School Board Takes Action on Audit Findings

The Charlotte County School transition audit occurred after Charlotte County Treasurer Patricia Berkeley and County Administrator R. B Clark approached the School Board, then-Superintendent Melody Hackney and incoming Superintendent Nancy Leonard and suggested a transitional audit be completed on the Charlotte County School System prior to the change in  Superintendents. All agreed that it would be in the best interest of the school system to do so.

The scope of the Audit covered all possible management, financial and personnel issues.

In an interview today, Superintendent Nancy Leonard stated “We had already identified potential issues and we were already on the right track and were moving to make changes and to implement new procedures when the audit was completed.”

In their first meeting following the audit, the School Board adopted “Increased Internal Control Measures” that addressed the issues documented. These measures included merging Statesman Computers into the school accounting system and eliminating the retail portion of Statesman.

The entire audit is available online at southsidemessenger.com following this article. The actions that the School Board adopted are below.

Increased Internal Control Measures

1.  Effective July 1, 2013, Statesmen Computers is no longer a retail business and has been merged into the same accounting system and pre-approval of purchases requirements as all other departments of CCPS. Funds from the Statesmen Computer Checking and Savings accounts will be deposited into the general operating fund of CCPS at the August 13, 2013 school board meeting. The current technology department implemented a division-wide technology inventory system.

2.  The current purchasing procedures as outlined in the County of Charlotte, Virginia Purchasing Manual as prepared for the Charlotte County Board of Supervisors by Robinson, Farmer, Cox Associates will be reviewed by the Board and a threshold requiring Board approval prior to procurement or purchase will be established. The threshold amount established will be added to our current implemented and adopted procedures.

3.  CCPS currently subscribes to Virginia School Board Association (VSBA) endorsed policy which outlines expectations for financial reporting to the school board.

4.  Procedures and controls for accounts payable were revised on July 1, 2013. New procedures under current administration include the following:

a.  Invoices must have the appropriate approval signatures prior to being processed.

b.  By using the Xpert Accounting System to its full capability, all incoming invoices are checked against the system to ensure they have not been processed previously.

c.  The Finance Department will cross-check invoices being keyed in for payment with the audit trails generated by Xpert to confirm accuracy.

d.  All departments will utilize an in-house Purchase Order System.

e.  The Finance Department will thoroughly evaluate all bills/invoices, statements and purchase orders for processing in a timely manner and pending proper approval (i.e. confirmation of receipt of goods and/or services).

f.  A final review of checks is conducted prior to mailing by matching checks with the approved invoices as listed in the Board Book.

g.  Prior to July 1, the Board gave pre-authorization to make mid-run utility payments only. The Treasurer of Charlotte County has a copy of this approval process on file.

h.  The 1099 issue was specific only to Statesmen Computers and closing the accounts addresses this concern.

i.  End of the year pre-payments will be minimized by spending at both local and state as well as federal funds. State and federal reimbursements will be filed monthly when applicable.  The current finance director will be tracking expenditures and revenue and making requests for reimbursements accordingly as approved by auditors.

j.  A document which certifies that all checks have been approved by the School Board has been created for Board review. This document will be presented to the Treasurer of Charlotte County as evidence of approval and will be a basis for the checks to be signed by the Treasurer of Charlotte County.

5.  Effective August 15, all staff must adhere to pre-approval for travel through the conference travel approval/reimbursement forms. Pre-approval must be given prior to travel and reimbursement will only be granted with submission of receipts of expenditures. All expenditures submitted for reimbursement must meet CCPS reimbursement guidelines which mirror state guidelines.

6.  Code of Virginia information pertaining to a whistleblower policy will be provided to the Board.

7.  CCPS currently has a Nepotism policy in place as prescribed by VSBA.

It is entitled Employment of Family Members.

Observations from the 2013 Audit of the Charlotte County Public Schools by Robinson, Farmer, Cox and Associates

No specific instances of misappropriation of assets were noted.  However, there were payments totaling $27,721 to Educators without Borders, LLC during fiscal year 2013 that did not appear to be supported by a contract or agreement for services, procurement files or other similar documents.  Payments were made to the vendor through the Statesmen Computer checking account and were supported by very basic invoices received from the vendor.  It is unclear why the payments to the vendor for consulting services did not follow the routine procedures of CCPS for processing and approval or why the payments were not originally paid using the CCPS operating account.  Furthermore, it is not evident that all procurement and contract negotiations were negotiated using the same procurement procedures as required for all goods and services.

As previously noted in the fiscal year 2012 audit and in our letter dated December 4, 2012 there is a practice of spending significant local appropriated funds at or immediately prior to the fiscal year-end.  The process of recording and paying vendors in an expedited manner creates the opportunity for errors in payment to vendors, including duplicate payments as noted in the fiscal 2012 audit.  Additionally, we noted an instance of payment to a vendor based on a quote and not an actual invoice, as is required.  As an example in the year 2013 a quote was received from Sonny Merryman for the purchase of one bus in the amount of $92,772.  Payment was made to the vendor in the amount of the quote absent of an official invoice, verification of a VIN number or delivery of the bus prior to CCPS releasing the payment.  The payment for goods prior to the receipt of the goods or payment for services without a contract is not adequate fiscal management of public funds.

In addition to risks related to improper procurement procedures, significant prepayment of invoices and payment of a large volume of invoices in an expedited manner at year-end increases the risk for duplicate payment of invoices, payment of incorrect amounts and issuing checks that have not been approved or examined by the School Board.  In summary the aforementioned practice exposes the County of Charlotte and CCPS to risks of fraud and errors in financial reporting.

We noted that certain invoices for services were paid in advance of receiving the service.  As an example, we noted that janitorial services were paid on June 28, 2013 in the amount of $280,249.67 representing payment for services for the first six months of fiscal year 2014.   Significant payment of invoices for services not yet rendered exposes the School Board to risk.  Furthermore, material or significant payments in advance require diligent cash flow management to ensure cash flow needs are available for all County and CCPS expenditures.  It is recommended that CCPS pay for services after they are rendered.

Our examination included verification of the posting to the accounting system certain invoices including payments to High Tech High (payments totaling $82,966.62) and payments for airfare, hotel and other travel costs (payments totaling $34,950.78) for a trip to San Diego to conduct business related to High Tech High.  We noted inconsistent posting to the accounting system for payments made to High Tech High.  It is unclear why invoices in the amount of $21,066.62 were posted or charged to Fund 34, a school operating fund, and the remaining amount of $61,900 was posted /charged to Fund 38, the NCLB fund.

From the selected invoices tested, we were unable to verify payments in the amount of $5,571.53 payable to High Tech High (posted to Fund 34), were included in the School Board packet for approval.  There appeared to be a practice of issuing checks during mid-month or outside the routine check-runs at the request of the former Superintendent and Former Director of Finance.  It is unclear if all other checks, other than those noted herein, were included in the board packet for approval.

We noted two vendors paid by Statesmen Computers were not issued a 1099-Misc for services rendered during calendar year 2012.  As required by Federal law all unincorporated vendors should be issued a 1099-Misc for services provided and paid in excess of $600 annually.

Upon detailed examination of the balance sheet accounts reported by Statesmen Computers and confirmation with personnel, we noted that there is a practice of selling equipment of Statesmen Computers to CCPS employees “on account or credit”.  A basic agreement with each employee to repay the balance owed on the equipment was executed and retained by Statesmen Computer personnel.  Routine and equal amounts were deducted from the employees’ paycheck each pay period while employed by CCPS.  We noted that Statesmen Computers was required to write-off bad debts/account balances left by former employees and not paid upon separation of service with CCPS.  In our opinion this practice exposes CCPS to unnecessary risks of uncollected accounts and creates a financial liability for CCPS without recourse.

Statesmen Computers sells computers, printers, TVs, game consoles and other technology in a retail format.  The controls over the sales and receipts of the retail operation appear adequate.  However, our examination of the sales practices by Statesmen Computers noted that sales tax was not calculated or paid to the Virginia Department of Taxation on sales to on-exempt customers.

Our examination of the controls over the retail inventory maintained by Statesmen Computers indicated that a physical count of the inventory on hand was not executed on a routine basis.  A physical count of the inventory should be taken on a routine basis verifying the existence of inventory on hand.

We noted several errors in which the amounts paid by CCPS to routine vendors were inconsistent with amounts listed on invoices presented for payment.  Vendor invoices reported past due balances or in some instances credit balances on the monthly invoice/statement.  It is apparent that numerous errors were made in the accounts payable process.  Furthermore, it appears that unresolved delinquent balances were not resolved with the vendor  – in one instance we noted that a delinquent balance remained unresolved with a vendor for months while incurring late charges totaling approximately $2,900.

As previously noted (Observation/Finding number 4), there appear to be numerous errors in the coding and posting (charging invoices to the correct account, grant, project, fund, etc.) of invoices to the accounting system.  Errors in coding and posting of invoices to incorrect accounts have an adverse effect on the usefulness of financial reports, including budget to actual comparisons.  The reliability of the financial reports is compromised when the input of the financial data contains errors.

We examined documentation related to the tuition reimbursements paid to employees.  We noted an instance in which an employee was reimbursed for courses toward a degree that did not appear to support the licensure guidelines of the Virginia Department of Education.  Furthermore, we noted during our examination that the standard tuition reimbursement form was not consistently prepared or filed timely with the School Board central office.  CCPS should evaluate the process and implement a detailed policy for approving the tuition reimbursement benefit program.  The policy should identify the appropriate personnel to approve an employee’s education plan and the respective tuition reimbursement.  The requirements of the education plan and the recourse if the plan is not completed should be clearly defined in the policy.

Recommendations

We have listed below our recommendations for improvements to the policies, procedures and internal controls of CCPS as it relates to financial reporting and processes.  We acknowledge many of the recommendations noted below have been implemented as of the date of this report by CCPS staff and/or the Treasurer of Charlotte County.

1.  All financial records of Statesmen Computers including the accounting system, bank accounts, purchase orders, and other financial reporting should be dissolved and merged with the financial records of CCPS.  Statesmen Computers should be treated as a department within the technology function of the CCPS operating budget.  Statesmen Computers should not operate independently but should function similar to other departments – maintenance, transportation, etc.  The bank accounts should be under the control and signature authority of the Treasurer of Charlotte County.  A detailed plan, including the effective date, should be established by CCPS to close the retail and merge the financial reporting process of Statesmen Computers.

Statesmen Computers should sell the remaining retail inventory and/or investigate the potential for use by CCPS of the inventory.  A physical count of the inventory should be taken as soon as possible and remaining items monitored closely as the retail operations are dissolved.

2. CCPS should refine the current local purchasing policy specific to the needs and operations of CCPS.  The policy should include thresholds requiring Board approval prior to the procurement or purchase.  The policy should provide guidelines with sufficient detail to provide direction to CCPS staff and ensuring that the division adheres to the Virginia Public Procurement Act and all related laws.  Additionally, the policy should provide guidance and procedures regarding sole source procurement.  Furthermore, CCPS should enhance documentation requirements related to vendor background checks, including contacting references, to verify the past performance and legitimacy of the business.

3. A policy should be developed outlining the expectations for financial reporting to the School Board and Management with specific types and frequency of reports to be provided.  Oversight and monitoring by the Government Body (School Board) is an important function of all internal control structures.  Furthermore, routine and detailed review of the financial reports including budget-to-actual documents will enable staff to monitor the status of the budget in comparison to actual results, monitor cash flows and will allow staff to accurately plan for the procurement of goods and services in the last several months of the fiscal year.

4. CCPS should consider documenting a policy over the procedures and controls related to the accounts payable process.  The policy should include procedures, but not limited to the following:

•Procedures for ensuring accurate payment to vendors for the actual services provided or goods received

•Timely payment of invoices

•Proper approval including verification of procurement, when applicable

•Procedures to prevent the duplicate payment of invoices

•Document the required procedures related payment of invoices outside routine check- runs

•Provide guidance for the payment of invoices at or around year-end ensuring posting to the appropriate accounting period

•Procedures to ensure that Forms 1099-Misc are issued to all appropriate vendors including those vendors paid with school activity funds

•Procedures to assist staff in identifying and verifying the proper posting /charging of checks

•Precise procedures for the approval of invoices by the School Board

•Checks issued mid-month should have a documented reason for the payment of the checks outside the routine check-run.  The School Board should consider authorizing two individuals designated as the personnel responsible for approving mid-month checks.  Additionally, all mid-month checks should be printed in the monthly Board packet for approval and examination, after-the-fact.

•A statement certifying that all checks have been approved by the School Board should be presented to the Treasurer of Charlotte County.  The statement will provide evidence and a basis for the checks to be signed by the Treasurer.

5. CCPS should reexamine detailed policies related to preauthorization of CCPS staff travel     including travel dates, costs to be reimbursed and the nature and purpose of the travel.  The policy should specify the process and proper forms to complete for preauthorization of travel.  We recommend CCPS consider specifying standard maximum reimbursements for meals and lodging.  The policy should disclose that all travel costs not preauthorized will not be reimbursed.  The School Board should specify which supervisors or department heads are authorized to approve travel.  As an alternative, the School Board would approve all travel requests.

6. We recommend the School Board implement a whistleblower policy in effect for all CCPS employees.  The policy should at a minimum include the following components:

Provide a clear statement that employees who are aware of possible wrongdoing within the organization have a responsibility to disclose that information to appropriate parties whether it is a member of management or the governing body

Outline specific steps to be taken by employees if unethical or illegal acts are suspected or confirmed and the appropriate parties or governing body that should be contacted; the policy should outline the responsibilities of the governing body to thoroughly investigate each possible wrongdoing and establish a fair and include steps for an impartial investigative procedure

Guarantee that employees who in good faith disclose perceived wrongdoing to the designated parties inside the organization will be protected from adverse employment consequences

Communication and monitoring are key components of a successful internal control structure.  Therefore, employees should have clearly defined procedures for reporting known or suspected wrongdoings involving direct supervisors either to another supervisor or the governing body to mitigate the potential for override.

7. CCPS should consider the need for guidelines regarding nepotism, related party transactions and similar matters.  It is common for family members, married individuals and other related parties to be employed by the same organization.  However, it is imperative that each situation be monitored closely and safeguards be implemented to prevent collusion, unethical acts or other unfavorable practices.

In conclusion, Robinson, Farmer, Cox Associates is available to provide additional details regarding our recommendations.  We recommend CCPS consider engaging the services of a qualified individual or firm to assist in implementing the technical recommendations disclosed herein.

Because the above procedures do not constitute either an audit or a review made in accordance with Government Auditing Standards, we do not express any assurance on the procedures described above.

Had we preformed additional procedures or had we performed an audit or review of the financial statements in accordance with Government Auditing Standards, other matters might have come to our attention that would have been reported to you.

This report relates only to the procedures specified above and does not extend to the audit of the basic financial statements of the County of Charlotte, Virginia.  Our report is solely for the purpose set forth in the first paragraph of this report and then for information and use of management noted above, the Board of Supervisors and School Board and is not intended to be used for any other purpose or to be distributed to any other parties.

Robinson, Farmer, Cox and Associates

Charlottesville, Virginia

July 19, 2013