|
Hevesi Audit Faults
Lawrence School Board and
Accounting Firm for Poor Oversight
Annual Audit Did Not Comply With Auditing Standards,
Findings Referred to State Board of Public Accountancy
The annual external audit for the Lawrence school district for the
last two years did not meet several critical professional standards,
according to a state
audit issued today by New York State Comptroller
Alan G. Hevesi. The audit findings have been referred to the State
Board of Public Accountancy for further investigation.
The Comptroller’s audit examined the audit procurement procedures
for the Lawrence school district and the district’s contracts
with CPA firm Coughlin, Foundotos, Cullen & Danowski from July
1, 2002 to June 30, 2004. State auditors found:
- The district had an inadequate process for selecting an
auditing firm and failed to provide proper oversight to ensure that
the annual audit was adequate.
- The CPA firm, which audits at
least 70 other school districts,
did not comply with at least three
professional standards for conducting
such audits. Non-compliance with any one standard is grounds for
referral to the State Board of Public Accountancy.
- When planning audit tests, the firm did not address significant
risks, including whether management had the ability to override
internal controls, the effectiveness of internal controls for the computerized
accounting system, and the possibility of fraud.
- In its testing of district spending, the firm failed to test
a sufficient number of transactions to ensure that spending was
proper and adequately supported. Of the transactions tested, it did not look
at all cancelled checks, which is a standard practice for audits
and is deemed a serious lapse by state auditors, and it missed a duplicate
payment.
“The board of education failed in its responsibility to oversee
the auditing process, and Coughlin & Foundotos produced sloppy
work that did not comply with auditing standards,” Hevesi said. “If
an outside auditor fails to conduct thorough audits, taxpayers may
have a false assurance that funds are safeguarded. Boards must demand
that their outside auditors meet auditing standards to ensure that
school assets are properly used.”
Every school district is currently required by Section 2116-a of the
Education Law and by regulations of the State Commissioner of Education
to hire an accounting firm to perform an independent audit every year.
The purpose of these audits is to assure that school district financial
statements are accurate and internal controls are adequate. The report
must be filed with the State Department of Education by October 1.
“Audits of school districts are designed to ensure that financial
statements meet accounting standards,” Lou Grumet, executive director
of the New York State Society of CPAs said. “When you are auditing
tax dollars in school districts, thorough audits of potential hot spots
are mandatory because the dollars at stake are channeled to the education
of our children. We are thrilled that legislation has passed to make
sure that every dime is looked at from the perspective of both the internal
controls that the school district have in plan and accountability for
all involved in the process.”
The CPA firm took exception to many of the findings of the Comptroller’s
audit. The firm believes that it significantly exceeded the requirements
of applicable auditing standards. The full response is included in
the audit.
This is the second audit report on the Lawrence school district released
by Hevesi. A previous audit of the district’s financial operations
released in June 2005 found no wrongdoing, but significant weaknesses
in the district’s fiscal management, including the ability for
personnel to override controls in the computerized accounting system
designed to prevent fraud, projects that were not always competitively
bid, and bank statements that were not reconciled for an account that
has millions of dollars in transactions per month. The School Board
promised to implement the recommendations of the audit. The types of
problems uncovered by the Comptroller’s audit, such as weaknesses
in internal controls, should have been, but were not, noted by the
accounting firm’s audits.
In the audit released today, state auditors found that the district’s
policy for procuring professional audit services was not adequate,
and that the district did not follow its own process for selecting
a CPA firm. The district was unable to locate most of the proposals
that were submitted by competing firms to demonstrate on what basis
Coughlin & Foundotos was selected over other firms. In addition,
the firm has been the district’s CPA firm since the 2001-02 fiscal
year, but the contract did not indicate that it would be extended beyond
the 2002-03 fiscal year.
State auditors discovered problems with several steps of the audit
process, including that the firm:
- Failed to Comply with Professional Standards
Regarding Fraud.
Coughlin & Foundotos did not comply with professional standards
that require the firm to consider the possibility of fraud. There
was no indication that the firm had considered the risk of district
management overriding accounting controls, such as paying claims
without proper documentation, changing vendor payments or authorizing
bank transfers.
- Did Not Meet Professional Standards Regarding
Internal Controls Over Information Technology. The CPA firm failed to obtain an understanding
of actual internal control practices relating to the district’s
use of information technology. State auditors found this particularly
disturbing because their assessment of the district’s information
technology internal controls identified a number of significant weaknesses,
including the lack of written policies and procedures, inappropriate
access rights to the computing system, and the capacity to perform
overrides such as making vendor changes with little or no audit trail.
- Testing That Did Not Meet Generally Accepted
Government Accounting Standards. The firm’s audit programs and workpapers supporting
testing of expenditures were not properly designed and executed to enable
the CPA firm to test enough transactions to conclude that expenditures
were proper. The firm tested only a very small number of individual transactions
and cancelled checks in 2002-03 and 2003-04, even though the firm assessed
the district’s risk at maximum. For the 2003-04 audit, the
firm tested 50 expenditures with a total dollar value of $97,000
out of $81 million in expenditures. The firm did not review the cancelled
checks for 20 of 50 transactions tested and failed to detect that
the district paid one invoice for football helmets twice.
- Did Not Complete Planned Testing of Fixed
Assets. While the
CPA’s audit program required that four audit procedures be completed
to test the district’s fixed asset inventory, the firm only conducted
one of these four procedures. The firm did not raise any questions about
the district’s lax controls over assets, even though the firm was
aware of serious problems with the district’s accounting and knew
that the district had not updated its asset database. In fact, state
auditors found that equipment, such as laptops and desk top computers,
totaling $112,000 in the 2002-03 fiscal year was not recorded in the
database. The same situation occurred in 2003-04 when another $315,000
in equipment was not logged.
The Lawrence Board of Education did not to respond directly to the
audit; rather it used the response of Coughlin & Foundotos as its
official response.
State auditors recommend that the district and board:
- Provide more specific guidance on the process to solicit
and review RFPs for professional services, and ensure that audit
services are obtained in accordance with its policies and procedures,
as well as solicit new proposals at least every five years.
- Retain all documentation concerning RFPs for selecting a CPA
firm.
- Educate themselves on the scope and limitations of the annual
independent audit. If audit services are needed and not covered
by the annual audit, then officials should consider expanding the scope of audits
or should contract for separate audits or reviews. The board should
also explore an audit of its computer controls to ensure that they are operating
properly.
- Establish an audit committee which can provide oversight of
external and internal audit work, select an outside auditor and
ensure that the work of the external audit report meets auditing standards.
The Lawrence Union Free School District 2004-05 budget is approximately
$85 million annually. It has six schools, 3,600 students and a workforce
of about 800 employees.
Click here for
the audit report.
Violations of Mandatory Professional Standards for Conducting Audits
School Districts Audited by Coughlin,
Foundotos, Cullen & Danowski
###
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 |
