Fiscal Oversight Module 1 - New York State School Boards

Transcription

Safeguarding District Resources:
Roles & Responsibilities
Presenter: Jamie P. McPherson
Leadership Development Manager
© 2013 New York State School Boards Association, Latham NY
New School Board Member
Mandated Training
Day Two: Fiscal Oversight Training
Module 1: Safeguarding District Resources: Roles & Responsibilities
Module 2: Building School District Fiscal Fitness
Module 3: Managing School District Fiscal Fitness
Module 4: Monitoring School District Fiscal Fitness
What is Fiscal Oversight?
Fiscal Oversight:
• The supervision of a school district’s
financial practice & policy implementation,
as well as the review & monitoring of
financial transactions & reports
School Boards:
• Stewards of public’s tax dollars
• Fiduciary Responsibility: Oversee the
district’s fiscal affairs to ensure public
monies are properly accounted for,
protected, & used efficiently
Fiscal Management
Overview
Key Responsibilities:
• Annually adopt a fiscally responsible budget
• Annually adopt a tax rate sufficient to fund
the budget (2% tax levy cap)
• Ensure expenditures do not exceed
approved budget
• Review & monitor district finances on an
ongoing basis
• Audit all claims & approve all district
purchases, or, appoint claims auditor
Fiscal Management
Overview
• Adopt & implement policies & procedures that
protect & properly account for school district
funds & assets
• Appoint treasurer, tax collector, audit
committee, internal auditor & external auditor
• Ensure the district undergoes an annual,
independent audit
• Designate purchasing agent & to certify
payroll
• Publish & file financial statements & reports
with state
Public Education in New York State
Public Education in New York State
210,616 Teachers
Total Salary Cost: $18,920,991,119
14,917 Administrators
Total Salary Cost: $631,400,824
Source: NYSED
Total number of buildings 5,247
Total number of charter schools 209 (state cap 406)
Where Does the Money Come From?
New York
(Millions of Dollars)
Total
Federal
State
Local
55,244,109 3,694,050 23,111,427 28,438,632
Where Does The Money Go?
New York State
2010 – 2011 average school
district expenditures
Source: Office of the State Comptroller
The Five Point Plan
How did We Get Here?
Road to the 5 Point Plan
• 2002 – 2004: An investigation &
audit of Roslyn revealed the largest
embezzlement scandal in public
education’s history ($11 Million)
• 2005 State Legislature mandated
OSC to conduct audits on all
school districts & BOCES in NY
• 2009 OSC completed the audits
Source: NY Office of the State Comptroller
State Audit Findings
Audit Report (733 audits of school districts &
BOCES):
• 19 school districts identified in outright fraud
or theft
• $615.4 million excess funds unnecessarily
tied up in reserve funds
• $7.7 in inappropriate or wasteful
expenditures
• $49.4 million in contracts awarded without
competitive bid process
Source: NY Office of the State Comptroller
2005 Legislation - The 5 Point Plan
Mandated Fiscal Oversight Training
Strengthened Claims /Deputy Claims Auditor Function
More Rigorous External Audit Requirements
Audit “Oversight” Committee
Internal Auditor Requirement
The Claims Auditor
• Claims Auditor: Verifies accuracy & legitimacy
of district transactions as they occur throughout
the year & reports directly to the board
• Claim: Legal document (invoice) from a vendor
or contractor demanding payment for provided
goods or services
• Voucher or Claims Packet: Contains all original
documentation for purchases & transactions
(purchase order, invoice, packing list / receiving
report, requisition & standard claims form)
The Claims Auditor
• Education Law requires board to audit &
approve all claims (vouchers) for payment
presented to the school district
Two Options for Auditing Claims:
1. School board can audit each voucher
packet (documentation for claim
2. School board can create claims auditor
position through resolution and works at the
pleasure of the board
The Claims Auditor
1. School Board as Claims Auditor
• Each board member board must audit
every voucher & be familiar with auditing
process
• Cannot delegate auditing responsibility to
single member, rotate through different
members, or a sub-committee
2. Appointing the Claims Auditor
• Once auditor is appointed, board loses
authority to audit & approve district bills
• Cannot split duty between board & auditor
The Claims Auditor
• Union Free, Central & Small City Districts
with enrollment of 10,000 or more & Large
City Districts – board may adopt a
resolution to utilize a risk based or
sampling methodology of auditing claims
(Expires 07/01/14)
-
Methodology must reasonably assure all
claims in sample represent proper charges
Comptroller will review effectiveness of
methodology to ensure accountability &
issue report 1/15/14
The Claims Auditor
Who Can and Cannot be Appointed?
Prohibited from position
Can hold position
• Board member, clerk or
treasurer
• Superintendent
• Business official or other district
official (i.e. audit committee
member)
• Purchasing agent
• Clerical or professional
personnel related to district
purchasing, accounting or
business functions
• Internal & external auditor
• Residents or non-residents of
the school district
• District employees who are not
specifically prohibited
• Inter-municipal cooperative
agreements
• Shared services
• Independent contractors
The Claims Auditor’s
Responsibilities
Audit each claim for payment against the
district, verifying that:
• The purchase is in compliance with law,
regulation & district policy
• All requisite forms in voucher packet are
present & complete
• All required authorization & signatures were
obtained
In short: Auditor verifies claim is true and
accurate and informs treasurer to issue
payment
Auditing & Approving Claims
• Suggested to use a standard claims form to
ensure all documentation is present in a
uniform & organized manner
• Is the claim for a valid & legal purpose?
• Was the purchase authorized & approved?
• Are there sufficient budget appropriations to
pay the claim?
• Is the claim sufficiently itemized?
Auditing & Approving Claims
• Does the claim meet the legal & policy
requirements in relation to competitive
bidding & the district’s procurement policy?
• Does the approved purchase order match
the goods or services received?
• Were the goods or services actually
received?
Fiscal AccountabilityThe 5 Point Plan
The Audit Committee
Education law requires every school district,
except those employing less than eight
teachers, to establish an audit committee
with at least three members
Role of Audit Committee:
• An advisory committee that reviews &
advises the board on issues relating to
the district’s external & internal audit
functions.
Audit Committee Charter
• Charter is required & must be board approved
• Establishes guidelines, procedures &
requirements to allow committee to operate
effectively
• Reviewed annually
Charter Should Outline & Specify
• Purpose/Mission
• Duties/Responsibilities
• Membership & frequency of meetings
• Reporting requirements
• Self-evaluation requirements
The Audit Committee’s
Responsibilities
External Audit Focus:
• Provide recommendations to the board
regarding appointment of the external
auditor
• Meet with external auditor prior to audit
– Review engagement letter
– Review & discuss risk assessment of
district’s fiscal operations
– Receive & review the draft annual audit
report & draft management letter, including
external auditors assessment of internal
controls
Responsibilities
External Audit Focus:
• Recommend acceptance of audit report &
management letter
• Review corrective action plan developed in
response to audit report & assist with
implementation of plan
• Assist board in interpreting documents
Responsibilities
Internal Audit Focus:
• Recommend appointment of internal auditor
• Review & discuss annual audit plan to
ensure high risk areas & key control
activities are periodically tested & evaluated
• Review all reports & findings of internal
auditor
• Monitor district’s implementation of internal
auditor’s recommendations to strengthen
internal controls
• Monitor performance of internal audit
function
Audit Committee Composition
• All current & former (2 yrs) district
employees including any board
appointed position ( claims auditor,
internal auditor, etc.) - includes close
& immediate family members
• Any current or former (2 yrs)
provider of goods or services to
district – includes close &
immediate family
• Anyone with direct or indirect
business interest with district –
current or within past 2 years
Can hold position
• Board Members - All, Some, or
None
− 3 members minimal who are
financially literate
− Do not have to be district resident
Audit Committee
Meetings & Reporting
Meetings
• Recommended to meet quarterly (minimum is
annually)
• Subject to Open Meetings Law
• Can enter executive session as defined by law
& commissioners regulations
• Also enter executive session for reasons
pertaining to external audit
– Meet with external auditor prior to audit
– Review external auditor’s risk assessment
– Receive & review the draft annual report &
management letter
Audit Committee
Meetings & Reporting
Reporting:
• Duty & responsibility to report to the board
• Scope & breath of committee activities
reflective in minutes or a summary of
meetings
• Committee’s review of draft annual report
and accompanying management letter
• Suspected fraud, waste, or abuse, or
significant findings of internal control function
• Significant non-compliances with laws or
district policies
• Other matters committee believes should be
reported
Audit Committee Self-Evaluation
Areas of Focus:
• Working relationship with management, auditors
& board
• Participation & contribution levels of members
• Appropriate skill level of members
• Committee size & number of meetings
• Encourage & help establish “Tone at the Top”
• Evaluation of internal auditor
• Review of significant control deficiencies
identified by internal / external auditors &
management’s corrective action plan to address
recommendations
Internal Audit – Mandate Relief
• Amended: Subdivision 2 of section
2116-b of the Education Law
• School districts with actual
enrollment of less than 1,500
students in previous years enrollment
have option to be exempt from
internal audit requirement
• Actual enrollment is reflected on
annual Property Tax Report Card
• Take effect July 1, 2013
Internal Audit
School accountability law requires an internal
audit function unless the district has
• Less than eight teachers
• General fund expenditures less than
$5 million in previous school year
• Actual enrollment is less than 1,500
students in previous school year
Purpose:
• Objective 3rd party that assists the board in
ensuring financial risks are identified &
appropriate internal controls are in place to
address risks
Internal Audit - Duties
Duties Fall into Two Broad Categories:
1. Perform a Risk Assessment:
– Includes review of financial policies &
procedures, as well as testing &
evaluating internal controls
– Risk assessment must be reviewed &
updated annually
2. Report to the Board of Education:
– Make recommendations for
improvements in controls & provides
board with estimated time frame to
implement recommendations
Internal Audit – Risk Assessment
Risk Assessment Process:
• Annual test & evaluation of one or more
of district’s internal controls to identify
risks that could allow fraud and / or error
to occur
• Analyze / evaluate likelihood risk will
result in fraud or error & level of risk
• Determine appropriate method & cost to
eliminate or control identified risks
• Report to board findings of risk
assessment & recommend changes to
strengthen internal controls
Internal Audit – Focus Areas
Internal audit risk assessment may focus on
areas such as
• Payroll
• Purchasing
• Food service
• Fixed asset policy
• Extra-curricular activities fund
• Budget transfers
• Bank statements
Internal Auditor
Can hold position
• Anyone who does not meet
professional auditing standards
• Employee (including close &
immediate family) of the district
associated with business
operations
• Employee, officer, or contractor
(including close & immediate
family) providing goods or services
to district
• Anyone (including close &
immediate family) with any
contractual interest with district
• Employee of district (with no
connection to business operations)
• Inter-municipal cooperative
agreement
• Shared services (as authorized by
Education Law, Section 1950)
• Independent contractor
Note: person or firm should have
experience with auditing standards &
school district financial operations
Evaluating the Internal Auditor
Focus Areas:
• Experience level
• Scope of internal audit
• Meeting & relationship with audit committee & management
• Frequency of reports & significant findings to ensure effective
action by management & audit committee
External Audit
Laws & regulations require each school
district employing eight or more teachers to
secure an annual audit by an independent
auditor
Purpose:
• Audit school district financial statements
to render an opinion on adherence to
Generally Accepted Accounting
Principles (GAAP)
• Ensure financial statements reflect
accurate picture of financial picture of
district
External Audit
• Provide guidance on internal controls &
audit testing, including specific types of
testing
• Audit report is presented to board
– Draft is sent to audit committee
– Based on findings, management has 90
days to prepare a corrective action plan
which will be implemented the next fiscal
year (July 1)
Appointing your External Auditor
• Must use RFP (Request for
Competitive Proposal) to hire external
auditor
– Lowest responsible bidder
• Engagement cannot exceed five
years
– After engagement, new RFP
– Can use same firm if they win bid, but
recommended to use different partner
External Auditor Qualifications
MUST be a financial professional
• Registered & licensed public
accountant in NY
• Meet required qualifications including
at least 80 hours of completed
professional education every two
years
• Have appropriate internal control
quality system & undergo an external
quality review at least once every
three years
External Auditor Qualifications
• Have experience in audits of
governmental entities & federal single
audits
• Possess sufficient staff to complete a
through audit in a timely manner
• Be independent in fact & appearance
Comptroller's Audit Report
2005 - 2009
Comptroller’s Audit Report
• 2005 – 2009 Office of State Comptroller
audited all school districts & BOCES in NY
• Focus: Internal controls, policies,
practices & operations to ensure adequate
protection against fraud, waste, & abuse
• Today: OSC conducts audits based on a
risk-assessment process that may include
– Investigations of alleged improprieties
– Previous audit findings
– Other financial indicators
Comptroller Findings
Financial Condition Problems
• Inadequate reporting & recording of financial
data
– Prevented boards from monitoring fiscal
condition in a timely manner
– Over-expending appropriations & fund
balances deteriorated, often to deficit
Payroll Issues
• Separation Payments: Lack of oversight
regarding leave balances or payments for
unused time were in accordance with
contract
Payroll Issues - continued
• Payment for personal services without contracts
– Poor internal controls & lack of oversight over
policies & payroll
– Allowed individuals to receive salary & unused
leave time payments they were not entitled to
Claims Auditor Deficiencies:
• Incompatible business functions (authorize
transaction & approve payment)
• Approved claims without proper documentation
or approval
• Reported to management instead of board
Information Technology (IT)
• No acceptable-use standards for computers,
internet, or email
• No safeguards for data – anti-virus,
password security, remote or physical
access controls, or data backup systems
• Access to financial software above job
duties
• No audit logs to identify or track individuals
who accessed the system or the
transactions they processed (no segregation
of duties)
Fiscal Stress
Monitoring System
Fiscal Stress Monitoring System
Office of State Comptroller implemented a system
to identify school districts that are in fiscal stress,
as well as those showing susceptibility to fiscal
stress
• Fiscal Stress: School district’s inability to
generate enough revenues within its current
fiscal period to meet its expenditures
• Monitoring will allow early intervention to
prevent a district from ending up in severe fiscal
stress
• System is based on both financial &
environmental indicators
Source: NYS Office of the State Comptroller
• Fiscal Indicator: Calculated using financial
data already filed in annual update documents
(AUD)
– Districts will be classified ranging from “significant fiscal
stress” to “not in fiscal stress”
• Environmental Indicators: Calculated using
data from sources such as US Census Bureau,
NYS Department of Labor, Taxation & Finance,
Education, & financial information from AUD’s.
– Goal: Identify districts that have a negative
environmental atmosphere that causes or will
potentially lead to fiscal stress
Preventing Fraud,
5Waste
Minute
Break
& Abuse
Fraud, Waste & Abuse
Fraud: The use of one’s occupation for
personal enrichment through the
deliberate misuse or misapplication of the
employing organization’s resources or
assets
Waste: Not acquiring, protecting, or using
resources in the most productive manner
to achieve program objectives
Abuse: Improper or questionable practice
that violates the public trust
Source: Association of Certified Fraud Examiners
National Fraud Statistics
• Typical organization loses 5% of its revenues
each year to fraud – in U.S. $652 billion
• Median fraud loss was $140,000 - more than
1/5 of cases resulted in a loss of more than $1
million
• On average, fraud occurred 18 months before
being detected
Source: ACFE 2012 Report to the Nations
• 49% of victims did not recover any money from
perpetrator
• 6.4% of fraud occurred in education
Education – 88 Cases
Source: ACFE 2012
Report to the Nations
Scheme
Number of Percent of Cases
Cases
Billing
28
31.8%
Expense Reimbursements
23
26.1%
Skimming
19
21.6%
Payroll
13
14.8%
Check Tampering
11
12.5%
Non‐Cash
7
8.0%
Financial Statement Fraud
4
4.6%
Who is most likely to commit the highest amount of fraud?
Fraud Perpetrator Profile
• 61% of fraud cases committed by men
(higher rate of fraud among older men)
• 41.2% of fraud committed by
employees
• Median loss for fraud committed by
executives 3X more than employees
• 40% fraud committed by two or more
people
• 87.9% fraud perpetrators have never
been charged or convicted of a crime
Source: Red Flags for Fraud ; NY Office of State Comptroller
Why Does Fraud Occur?
The Fraud Triangle
Elements of Committing Fraud
• Pressure: Some financial pressure
that motivates individual to commit
illegal act
• Opportunity: Low risk of getting
caught
• Rationalization: Justifies the crime
in a way that makes it acceptable
Source: Donald R. Cressey, Other People's Money
Do not view themselves or their
actions as criminal
Fraud, Waste & Abuse
Factors Contributing to Fraud:
• Poor internal controls
• Management override of internal controls
• Collusion between employees
• Collusion between employees & third parties
Fraud Myths:
• Internal or external audits catch most fraud
• Usually caused by individuals who have
committed a previous crime
• Only happens in large organizations
Areas Most Susceptible to Fraud
• Areas involving cash/assets
(purchasing, cash receipts)
•
•
•
•
Payroll & benefits
Information Technology (IT)
Financial reporting
Credit cards, cell phones, travel
& conferences
The Board’s Role
Preventing Fraud, Waste & Abuse
Boards should:
• Set the tone at the top
• Ensures policies exist, are up-to-date, &
followed
• Develop & receive recommendations for
strengthening internal controls & policies
• Communicate with audit committee
• Read & understand reports
• Oversight through observation & analysis
(Red Flags)
The Role of Policy:
Preventing Fraud, Waste & Abuse
Use policy to set the tone at the top:
• Clearly communicates board’s purpose
& direction
• Segregates, identifies, & explains
fiscal duties (who does what)
• Provides a time & method for periodic
board monitoring
• Is widely disseminated
• Consistently reviewed & updated
The Policy Role
Policies required by law:
• Code of Ethics: Sets the standards of
conduct reasonably expected of all board
members & employees of the district
• Investment Policy: Details district’s
policies, procedures, & instructions for
investing, monitoring & securing funds,
as well as reporting investments
• Procurement Policy: Policies &
procedures for procurement of goods &
services not subject to competitive bid
The Policy Role
Recommended Policies:
• Wire Transfer & Online Banking
• Budget Transfers
• Travel & Conference Reimbursement
• Credit Card
• Computer Use
• District Cell Phone
• Capital Asset Control
• Claims / Internal / Eternal Auditor
• Conflict of Interest
• Whistleblower
Top Ten Fraud Risk Indicators
1.
2.
3.
4.
5.
Key documents missing
No separation of financial duties
Accounting system in disarray
Lack of policies that establish controls
Inadequate monitoring to ensure internal
controls work as intended
6. Ineffective accounting, information technology
or Internal Audit Staff
7. Documentation that is photocopied or lacking
essential information
Source: Ohio State Auditor reporting on
8. Unusual employee behavior
School Districts in Ohio
9. Tips or complaints about fraud
10. Lack of established code of ethical conduct
Financial Red Flags
•
•
•
•
•
•
•
•
•
Payments made on non-business days
“Out of season” payments
Rounded payments
Excessive transactions, esp. to one
vendor
Vendor & employee addresses match
Purchases without shipping documents, or
that bypass normal procedures
Incomplete or untimely bank reconciliation
Accepting invoice duplicates for payment
Excessive number of year-end
transactions
Organizational Red Flags
•
•
•
•
•
•
•
•
Weak or lax internal control environment
No communication of expectations
Too much trust in key employees
Lack of proper authorization procedures
Lack of attention to detail
Lack of separation of duties
Lack of physical security and/or key control
Weak links in chain of controls and
accountability
• Lax management style
• Inadequate training
Detecting Fraud - Red Flags
Source: ACFE 2012
Report to the Nations
Behavioral Red
Flags
Behavioral Red Flags
of Perpetrators
Behavior
% of Cases Reported
Living Beyond Means
35.6%
Financial Difficulties
27.1%
Unusually Close Association with Vendor
19.2%
Wheeler‐Dealer Attitude
14.8%
Irritable, Suspicious or Defensive
12.6%
Addiction Problems
8.4%
Refusal to Take Vacations
6.5%
Family / Peer Pressure for Success
4.7%
If Fraud is Suspected
Action Steps:
• Ensure district has a Whistleblower
Policy & is clearly communicated to all
employees
• Employees should be able to make tips
without fearing for their safety or job
• Monitor district finances & ensure
claims auditor, internal auditor & audit
committee are properly trained to
detect red flags
44% of fraud is detected by tip
If Fraud is Suspected
Action Steps:
• Do not ignore red flags – take action
(What are the consequences if you don’t?)
• Follow the chain of command
• If suspect is within the chain contact
another source (OSC, school attorney,
State Ed, etc)
• All reported cases of fraud, waste, or
abuse should be investigated by proper
authority (sometimes an error is just an
error)
44% of fraud is detected by tip
Summary of Board’s Role
in Financial Oversight
Summary of the Board’s Role in
Financial Oversight
Monitoring
Reviewing & Managing Control Systems Control Activities
Policies & Activities to Eliminate or Minimize Risks
Risk Assessment
Identification & Analysis of Relevant Risks Control Environment
“Setting the Tone at the Top”
Source: COSO Internal Controls Pyramid
Presenter: Jamie P. McPherson – Leadership Development Manager
Email: [email protected]
Phone: (518) 783 - 0200

Fiscal Oversight Module 1 - New York State School Boards

Transcription

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