Statutory And Policy Compliance At Issue—

Audit Raises Concerns About School Transfer Reporting

By John Voket

Newtown’s latest municipal audit, which reviews town and school finances, has raised concerns about the failure of the school district’s business office to properly report financial transfers to the Board of Education. The auditor’s management recommendations note that the proper administration of transfers is “required by state statutes and board policy.”

According to the audit, the Newtown school board’s policy, which complies with state statutes, “requires that budget transfers between objects be approved by the Board of Education. The board policy provides that management is authorized to make and approve transfers within object codes.”

The auditing firm, Kostin, Ruffkiss and Company, indicated that the reason why the transfers are not being handled accordance with the board’s policy “is unknown.” But the report states that the “effect is that Board of Education is not in compliance with the state statutes and board policy regarding approval of budget transfers.”

For the future, the auditing firm has recommended that the school’s business office begin submitting budget transfers to the Board of Education as required by state statutes and board policy.

Stating that he had not yet seen the auditor’s information when contacted by The Bee on the matter, school board Chairman William Hart stated that the district’s lack of adherence to state law and its own board policies “is not a deliberate approach to obfuscate anything.”

Reserving the opportunity to review the details, Mr Hart said he “will make sure we are in compliance with the law.”

“I’m committed to having an open and well-managed system, and that includes ensuring our accounting is clear and above reproach,” Mr Hart said.

At its regular meeting September 7, the Board of Education, on a 5-2 vote, approved a motion by Lillian Bittman to change in its budget reporting practices to what is described as an “encumbrance based” system. At issue is whether the change, which was recommended by the school board’s finance subcommittee and employed during most of the last budget cycle, obviates statutory requirements to discuss and approve transfers within its budget on an ongoing basis.

One week later, the Board of Finance requested school officials reverse their recently adopted change in financial reporting practices. Finance Chairman John Kortze said at the time his board’s motivation was to ensure the district not only conformed to state statutes and local charter stipulations, but to also maintain maximum accountability for the district’s $67 million budget on a monthly basis.

The school board’s newly adopted system only requires the reporting of transfers in the event of an emergency, or a mistake. Otherwise, according to school board member David Nanavaty, the only transfers that would be required to be discussed and endorsed publicly by his board would occur during the final meeting at the end of each fiscal year.

Additional Recommendations

The latest audit also notes that the school district has not maintained its accounting records under general ledger control, instead continuing to maintain various fund accounting records on a manual basis.

“General ledger control encompasses the recording of all transactions utilizing double entry procedures,” the audit states. “Assets, liabilities, along with revenue and expenditure activity should all be recorded and controlled by the general ledger.”

Although expenditures transactions are currently processed through the computer system, the remainder of the general ledger accounting is done outside the general ledger software, according to the audit.

“The result of maintaining these accounts outside of the general ledger system is the loss of general ledger controls and efficiency in the process of recording, controlling, monitoring and preparation of financial statement and other reports,” the auditors concluded.

In the future, the auditing firm recommends development of automated systems, including general ledger accounting control, for all funds. That system “should be structured to facilitate systematic processing of all financial data.”

As a result, the auditors expect a common account structure that will ensure financial reporting consistency between funds.

The audit also raised concerns about drawdown requests for grants, because they “are prepared and submitted without management review or approval.”

In order to ensure that grant requirements regarding drawdowns are properly met, proper procedures would include review and approval by management, the auditors state. To address that point, the auditors recommend that either the grants manager or business manager review the requests prior to submission to the granting agencies.

The company also performed a review the town and school district’s information technology system for the purpose of obtaining an understanding necessary to perform the latest audit. And based upon that review, the firm has provided recommendations to the IT department for improvements.

Policies Manual

On the town side, the auditors recognized that a comprehensive policies and procedures manual is currently being drafted. They recommended the town continue toward completion of documenting its departmental responsibilities, as well as all individual employee’s roles and job duties.

The auditors state that such documentation should be formal so that it can be used in case of employee changes.

Lacking such a formalized manual, the auditors state, can “create an environment where expectations and responsibilities are not clearly understood, communicated, monitored and evaluated. Under such conditions, certain job duties could be omitted, or performed improperly, which could create material misstatements in the financial report.”

Town Finance Director Robert Tait was also advised to show written approval of all “nonstandard journal entries.”

Failure to do so creates “an increased risk of improper entries and manipulation of the financial statements when entries can be made without approval,” according to the report, and the firm recommends “all nonstandard journal entries are approved by an employee at least one level above the employee making the journal entry.”

Mr Tait pointed out that the few nonstandard journal entries the auditors found, which were not approved by him, were made by the assistant finance director and not by his staff or other town employees.

“Their journal entries are where you record transactions to post into the accounting system,” Mr Tait said, adding that in his absence, such entries are approved by the ranking finance official, which is his assistant.