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October 18, 2005 |
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Hevesi Audit Faults Lawrence School Board and
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 | The district had an inadequate process for selecting an auditing firm and failed to provide proper oversight to ensure that the annual audit was adequate. |
| The CPA firm, which audits at least 70 other school districts, did not comply with at least three professional standards for conducting such audits. Non-compliance with any one standard is grounds for referral to the State Board of Public Accountancy. |
| When planning audit tests, the firm did not address significant risks, including whether management had the ability to override internal controls, the effectiveness of internal controls for the computerized accounting system, and the possibility of fraud. |
| In its testing of district spending, the firm failed to test a sufficient number of transactions to ensure that spending was proper and adequately supported. Of the transactions tested, it did not look at all cancelled checks, which is a standard practice for audits and is deemed a serious lapse by state auditors, and it missed a duplicate payment. |
“The board of education failed in its responsibility to oversee the auditing process, and Coughlin & Foundotos produced sloppy work that did not comply with auditing standards,” Hevesi said. “If an outside auditor fails to conduct thorough audits, taxpayers may have a false assurance that funds are safeguarded. Boards must demand that their outside auditors meet auditing standards to ensure that school assets are properly used.”
Every school district is currently required by Section 2116-a of the Education Law and by regulations of the State Commissioner of Education to hire an accounting firm to perform an independent audit every year. The purpose of these audits is to assure that school district financial statements are accurate and internal controls are adequate. The report must be filed with the State Department of Education by October 1.
“Audits of school districts are designed to ensure that financial statements meet accounting standards,” Lou Grumet, executive director of the New York State Society of CPAs said. “When you are auditing tax dollars in school districts, thorough audits of potential hot spots are mandatory because the dollars at stake are channeled to the education of our children. We are thrilled that legislation has passed to make sure that every dime is looked at from the perspective of both the internal controls that the school district have in plan and accountability for all involved in the process.”
The CPA firm took exception to many of the findings of the Comptroller’s audit. The firm believes that it significantly exceeded the requirements of applicable auditing standards. The full response is included in the audit.
This is the second audit report on the Lawrence school district released by Hevesi. A previous audit of the district’s financial operations released in June 2005 found no wrongdoing, but significant weaknesses in the district’s fiscal management, including the ability for personnel to override controls in the computerized accounting system designed to prevent fraud, projects that were not always competitively bid, and bank statements that were not reconciled for an account that has millions of dollars in transactions per month. The School Board promised to implement the recommendations of the audit. The types of problems uncovered by the Comptroller’s audit, such as weaknesses in internal controls, should have been, but were not, noted by the accounting firm’s audits.
In the audit released today, state auditors found that the district’s policy for procuring professional audit services was not adequate, and that the district did not follow its own process for selecting a CPA firm. The district was unable to locate most of the proposals that were submitted by competing firms to demonstrate on what basis Coughlin & Foundotos was selected over other firms. In addition, the firm has been the district’s CPA firm since the 2001-02 fiscal year, but the contract did not indicate that it would be extended beyond the 2002-03 fiscal year.
State auditors discovered problems with several steps of the audit process, including that the firm:
| Failed to Comply with Professional Standards Regarding Fraud. Coughlin & Foundotos did not comply with professional standards that require the firm to consider the possibility of fraud. There was no indication that the firm had considered the risk of district management overriding accounting controls, such as paying claims without proper documentation, changing vendor payments or authorizing bank transfers. |
| Did Not Meet Professional Standards Regarding Internal Controls Over Information Technology. The CPA firm failed to obtain an understanding of actual internal control practices relating to the district’s use of information technology. State auditors found this particularly disturbing because their assessment of the district’s information technology internal controls identified a number of significant weaknesses, including the lack of written policies and procedures, inappropriate access rights to the computing system, and the capacity to perform overrides such as making vendor changes with little or no audit trail. |
| Testing That Did Not Meet Generally Accepted Government Accounting Standards. The firm’s audit programs and workpapers supporting testing of expenditures were not properly designed and executed to enable the CPA firm to test enough transactions to conclude that expenditures were proper. The firm tested only a very small number of individual transactions and cancelled checks in 2002-03 and 2003-04, even though the firm assessed the district’s risk at maximum. For the 2003-04 audit, the firm tested 50 expenditures with a total dollar value of $97,000 out of $81 million in expenditures. The firm did not review the cancelled checks for 20 of 50 transactions tested and failed to detect that the district paid one invoice for football helmets twice. |
| Did Not Complete Planned Testing of Fixed Assets. While the CPA’s audit program required that four audit procedures be completed to test the district’s fixed asset inventory, the firm only conducted one of these four procedures. The firm did not raise any questions about the district’s lax controls over assets, even though the firm was aware of serious problems with the district’s accounting and knew that the district had not updated its asset database. In fact, state auditors found that equipment, such as laptops and desk top computers, totaling $112,000 in the 2002-03 fiscal year was not recorded in the database. The same situation occurred in 2003-04 when another $315,000 in equipment was not logged. |
The Lawrence Board of Education did not to respond directly to the audit; rather it used the response of Coughlin & Foundotos as its official response.
State auditors recommend that the district and board:
| Provide more specific guidance on the process to solicit and review RFPs for professional services, and ensure that audit services are obtained in accordance with its policies and procedures, as well as solicit new proposals at least every five years. |
| Retain all documentation concerning RFPs for selecting a CPA firm. |
| Educate themselves on the scope and limitations of the annual independent audit. If audit services are needed and not covered by the annual audit, then officials should consider expanding the scope of audits or should contract for separate audits or reviews. The board should also explore an audit of its computer controls to ensure that they are operating properly. |
| Establish an audit committee which can provide oversight of external and internal audit work, select an outside auditor and ensure that the work of the external audit report meets auditing standards. |
The Lawrence Union Free School District 2004-05 budget is approximately $85 million annually. It has six schools, 3,600 students and a workforce of about 800 employees.
Click here for the audit report.
Violations of Mandatory Professional Standards for Conducting Audits
School Districts Audited by Coughlin, Foundotos, Cullen & Danowski
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