650 employees. Its 2004-05 budget was $85 million.

Click here for a copy of the report.

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