Troubling TPS management letter Part 2

Toledo Public Schools wants a new 6.9 mill levy - a permanent one.

Since they're asking for more money, I thought I'd see how they're spending the money they already have. Their audit was troubling, with 18 citations of non-compliance, significant deficiencies and material weakness, including a finding for recovery.

But the management letter, which provides details of issues along with recommendations on items not required by law to be included in the audit, was even more disturbing. Yesterday, I detailed the first half of the issues noted in the management letter and here are the highlights of what the audit found about TPS:

* they spent money without first appropriating it;
* they appropriated money without first verifying they had it available to be appropriated;
* they got reimbursed for more school meals than they were eligible for
* they didn't check the state list for ineligible vendors
* they didn't keep good inventories not just of the district property but of property purchased through specific grant programs

Today we'll take a look at the second half of the letter, beginning with transfers the district makes between funds.

• Transfers were posted independently of Transfers out, resulting in transfers in not matching transfers out; transfers in and out not being made on the same date; transfers in being posted as receipts; receipts being posted as transfers in; and transfers being posted to the wrong account.
• Transfers within the same fund were presented as Interfund Transfers
• Transfers were posted as revenues and expenditures.
• There is no review of transfers posted to ensure that transfers are properly posted and balance.

In case you're not good at accounting, this is the equivalent of you transferring $100 from a savings account to a checking account but recording $90 going into the checkbook.

It's the equivalent of you doing the transfer all on one day, but recording your savings withdrawal on Monday and your deposit into your checking on Tuesday. It's the same as you recording the amount going into the checkbook as a straight deposit and not noting that it was money from the savings account.

It's as if you recorded the deposit in your child's account rather than in your own checking account. And then, you take your paycheck, deposit it to your checking account and record it as a transfer from your savings.

Furthermore, you never balanced your accounts. And you did these things several times throughout the year.

As you can imagine, you'd have a mess on your hands. You'd have no idea how much money you had in any of your accounts, where the money came from or where it went. You'd probably be able to figure it out, but it would take a long time - and maybe the involvement of someone else to help you.

That's what the auditors found and noted in the management letter. This is how TPS is handling your tax dollars.

But that's not even the worst of it. The management letter noted nine transfers between eight different funds that occured without board approval. The amount of the unauthorized transfers: $1,444,747.

Then we get to employee reimbursements.

TPS does have a policy and a form detailing that reimbursements will be made from itemized receipts and won't cover such prohibited items as gratuity, alcohol and tax. Apparently the policy isn't being followed, as the audit found:

• Reimbursements were made for taxes;
• Gratuities were reimbursed;
• Meals were reimbursed based upon a bill, not a receipt;
• Meals unsupported by itemized receipts were reimbursed; and,
• Mileage was reimbursed but there was no documentation that specified the dates and location of travel.

The letter does not detail the amounts, or whether or not anything reimbursed over and above the policy was returned to the district.

The auditors also found a significant (not defined) number of invoices that were not paid on time and/or included past-due amounts. They wrote (emphasis added):

District management is responsible for ensuring that payments are made to all vendors in a timely manner. Late fees indicate an inefficient accounting operation and/or lack of management oversight. Failure to timely pay bills could result in late fees and fines, which are not for a proper public purpose, being incurred by the District.

It does detail if any late fees or fines were paid - and how much they might total if there were.

Whenever you have humans, you have mistakes. When it comes to accounting and accounting software systems, it is expected that you will have "adjusting entries." The auditors obviously found a larger than expected number of such adjustments because they made this recommendation:

There were a significant number of correcting entries posted to the District's system during the year. Adjusting entries indicate an inefficient accounting operation and/or lack of management oversight.

Excessive correcting entries being posted could result in misappropriation of District assets or fraud.

The District should implement policies to assure entries are posted correctly the first time to reduce the number of adjusting entries posted to the system.

The next recommendation is about the Child Nutrition Program. As this is cited in the audit and earlier in the management letter, it is apparent TPS is having significant issues with managing this program.

The audit discovered that 3% of the students tested did not have an application for the program on file. As the letter explains, "Failure to have an approved application on file could result in ineligible students being served free or reduced meals."

This next item boggles my mind.

Apparently, TPS is missing withholding forms for employees. You're certainly familiar with those forms - they're the ones you have to fill out and sign that tell your employer how many exemptions you want to claim and whether or not you want additional funds taken out in taxes. The forms also tell the employer where you live so that the proper local tax is computed and withheld.

But TPS wasn't just missing the payroll tax forms, they were missing employee completed forms for the retirement system as well. If I were a TPS employee, I'd ask to see my personnel file and make sure my withholding forms weren't just in there, but accurate, too.

The next item on the management letter is a bit more difficult to understand.

For one of the federal programs dealing with the education of children with disabilities, a specific report is required to be completed. The report is needed to verify that the district is properly following the rules for spending the funds. The auditors

...were unable to obtain supporting documentation for some of the data within the report, and the district does not perform calculations to assure compliance with the level of effort requirements.

When testing the 15 percent Earmarking requirement for early intervening services, the district was unable to provide adequate support to identify the District was in compliance with the 15 percent requirement.

These conditions provide for possible federal program non-compliance.

What you need to understand from this recommendation is that TPS doesn't have all the documentation and doesn't perform the necessary calculations so they can ensure that this required report is properly completed.

TPS gets monthly foundation settlement distributions.

These distributions from the state are adjusted based upon reductions in revenue and expenses. The auditors found TPS was "...inconsistent in posting revenue reductions and expenses. The inconsistency in the method of posting the adjustments could result in an over/understatement of revenues and expenses."

TPS is required to document accrued wages.

These are wages earned but not yet paid at the time the balance sheet is computed. In 25% of the items tested, the auditors found that the accrued wages were not properly calculated for $14,123 out of the $99,620 tested. They were told they need to correct this "to avoid inflating accrued wage liability."

In 2010, TPS eliminated their self-insurance department and moved those responsibilities to the payroll department. In 2011, they added a new accounting software system that did not include payroll. Since the payroll doesn't automatically populate the accounting program, they have to make entries in the system to include the payroll and self-insurance information. The auditor noted discrepancies in the entries being made, adding that the amounts were not material.

However, the did find a problem with the dental insurance account:

Although the self insurance fund in total was funded adequately to pay for premiums and benefits paid, the funding provided to the dental insurance receipt account were inadequate to pay for dental related expenditures;

They also couldn't find any supervisory personnel responsible for monitoring these entries and ensuring they were accurately and timely recorded.

The management letter cites a problem with access to the computer system, noting that 44% of the new users tested did not have the required form authorizing their access. They note that the forms documenting their addition to the system were signed by the DBA, but the initial form authorizing the access was missing.

Also, they note that many users in the payroll system had access to screens and functions that were not necessary for doing their jobs. Users also had access to the command line (usually reserved for supervisors or system administrators). Users in the financial computer system also had access above what is necessary for their job duties.

The District should review the access structure at the application level. Changes should be made to ensure user access on the system mirrors the physical segregation of duties of the job position. User access should be restricted to only the functions necessary for performance of day to day job responsibilities. If additional access is required for special projects or situations, access should be temporarily authorized for the duration of the project and then removed. Documentation should be kept to explain access controls that are in place.

There were other issues with the computer system (emphasis added):

Standard security controls require the confirmation of a user accounts to confirm accounts still need the access that is granted.

Confirmation documentation could not be found during the audit period (Mainframe). Thousands of accounts haven't been accessed in over 6 months (Active Directory) and three accounts that have elevated privileges were active but no longer employed by the district.

The following conditions existed related to logical security at the departments reviewed at the District:

• Passwords weren't required to meet the districts minimum password length parameters for several accounts. (Mainframe)
• Password history is not kept so users can re-use old passwords. (Active Directory)
• A lock-out parameter has not been set. (Active Directory)
• Several accounts are not forced to change their password. (Active Directory)

TPS also does not have a disaster recovery program.

The need for proper computer access forms, the problem with access above the level needed to perform job duties and the need for a disaster recovery program were also included in the 2010 management letter. So this makes two audits in a row that TPS has been told to correct these problems.

The management letter ends with this sentence:

We intend this report for the information and use of the Board of Education, audit committee, and management.

However, it is a public record and I believe the information about the problems with the way TPS handles its financials is critical for the public to know in order to hold our elected school board members accountable not just for the education of our children but also for the management of our money - especially when they want more from us.