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Comptroller
Hevesi Testifies on School District Audits and Financial Accountability
to Senate Higher Education Committee
State Comptroller Alan G. Hevesi testified before the State Senate
Committee on Higher Education today regarding audits and financial
accountability in school districts across New York State.
“I think it is now clear that the State Comptroller’s
Office must resume regular audits of school districts to provide another
layer of independent and expert oversight and monitoring for school
districts and their outside auditors,” Hevesi said. “To
accomplish that goal, I have requested $5.8 million so that I can hire
and train 89 auditors in order to audit all school districts in the
state, and also add investigators to my Investigations unit who would
be dedicated to working with those school auditors.
“I am very disappointed that the Governor did not include this
request in his Executive Budget proposal,” Hevesi added. “This
important issue must be addressed now. I urge the Legislature to provide
the necessary funding.”
***
Following is Hevesi’s complete testimony:
During the late spring and early summer of 2004, a series of public
reports surfaced concerning allegations of theft by senior management
at the Roslyn Union Free School District, followed by allegations of
improprieties and mismanagement in other school districts on Long Island.
Naturally, these allegations raised serious concerns among the parents
and taxpayers not only on Long Island, but also around the state.
School taxes are among the highest payments New Yorkers make to government.
Taxpayers want to know that their money is being well spent on education,
not stolen.
A highly educated workforce is the key to our future and that of our
children. If people lose confidence in their schools, the quality of
that education is bound to suffer.
The school community, including the State Education Department, has
stepped forward to deal with this issue, as I will describe in this
testimony. My Office is also playing an important role. It is vital
that State government act quickly to support these efforts and help
restore the public’s confidence in our schools.
I am here today to discuss this crisis and offer some solutions for
the Legislature to consider.
First, it should be pointed out that this crisis in accountability
is not isolated to school districts. There has been a series of well-publicized
corporate scandals. Most companies are run by honest professionals
striving to build their companies and make a profit. But sadly at a
number of companies, top executives were willing to lie and cheat.
The lesson we learned from these scandals is that when no one is watching,
when there is no effective monitoring, some people will cheat.
The response has included a number of efforts to strengthen corporate
boards of directors, make outside audits more independent and effective
and set higher standards for executives.
We have found similar problems with our public authorities here in
New York. Some are very well managed and provide excellent services.
Others are poorly managed. And some are corrupt. Again, the problem
is a lack of effective monitoring.
There is a growing consensus that actions must be taken to increase
the oversight of public authorities. The Governor has made some proposals
and both houses of the Legislature have considered a number of different
bills. All of these efforts in different ways would make public authorities
more accountable.
Now we come to the schools. Let me stress the following. I believe
that most schools are well run and the individuals on our School Boards
and the staff who work in our schools are dedicated and capable public
servants. As in our review of public authorities, we have found many
school districts and officials are performing critical work and doing
it very well. We have released several positive audits recently that
document these findings. But unfortunately, as in corporate America
and in the authorities, a few school officials are greedy and unethical.
In March the public became aware of the alleged theft of $223,000
of Roslyn School District funds that had been discovered, and then
covered up, 18 months earlier. Over the next three months, spurred
by an investigation by Nassau County District Attorney Denis Dillon,
the public became aware that the fraud at Roslyn was much more extensive
and involved more people than had previously been thought. So far,
three officials have been indicted and charged with stealing or misusing
more than $2.3 million.
Subsequently, allegations arose concerning theft by officials at the
William Floyd School District, where two officials have been arrested
and charged with nearly $1.5 million in theft of public funds. In the
Three Villages School District, the former Superintendent is alleged
to have charged more than $40,000 in personal expenses on a district
credit card. In addition, there have been a continuing series of public
disclosures alleging questionable behavior by board members and school
officials at the Hempstead School District.
These allegations have created a crisis of confidence throughout Long
Island. The clearest evidence has come in voting on school budgets
on Long Island. In 2004, well over one-third of school budgets were
rejected by voters, an all time high.
Given this public turmoil and erosion of confidence, it is imperative
that State leaders and elected officials take immediate steps to restore
the public’s confidence and ensure that the resources we have
dedicated to our children’s education are used exactly for that
purpose. I would like to describe just some of my Office has done in
response.
The best defense against fraud is strong internal controls in every
school district. My Office has worked with a coalition of various education
organizations to develop policy solutions to improve the internal control
structures in school districts and increase the effectiveness of some
of the oversight mechanisms. The Schools Financial Accountability Coalition
is comprised of representatives from my Office, the New York State
School Boards Association, the New York State Society for Certified
Public Accountants, the New York State Council of School Superintendents
and the New York State Association of School Business Officials. We
also worked with representatives from the State Education Department
in developing our plan, and their assistance has been invaluable.
In addition, I have redirected resources within my Office and initiated
audits of 21 school districts on Long Island, including in-depth audits
of operations in five districts and audits of administrative expenses
such as credit card usage, meals and travel in 16 other districts.
To-date we have issued three final audit reports from this effort.
Two of those were reviews of the Baldwin and Plainedge school districts.
I am happy to report that in both districts we found no wrongdoing,
although we did recommend some administrative improvements in each.
On January 6, we completed our review of the external audit process
at Roslyn during the period the alleged thefts were occurring. The
fact that each school district is required by the State Education Department
to undergo an annual audit is intended to give the public some assurance
that taxpayer funds are spent appropriately. In fact, it was the presence
of this annual audit requirement that led Comptroller Edward Regan
more than 20 years ago to suspend the State Comptroller’s routine
audit efforts in schools. Comptroller Regan made this point clear in
a May 10, 1984 letter to then Assembly Speaker Stanley Fink, when he
wrote that the State Comptroller was not doing regular school districts
audits, because of “the fact that State Education Law requires
school districts to be audited annually by certified public accountants.” This
rollback of the OSC audit coverage was necessitated by budget cuts
that resulted in substantial reductions in the number of Comptroller
auditors. In fact, the number of the local government auditors was
reduced by half during the 1980s and early 1990s.
Our report on the Roslyn outside auditor, Miller, Lilly and Pearce,
was designed to determine why this outside check on the school district
failed to operate effectively. The results of our review were remarkable.
We found a complete failure of oversight.
The CPA firm knew, as early as 2002, that a fraud had occurred, but
in its audits it never looked for more fraud. The CPA firm looked at
what were clearly fraudulent transactions in the sample that it tested,
but did not identify them as fraudulent. The CPA firm’s workpapers
contain evidence of significant internal control weaknesses, but it
never followed up to see what might have resulted from those weaknesses
or pointed out that they could cause problems. District officials had
to post millions of dollars of accounting adjustments at the end of
each year to cover up massive theft, but the CPA firm failed to identify
any unusual activity in its annual audit reports. In fact, in both
the years we examined, the CPA firm gave the District a clean, unqualified
opinion on its financial statements.
We found numerous deficiencies in this audit. Nine of 22 required
professional standards for such an audit were violated. Violating any
one of those standards can lead to professional sanctions. For example,
an auditing firm is required to be independent of the school district
it is auditing. We found obvious conflict of interests, clearly prohibited
by professional standards. The CPA firm had designed and developed
computerized accounting software and sold it to the District. The CPA
firm also provided ongoing support and periodic upgrades and maintenance
for this software. Thus, when the firm was auditing the accounting
system, they were auditing their own work. In addition, the firm was
involved in selling to the District student tracking software. They
therefore had a financial relationship with the District outside the
audit, a direct conflict of interest.
When testing transactions, the CPA firm did not review cancelled checks.
Such a review is basic and elementary. In fact, the name on some checks
was different than the vendor name for those checks shown in the District’s
records. Because they didn’t review the checks, they missed this
obvious fraud.
In another case, we found that the vendors listed on the CPA’s
workpapers for certain payments were not the vendors listed in the
District’s records at the time the audit was done. They were
phony names put into the District records to cover up the fraud. And
they were put into the records after the CPA’s audits were completed.
In other words, the CPA had fraudulent information in its workpapers
supposedly completed in 2002 and 2003 that was not put in the District’s
records until 2004.
We asked the CPA firm to explain this discrepancy. The CPA told us
that he was given the vendor names by the former Assistant Superintendent.
This is an extraordinary admission for two reasons. First, the auditor
is admitting that he simply accepted the verbal representation of a
member of the organization he was auditing without verifying these
assertions by checking them against the written records. That would
be bad enough. But consider, the Assistant Superintendent is the person
the auditor found to have stolen $223,000. She had resigned before
the second audit reviewed by us was done. So she was not around to
provide the fraudulent information during this second audit. The fact
that the workpapers presented to us, and ostensibly produced in the
summer of 2002 and 2003, contain phony vendor names that do not appear
in the District computer records until February 2004, when someone
changed the vendor names in an attempt to cover up the theft, is more
than troubling.
In 2002, a whistleblower went to the CPA firm with evidence that a
theft had occurred in the District. As a result, the District asked
the firm to identify the amount taken. The CPA firm calculated that
$223,000 had been stolen from the District by the Assistant Superintendent.
The firm then helped District officials keep this fact secret from
the public and other interested agencies, such as the State Education
Department, the District Attorney, and my Office. Even though it was
aware of this theft, the CPA firm made no effort in its audit for the
2002-03 fiscal year to actively look for fraud or other questionable
activity, as required by national audit standards. It is of course
now obvious that had the CPA firm done its job and looked for additional
fraud, it would certainly have found plenty. In addition, when we replicated
the work that the CPA claimed he did in calculating the $223,000 theft
in the fall of 2002, we identified $1.6 million in questionable transactions,
not $223,000. How this could have occurred, what actually happened,
how more than $1.3 million in additional questionable transactions
could have been ignored, is a job for the Nassau County District Attorney
to determine.
In short, one of the fundamental safeguards we have all come to depend
on, the outside independent audit, failed.
In addition to our audit
program, we are working with our School Financial Accountability Coalition
to provide training to school officials in financial management and
internal controls. So far, we have provided training at two major school
district conferences and seventeen regional workshops. These workshops
included such topics as “Promoting
a Healthy Financial Environment”, “Red Flags for Fraud”, “Internal
Controls” and information on our Five Point Plan for good management.
More than 4,300 school district officials and employees have attended
these sessions. In addition, we produced a teleconference during which
State Education Commissioner Richard Mills and I discussed the topic
of school accountability. Finally, working with the Coalition, we are
developing guidance on how school district officials can work more
effectively with internal and external auditors.
I believe that we need strong internal controls in every school district,
augmented by effective annual outside independent audits performed
by CPA firms. The standards for those independent audits and for peer
review of CPA firms must be improved. There are a number of bills that
have been proposed to deal with these issues, including legislation
before you and legislation proposed by the Attorney General and the
Assembly Speaker.
In addition, I think it is now clear that the State Comptroller’s
Office must resume regular audits of school districts to provide another
layer of independent and expert oversight and monitoring for school
districts and their outside auditors. To accomplish that goal, I have
requested $5.8 million so that I can hire and train 89 auditors in
order to audit all school districts in the state, and also add investigators
to my Investigations unit who would be dedicated to working with those
school auditors. I am very disappointed that the Governor did not include
this request in his Executive Budget proposal. This important issue
must be addressed now. I urge the Legislature to provide the necessary
funding.
Regular and expert audits are a strong deterrent to mismanagement
and fraud. But they cannot serve as the only method of ensuring accountability.
Accordingly, I have worked with the School Financial Accountability
Coalition I mentioned earlier to craft a plan to strengthen existing
school financial accountability by providing additional fraud prevention
and deterrence measures, expanding and improving deterrence mechanisms
already in place, and increasing awareness of these issues among school
board members.
With the assistance of the Coalition and the State Education Department,
we have drafted legislation to implement a five-point plan strengthening
auditing, training and financial oversight by school district officials
and their boards. Our bill was developed cooperatively with staff members
of the New York State Education Department, and is supported by the
New York State School Boards Association, the New York State Council
of School Superintendents, the New York State Association of School
Business Officials, and the New York State Society of Certified Public
Accountants. The legislation includes the following key provisions:
- Require training for school board members on their financial
oversight responsibilities, including six hours of training covering
the basics of financial oversight, accountability and fiduciary responsibilities.
- Establish an internal audit function within each school district.
- Create audit committees in school districts.
- Mandate a competitive RFP process for selecting audit firms when
contracts expire or at least every five years.
- Improve the effectiveness of annual external audits by requiring
direct school board involvement and a formal response to issues raised,
and provide better guidance on internal controls testing.
I want to thank Senators Kenneth LaValle (R-Selden) and Michael Balboni
(R-Mineola) for joining Senator Stephen Saland (R-Poughkeepsie) and
others in the Senate for sponsoring this legislation in the Senate.
I would also like to thank Assemblyman Thomas DiNapoli (D-Great Neck)
and a number of his colleagues for doing the same in the Assembly.
While some aspects of this legislation have been included in the Governor’s
budget bills, other aspects were omitted or changed so significantly
that the plan would be difficult to implement. I will continue to work
with you on the bill.
In summary, while we must treat the current financial issues in the
schools promptly and seriously, I do not want to overstate the problem.
I believe the overwhelming majority of school district officials, members
of CPA firms and government officials are honest, hard-working individuals
who live by the highest ethical standards. We can help them focus on
providing the best education for our children by making sure that they
have an effective monitoring system, including internal controls and
outside auditing. Good managers welcome such oversight because they
know it will make their profession stronger and better.
I ask the State Legislature to lead this effort to help our schools.
Join with our coalition to pass the reform legislation we have presented
to you and provide the necessary funding so that my Office can initiate
a comprehensive school audit program. The time to act is now.
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Albany Phone: (518) 474-4015 Fax:(518)
473-8940
NYC Phone: (212) 681-4825 Fax:(212) 681-4468
Internet: http://www.osc.state.ny.us
E-Mail:press@osc.state.ny.us |
