Tuesday, May 15, 2012

TPS audit shows troubling issues

Toledo Public Schools will have a 6.9 mill levy on the ballot in November - a permanent levy, that is.

They say they need the additional money for the next school year in order to add new programs and keep existing ones. They also say the additional money, $211 per year for the owner of a house valued at $100,000, is necessary even in these tough economic times. But before we give them any more money, it's important to see how they're doing with the money they already have.

And an audit is just the place to look. More important information is contained within the management letter accompanying the audit that is sent to the school board members and superintendent. The management letters are not included on the Auditor's website like the audits are, but they are a public record.

A look at both documents is key to understanding how well - or poorly - TPS is managing our tax dollars.

On March 21, 2012, the State Auditor issued their audit report on Toledo Public Schools and notes several "material weaknesses," "significant deficiencies," "instances of non-compliance" and findings for recovery.

The Auditor definitions:

A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and timely corrected.

A significant deficiency is a deficiency or a combination of deficiencies in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

The audit also states:

"...the District did not comply with requirements regarding allowable costs, equipment and real property management, program income, eligibility, and cash management applicable to its Child Nutrition Cluster and Teacher Incentive Fund major federal programs."

TPS did provide responses to the 2011 audit. Let's look at what the audit found.

Finding 2011-001 Non-compliance

Before spending money, the TPS treasurer must certify that the money to pay the expense is available and has been lawfully appropriated before issuing a contract or order. There are a few exceptions (then-and-now and blanket certificates) that require other types of actions, but for the most part, every time TPS goes to purchase something, a treasurer has to check and sign off on the available funds.

For twelve percent of the transactions tested, certification occurred after the invoice date and no then and now certificates were utilized. For three percent of the transactions tested, certification was not obtained.

Certification is not only required by Ohio law but is a key control in the disbursement process to assure purchase commitments receive prior approval, and to help reduce the possibility of District funds being over expended or exceeding budgetary spending limitations as set by the Board.

TPS response: Compliance with this finding has been corrected with continued improvements and understanding of the new financial software.

Finding 2011-002 Recovery

TPS made an overpayment of severance for an employee in the amount of $5,565. The payment was in July of 2011. The Auditor issued a finding for recovery, which means that TPS needed to recoup the amount and return it back into their own accounts. That was done, but note the TPS response (emphasis added):

The overpayment cited in this finding took place outside the period of this audit. As stated in the finding, the overpayment has been repaid.

I don't really care when the overpayment took place - this year or last year's audit. I care that the mistake happened in the first place, though I'm glad it has been corrected. However, as the repayment occurred on February 12, 2012, it is clear that the recovery was a result of the audit and not because TPS caught the mistake on their own.

Finding 2011-003 Non-Compliance

Signed contracts for all union administrative and teaching employees are required. These contracts identify the individual as a valid employee and also state the salary to be paid. Signed contracts were missing, though the audit does not say how many. The management response was that they would "increase the rate of compliance with regard to signed contracts."

I wonder why they use the term 'increase rate of compliance.' Are they expecting that they will always have some employees without contracts? This makes no sense to me and it calls into question how they're paying those employees without contracts.

Finding 2011-004 Material Weakness

The following conditions exist over the District’s disbursements:
• Fifty percent of the invoices tested that were paid by the District did not show any sign of being reviewed and/or paid.
• The District did not maintain purchase orders signed by the Treasurer for five percent that were tested.

Ensuring that supporting documentation for expenditures is obtained, reviewed, and retained is a key control over the disbursement process. Lack of signing off invoices could result in the double payment of expenditures. Without proper documentation showing approval for purchases could result in funds being spent on purchases that are not for a proper public purpose and misappropriation of assets.

Half of invoices tested weren't reviewed and/or paid?!? While 5% doesn't seem like a large percentage of purchase orders that weren't signed, I think the actual number, considering how much purchasing TPS must do, would be rather high.

How do you end up with this kind of material weakness?

TPS's response is that this is done via an electronic receiving method which prevents duplicate payments being made. They also state that "hard and electronic copies of certified purchase orders are on file and kept for review." However, "kept for review" doesn't mean that they are, actually, reviewed, though not knowing the computer system, this could be semantics. But if it's just a matter of definitions for 'review,' why does it end up as a material weakness on the audit report?

Finding 2011-005 Material Weakness

The books are required to show receivables (money due) from grants. TPS understated (did not included) the Education Jobs Grant by $7,578,666. Also, when they appropriated funds from the grants, the appropriation amount didn't always equal the grant award "resulting in an overstatement of the receivable. This condition provides for possible inaccuracies in reporting grants receivable and misrepresentation of the financial statements."

TPS did not comment on the appropriations not matching the award in their response, but they did state that by deciding to use the Education Jobs Grant in FY12 rather than when received in FY11, they thought they had properly accounted for the change in receivables.

Finding 2011-006 Material Weakness

This finding deals with budgetary financial statements - what they show, how they are calculated and whether or not they agree with what is input into the accounting software system from what the board has approved and appropriated. They found exceptions:

* The District’s legal level of control is at the fund level. We could not determine if the Board approves estimated receipts or appropriations at a level of control greater than the fund level; • Taxes and Other estimated receipts reported on the Certificate of Estimated Resources did not always agree with the Budgetary Financial Statements for the following major funds and amounts:

* $15,594,389 difference between original budgeted receipts and Budgetary Financial Statements in the General fund
* $ 2,815,066 difference between final budgeted receipts and Budgetary Financial Statements in the General fund
* -$ 6,072,292 difference between original budgeted receipts and Budgetary Financial Statements in Debt Service
* $44,013,410 difference between original budgeted receipts and Budgetary Financial Statements in the Locally Funded Initiatve
* $47,253,350 difference between final budgeted receipts and Budgetary Financial Statements in the Locally Funded Initiative
* $15,091,005 difference between original budgeted receipts and Budgetary Financial Statements in Classroom Facilities
* $44,647,513 difference between final budgeted receipts and Budgetary Financial Statements in Classroom Facilities

The District has made the budgetary adjustments for the Locally Funded Initiative and the Classroom Facilities Fund as of February 27, 2012.

They also found seven other conditions ranging from board approval for estimated resources, to reserve amounts not matching, to missing documentation, to appropriations resolutions failing to agree with budget documents.

These conditions provide for inaccurate presentation of the Budgetary Financial Statements, lack of appropriate approvals for budgets and amendments to the budget, and inability of management to appropriately monitor the budget.

TPS notes that two of the issues raised in this audit were done in the past and not included as a finding in prior audits. They made corrections where the estimated resources did not agree and changed procedures for the upcoming fiscal year.

Finding 2011-007 Significant Deficiency

This finding deals with fixed/capital assets.

We have identified the following:

• The District has not performed a physical inventory since June, 2002, exceeding the five year Board policy requirement;
• The District does not use Capital Asset software to maintain and update additions, deletions, and depreciation. Capital Assets are currently maintained and updated by the use of spreadsheets;
• The assets reported on the spreadsheets do not always have an assigned asset tag number, and do not always have an adequate description to enable location and observation of the asset, and the equipment assets in school buildings are not always tagged and not always traceable to the capital asset spreadsheets;
• Disposal forms are nonexistent and supporting documentation for the deletion of assets from the asset spreadsheets were incomplete, and buildings that have been demolished still have values reported on the asset spreadsheets;
• Depreciation expenses for the new building additions were overstated by $214,094.

TPS's response was that the overstated depreciation was "immaterial" but they have issued an RFP and will be contracting for an inventory. They plan on using the inventory feature in their accounting software.

So they haven't done an inventory in 10 years?!? Their response doesn't say so when do you think they issued the RFP for an inventory - before or after the significant deficiency was noted by the auditors?

Finding 2011-008 Significant Deficiency

This finding documents how changes to the computer systems are not made with the proper controls. They note that a request form for making changes was implemented following the prior audit, but was not being used. They make recommendations on what the form should contain and they recommend that all changes to programs take place in a test environment and be approved before being moved into the actual program.

TPS says they will "will review procedures to document program changes."

Finding 2011-009 Significant Deficiency

The District accrues wages and benefits to recognize work performed prior to June 30, 2011 but unpaid at that time. The District also compensates its employees for vacation and sick leave balances at the time of separation. The following was noted in regards to these accruals:

• State Fiscal Stabilization fund wages were accrued in the General fund instead of the State Fiscal Stabilization fund. Entries were made to properly classify these accrued wages;
• The District accrued wages for some employees twice. Entries were made to eliminate the duplication.
• The District accrued severance payments related to actual and estimated sick leave payouts. The entire amounts of these accruals were posted to the Noninstructional expense line item. Instead, these accruals should have been charged to each employees function (i.e. instructional, support services, and noninstructional expenses);
• The District accrued severance payments to some employees twice. Entries were made to eliminate the duplication;
• Ten month employees were paid out annually for their vacation leave balances. No accrual was made to accrue the payouts;
• The District only accrued cabinet employee's vacation leave balances subject to payout for amounts due within one year. Entries to accrue severance payments to employees known to be retiring at June 30, 2011 were made; and,
• The District has not established policies and procedures that identify how accrued wages, benefits, and compensated absences will be accrued.

Failure to properly accrue wages, benefits, and compensated absences payable could result in the District misstating its liabilities.

So they accrued things twice, posted items to the wrong expense line, posted them to the wrong account, didn't have any policies and procedures for how to calculate the accruals. Their response:

Toledo Public Schools will review the process used for accrual of wages and compensated absences for future years.

Well, what else are they going to say?

Finding 2011-010 Questioned Cost/Noncompliance/Material Weakness

This finding relates to Federal grants and payrolls.

The District charged Federal grant programs for payroll and benefits expenditures that were either unsupported by personnel activity reports required or did not match activities documented on personnel activity reports provided.

The total amount questioned is $6,928,045. Yes, nearly $7 million dollars! So they're going to "work to improve employee filing of Time and Effort" so they can properly document their charges.

Finding 2011-011 Noncompliance Citation/Material Weakness

The District did not maintain the required federal equipment listing, physical inventories and related reconciliation to equipment records have not been performed, control systems to safeguard equipment have not be established, and disposal procedures have not been established. These conditions provide for possible misappropriations of assets purchased with federal funding, and the possibility of jeopardizing future federal funding.

Apparently, it's not just their own equipment they fail to keep track of. Fortunately, they will "will establish and maintain equipment records" from now on.

Finding 2011-012 Noncompliance Citation/Material Weakness

TPS has a Teacher Incentive Fund and they noted the following in their review of the cash management of the fund:

• The District does not have policies or procedures in place to ensure compliance with grant cash management requirements;
• The District is required to complete and submit project cash requests to the Ohio Department of Education to draw down grant funds. The District did not submit the required project cash requests to draw down grant funds; and,
• The District is required to complete and submit a final expenditure report to the Ohio Department of Education to identify total grant expenditures. The District did not submit the required report.

The audit notes that failure to have policies and procedures resulted in the non-compliance finding for TPS. TPS said that appeals created the delay submitting the project cash requests and that they intend to be on-time and in compliance in the future.

Finding 2011-013 Material Weakness

The audit says TPS does not have internal controls to ensure compliance with Suspension and Debarment requirements for contracts and subawards. They cannot use companies and individuals who are on the Excluded Parties List System (EPLS) maintained by the General Services Administration (GSA). If TPS uses a someone on the list, it could result in the loss of federal funding. They state they will check the list from now on.

Finding 2011-014 Material Weakness

TPS is required to make certain reports to the Ohio Department of Education. Final Expenditure Reports for various projects must include documentation verifying the expenditures. The audit showed the documents didn't agree with the final report for one project (emphasis added):

The supporting documentation provided was $1,145,249 greater than the amounts reported in the Final Expenditure Report. The district re-visited and provided revised supporting documentation that was $220,953 greater than the Final Expenditure Report. The District concluded that the Final Expenditure Report filed and approved by Ohio Department of Education was incorrect and would need to be re-filed.

TPS hopes their new financial accounting software will solve the problem in the future.

Finding 2011-015 Noncompliance Citation/Material Weakness (don't worry, we're almost through!)

Under the Child Nutrition Program, certain records must be maintained, including the number of free, reduced price and paid lunches and breakfasts served to eligible children. Obviously, there must be documentation as to the eligibility of the children as well.

Cash register receipts were used to document the numbers, but they don't identify which children were served. As a result, the auditors could not verify that eligible children were participating in the program and, they further note, this deficiency "may result in misappropriation or theft of assets if a cashier identifies a child in the cash register as free or reduced, when the child in fact paid."

TPS agreed that each student receiving free or reduced benefits should be identified and documented and they will review their procedures.

Finding 2011-016 Material Weakness

Federal grants come with a lot of paperwork requirements, especially when it comes to payroll. Employees being paid fully or partially with grant monies need to document their time on the grant activity. That time should then be reported on the grant with the appropriately calculated compensation. The audit found several problems sufficient to be designated a material weakness:

• Employees working on multiple activities or cost objectives did not always complete time and effort forms (i.e. monthly personnel activity reports);
• Personnel activity as documented by employees on time and effort forms did not always match amounts charged to grants;
• Subs and employees separated from employment did not document personnel activity during the fiscal year;
• Time and effort forms provided to employees for completion include language that identifies the budgeted time each employee must support (i.e. time and effort forms do not necessarily reflect actual time spent on an activity); and,
• There is no reconciliation of budgeted personnel activity to actual activity documented by time and effort forms; as such, no adjustments were made to payroll amounts posted to federal grants to reflect actual work performed.

Their response: Toledo Public Schools will make an effort to reduce the number of split funded employees. Additionally, we will review and update our Time and Effort documentation process as necessary.

Finding 2011-017 Material Weakness

The audit found that there were no formal policies and procedures in the management of the Child Nutrition Program to ensure that all expenditures met the requirement for being both an allowable activity and an allowable cost. They found that 82% of the expenditures they tested were not approved by the program director as an allowable activity. They also found "no evidence any of the transactions selected for testing were reviewed and approved as to allowable cost."

TPS stated that all purchase requests are reviewed prior to contracting and that they would review their procedures.

My concern would be that just because you approve the purchase request doesn't mean the actual supplied items still comply. Changes are often made and reviewing invoices prior to payment is probably a good step to add.

Finding 2011-018 Material Weakness

The Child Nutrition Program seems to have a lot of issues:

The District collects money from students for breakfast meals, lunch meals, and ala cart items. Students may pay daily for meals, may pay in advance for multiple meals, or may charge all or part of a meal to be paid in the future. The District has not implemented controls over program income to ensure the correct rates are charged to students related to the food service program. For 60 percent of transactions tested, the District did not maintain written support to identify what products were sold and the amount collected for each item. As such, it was impossible to determine students were charged the correct rate in accordance with the pricing list. Failure to document products sold and receipts collected could result in theft of District assets or charging students incorrectly for products.

Again, TPS's response is that they will review procedures. They also note that they will have a new system in place in high schools in FY12.

The audit then lists a corrective action plan, including completion dates and individuals responsible for implementation for findings 2011-010 through 2011-018.

I think that's enough for today. I'll cover the Management Letter tomorrow.

Think about these things as you consider their request for more money.

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