Michele A. Huntoon , CPA Associate Vice President Lewis W. Wiley, Jr. Director, Management Consulting Services

Michele A. Huntoon, CPAAssociate Vice President

Lewis W. Wiley, Jr.Director, Management Consulting Services

Cosponsored by:

The Audit ChallengeWorkshop

2Workshop Topics

Audit basics

Audit administration

The annual audit

Charter school audits

Federal and state compliance issues

Audit findings and resolution

Internal audits and controls

Fraud prevention and detection

Audit Basics

4Why Do We Have Audits?

Required by state and federal law

Education Code Section (E.C.) 41020

Encourages sound fiscal management

Federal Single Audit Act (Office of Management and Budget [OMB] Circular No. A-133)

Requirement relates to expenditures of federal funds

Local educational agencies (LEAs) must have an audit that covers all funds and accounts and that addresses financial management and compliance with laws and regulations

5Who, What, and When?

Annual single audit is required to be performed by an independent Certified Public Accountant (CPA) with whom the LEA contracts

Must select an auditor by April 1 of each year to be audited

Program compliance of “build-upon” audits

Performed either by state or federal auditors

State Controller’s Office (SCO)

California Department of Education (CDE)

State Teachers’ Retirement System (STRS)

6Audit Standards

Financial Statement Audits

Generally Accepted Auditing Standards (GAAS)

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Government Auditing Standards (GAGAS) (Yellow Book)

Title 5, California Code of Regulations (CCR), Education

Education Audit Appeals Panel (EAAP)

Audit of California K-12 LEAs

7Audit Standards

Compliance Audits

Yellow Book – General Accounting Office (GAO)

Federal OMB circulars

Federal Compliance Supplement

Catalog of Federal DomesticAssistance (CFDA)

K-12 Audit Regulations

Federal and state laws andregulations

8The Politics of State Compliance Auditing

The K-12 Audit Regulations are the playing field

At risk of losing funding

675 audit findings reported in 2008-09 (22.2% in the attendance area)

516 state

159 federal

Other state areas with significant findings were class-size reduction (CSR) and the After School Education and Safety (ASES) grant

Federal program area with the largest number of findings was noncompliance with OMB Circular No. A-87, allowable cost/cost principles under Title I

9State Compliance Auditing

Current law requires:

SCO to publish by December 31 of each year a list of CPA firms that are eligible to perform LEA audits (E.C. 41020[f][1])

Mandatory rotation of audit partners/firms at least every six years(E.C. 41020[f][2])

Waiver available

10The Role of the State Controller’s Office

SCO, Division of Audits, has been designated by the Legislature as having oversight responsibility for school financial matters

Responsibilities include:

Proposing and coordinating updates to the K-12 Audit Regulations

Reviewing and certifying that audits are in compliance with legal, administrative, and professional standards

This includes K-12 Audit Regulation compliance

Performing Quality Control Reviews (QCRs) of audit firms performing school audits

Compiling data and making annual reports to the Legislature

Performing audits of districts with state loans

Performing build-upon audits (program audits)

11SCO Review of Annual Audit

SCO is responsible for monitoring quality of audit reports submitted

Done via a desk review of all audit reports, including charter school audits

Review focuses on eight areas:

Auditor’s report

Required supplemental information

Management Discussion andAnalysis

Basic financial statements

Notes to financial statements


Required Supplementary Information

Budgetary comparisons

Other Supplemental Information Section

Supplementing schedules

Other Reports Section

Internal control

Compliance

Findings and recommendations


If report does not meet standards, a letter identifying problems and requiring correction is sent to the CPA, county office of education (COE), and district

Negative impact to district

Increases district’s profile with SCO, CDE, and Departmentof Finance (DOF)

Increases likelihood ofbuild-upon audit

14Build-Upon Audits – Areas Likely to be Audited

Average daily attendance (ADA) is a primary area for audit:Districts also could be subject to additional program-specific audits conducted by SCOThe areas likely to be reviewed are:

The attendance collection and reporting process California Basic Educational Data System (CBEDS) enrollment changes – and the process for enrolling and disenrolling studentsIndependent studyInstructional timeCSRKindergarten admission age and retention requirementsCharter schoolsOther alternative programs with significant ADA reported

Areas identified with audit findings in your single audit report

Audit Administration

16The Audit Challenge – Annual Audit

Minimize the challenges and maximize the benefit

Auditor is hired by the district

District has the ability to choose from the list of auditors on the SCO website for the services

Audit administration is a district’s responsibility

Work with your auditor to make the process convenient and efficient for both parties

View the auditor as a business consultant, and utilize him or her to have areas of concern analyzed or procedures improved

Obtain validation of things operating well, and use to generate good public relations

17Issues of Audit Quality

Audit quality is affected by several factors:

Price

Specialized skill

Your value as a client

Without audit quality, be concerned that:

Errors and irregularities might go undetected and uncorrected

The SCO might reject your audit report

Issues of noncompliance may not be found in the early stages

You are wasting your school agency’s money

18Issues of Audit Quality

Ask for a copy of your audit firm’s most recent peer review or QCR opinion

Audit quality can also be gauged through:

Review of another school audit report the firm has prepared

Inquiry of other school agencies using the firm’s services

Checking the results of any QCRs performed by the SCO

19When to Change Auditors

Ask the COE about its experience with the firm when the firm performs audits elsewhere in the county

Firsthand assessment of the firm’s work

Some school agencies change auditors as a matter of policy, i.e., every five years

But there is no requirement that you need to change properly licensed auditors if you are satisfied with their thoroughness and responsiveness, except within the six-year rotation requirements of E.C. 41020(f)(2)

20Evaluating Audit Quality

In 2008-09, a sample of firms were reviewed by the SCO

Some elements were met

Majority of auditing standards and federal and state requirements were not met

For 2008-09, 77% of the audit reports were accepted

Number of rejected reports decreased from 377 in 2007-08 to 337 in 2008-09

34% were charter schools

Most rejections were due to errors in the findings and recommendations report and the supplemental information

21Use of an Audit Committee

Formation of an audit committee is beneficial for:Bringing objectivityDelegating audit administration responsibilitiesLending technical adviceDirecting and reviewing the work of internal auditorsImproving financial practices and reportingEnhancing the internal audit functionEnhancing the external audit function

Typical committee composition is three to five members who are selected for:

Their financial expertiseTheir independence from the business officeTheir interest as a Governing Board member

22Model Request for Proposals

Mandatory Criteria – items required by law or regulation:

Licensed CPA in California

On SCO list of approved CPAs

Lead and coordinating partners cannot have performed the services in the prior six years

Optional Criteria – items required to make a complete evaluation on quality:

School experience

Adequacy of sizes

Staff qualifications

Other expertise

23

Proposed Criteria

Point Distribution

Points Earned

QualificationsExperience xxReferences xxEtc. xxSubtotal 50

Audit approachTiming xxTesting Methods xx

Etc. xxSubtotal 20

Price 30Total Points 100

Try to give greater weight to expertise over cost (see right for example)

Avoid “all or nothing” scoring; use a scale

Assign the highest number of points to the firm best meeting that particular qualification

This formula can assist with the process of assigning points for auditor selection

Point Ranking System

24Audit Contracts

E.C. 14505 requires certain elements to be included in the audit contract

10% of the audit fee to be withheld pending certification by the SCO

The contract must include a provision that a multiyear contract is null and void if the SCO declares an audit firm to be ineligible to conduct audits

25Managing the Audit—Coordination and Arrangements

Assign an audit coordinator/liaison

Auditors need:

Appropriate amount of space conveniently located to the accounting department – private, if possible

Full access to phones, faxes, and copiers

Ability to freely meet with key staff throughout the visit

Clerical assistance

Offer to run special computer reports and prepare schedules in advance

Consider allowing auditors direct access to certain files in the computerized accounting system from a terminal

26Managing Field WorkRequest in advance a list of items necessary for the initial fieldworkvisit

Gather data for the auditor in a timely manner

Finalize key reports on time

Be available to answer questions

Insist on both an entrance and exit conference

Hold progress meetings if you are a larger entitythat has more complex audits and longer audittimelines

Insist on reviewing the draft reportprior to finalizing the audit

The Annual Audit

28The Basic Financial Statement Audit

The independent auditor is required to issue an opinion on the fair presentation of the financial statements

What are the basic financial statements?

Governmentwide Financial Statements

Statement of Net Assets

Statement of Activities

Fund Financial Statements

Balance Sheet – Governmental Funds

Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets

29The Basic Financial Statement AuditReconciliation of the Government Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities

Statement of Fund Net Assets – Proprietary Funds

Statement of Revenues, Expenses, and Changes in Fund Net Assets – Proprietary Funds

Statement of Cash Flows – Proprietary Funds

Statement of Fiduciary Net Assets – Fiduciary Funds

Statement of Changes in Fiduciary Net Assets – Fiduciary Funds

Statement of Revenue, Expenditures, and Changes in Fund Balances – Governmental Funds

30The Basic Financial Statement Audit

In addition, the auditor may express an opinion on individual fund statements

Fund forms (Standardized Account CodeStructure [SACS] forms) are essentiallythe basic financial statements of aschool agency

31Audit Opinions

Four possible audit opinionsUnqualified

Clean opinion and in conformity with GAAPQualified

Reservations about the fair presentation of the financial statementsInsufficient records (i.e., inventory)Inconsistent accounting principles from one year to the next

AdverseMaterial departure from GAAP (i.e., governmentwidestatements not presented in financial statements)

DisclaimerMaterial amounts without sufficient documentation – all or a portion of the financial statements

32Audit Adjustments

The auditor will propose audit adjustments to:Correct errorsRecord transactions in accordance with GAAPProvide for allowances and estimates

Avoid audit adjustments by carefully closing the booksCash with fiscal agentsYear-end accrualsDue to/from other fundsInterfund transfers and abatementsFund balance reserves and designationsOther nonroutine entries (i.e., issuance costs on debt)Prior-year accruals and audit adjustments

33Typical Audit Approaches

Typically, the audit approach is a combination of methods

Tests of controls (i.e., attendance, payroll, and disbursements)

Substantive testing (i.e., financial statements)

Compliance testing (i.e., OMB A-133)

Assertions

Existence or occurrence

Completeness

Rights and obligations

Valuation or allocation

Presentation or disclosure

6th assertion – compliance with laws and regulations

34Sampling and Materiality

Auditors rarely test 100% of transactions

Sampling techniques are used, either statistically orjudgmentally drawn

Materiality is considered to be the level at which an error in the financial statements would change a reader’s opinion about the school district’s financial position and operation

Can be both qualitative and quantitative

Determined at the lowest level at which an opinion is rendered

Materiality may be mandated by law

ADA by instructional program

35

Program Total Reported ADA

Minimum Reported ADA for Each Program Before Audit

Testing is Required

All attendance-

driven programs

1 – 1,0001,001 – 2,500

2,501 – 10,000Over 10,000

102050

100

For federal programs, materiality is determined at the program level

Financial statement materiality is between 0.5% and 4.0%

Sampling and Materiality

36The Audit Trail

All transactions need to:

Have sufficient supporting documentation

Be accessed in a timely manner

An inadequate audit trail leads to audit exceptions and increases the potential for fraud and errors

37The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003

In the mid-1970s, there were more than 100 different program audit guides

The process was unmanageable for both the auditor and auditee

A wasteful duplication of effort

Conflicting audit requirements

Findings resolution nightmares

To streamline the audit process, the Single Audit Act of 1984 was enacted

OMB Circular No. A-133, revised June 27, 2003

Revision increased the threshold to $500,000, effective for periods ending after December 31, 2003 (i.e., the 2003-04fiscal year)


Auditors will decide whether an auditee is low or high risk

If low risk, 25% of federal programs to be tested

If high risk, 50% of federal programs to be tested

A low-risk auditee must meet these criteria:

An unqualified opinion for the last two years

No material internal control weaknesses or findings in Type A programs


The Single Audit Act adds numerous audit testing and reporting requirements and costs

Expenditures for an individual federal program are identified asType A programs as follows:

$300,000 or 3% (.03) of total federal awards expended for which total federal awards expended equal or exceed $300,000, but are less than or equal to $100 million

$3 million or 3/10 of 1% (.003) of total federal awards expended for which total federal awards expended exceed $100 million, but are less than or equal to $10 billion

$30 million or 15/100 of 1% (.0015) of total federal awards expended for which total federal awards expended exceed$10 billion


Low risk are those with no findings of internal control weaknesses, and those that are not identified by the federal government as having problems

Federal programs not labeledType A shall be labeled Type Bprograms


The auditor must perform risk assessments on Type B programs that exceed the larger of:

$100,000 or 3/10 of 1% (.003) of total federal awards expended when the auditee has less than or equal to $100 million in total federal awards expended

$300,000 or 3/100 of 1% (.0003) of total federal awards expended when the auditee has more than $100 million in total federal awards expended

Auditors test if risk is assessed as high

Compliance with specific requirements for major programs is tested

Compliance with common requirements is tested


An auditor may be required to expand the testing of Type A programs if less than 50% of the total federal awards expended are not included in the test of federal programs

For a low-risk client, the auditor is required to test at least 25%of the total federal awards expended

43

Real property acquisition and relocationProcurement, suspension, and debarmentEligibility*Reporting*Program incomeSub-recipients monitoringSpecial tests and provisions

Activities allowed or not allowedAllowable costs/cost principlesCash managementDavis-Bacon ActEquipment and real property managementMatching, level of effort, or earmarking*Period of availability of federal funds

The Single Audit Act of 1984 and Subsequent Amendments in 1996 and 2003

The auditor will look at:

*These compliance requirements are generally specific to a program and, for the majority of programs, are described in the Compliance Supplement.


The auditor has many resources to assist in planning a single audit

K-12 Audit Regulations – available on EAAP’s website

www.eaap.ca.gov

But SCO no longer publishes the procedures in an audit program format with authoritative references and supplemental information

The Compliance Supplement for Single Audits of State and Local Governments – available on OMB’s website

www.whitehouse.gov/omb/circulars/index.html

The Catalog of Federal Domestic Assistance – available on the General Services Agency website

www.gsa.gov/fdac/queryfdac.htm


An idea to distribute audit costs:

Both OMB Circular Nos. A-87 and A-133 allow for the direct or indirect allocation of proportional audit cost to federal programs

However, if the indirect cost pool includes costs charged directly, then those costs cannot be charged twice

46Governmental Accounting Standards Board

The Governmental Accounting Standards Board (GASB) was established in 1984 and is responsible for developing standards of state and local governmental accounting and financial reporting that will:

Result in useful information for users of financial reports

Guide and educate the public, including issuers, auditors, and users of those financial reports

Compliance with GASB standards are enforced by some states laws and auditors through the audit process

GASB is a private sector not-for-profit entity

47Governmental Accounting Standards Board

GASB 43 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans

When an LEA reports an Other Than Postemployment Benefit (OPEB) plan as a trust or agency fund

GASB 45 – Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions

Financial reporting by government agencies sponsoring benefits for retirees other than pensions (i.e., medical, dental, life insurance, etc.)

See CD-ROM for GASB 45

48Governmental Accounting Standards Board Statement No. 45 – Funding Alternatives

Year Pay-As-You-Go

Level Contribution

Level % of Unfunded Accrued Liability

(AL)

Level % of Payroll

2005 $596,865 $1,199,000 $1,579,150 $936,000

2006 $721,391 $1,199,000 $1,474,189 $964,080

2007 $848,958 $1,199,000 $1,384,194 $993,002

2008 $966,047 $1,199,000 $1,307,013 $1,022,792

2009 $1,082,860 $1,199,000 $1,240,259 $1,053,476

2010 $1,224,957 $1,199,000 $1,182,141 $1,085,081

2011 $1,331,547 $1,199,000 $1,131,732 $1,117,633

2012 $1,382,667 $1,199,000 $1,086,405 $1,151,162

2013 $1,368,560 $1,199,000 $1,043,556 $1,185,697

2014 $1,355,578 $1,199,000 $1,001,017 $1,221,268

49Governmental Accounting Standards Board Statement No. 54

Fund Balance Reporting and Governmental Fund Type Definitions

Issued on March 11, 2009, and became effective for the 2010-11 fiscal year

Improve usefulness of fund balance information by:

Clarifying the relationship between reserved fund balances reported under the modified accrual (SACS) and reserved balances reported under the full accrual basis (GASB 34)


New categories of fund balance:

Nonspendable – store inventory, prepaids, etc.

Restricted: Amounts constrained by external parties

Committed: Amounts constrained by a government (internally by formal action)

Assigned: Amounts for a particular intended purpose

Unassigned: Amounts that are constrained or assigned

Also, GASB 54 specifies how to disclose “rainy day” amounts in the financial statements


LEAs are required to implement this statement with the 2010-11 financial statements dated June 30, 2011

The SACS software will be updated for GASB 54 with the 2011-12 budget software

Regardless of software changes/updates, LEAs are required to follow GASB 54 in the 2010-11 fiscal year financial statements

The CDE has provided guidance in the form of a crosswalk for the components of the ending fund balance, including object codes

See Appendix A for GASB 54 Crosswalk


Government Finance Officers Association recommends, as a best business practice, to establish a formal policy on the level of the unrestricted fund balance that should be maintained

Unrestricted fund balance includes:

Committed

Assigned

Unassigned

A fund balance policy should consider:

Volatility of revenues and expenditures

Impact on general fund resources from other funds

Exposure to one-time outlays (i.e., State Budget crisis)


Restricted resources that are reported in unrestricted resources in funds other than the general fund (i.e., local revenues and financing sources) will need to be defined locally as restricted

Funds other than the general fund

Minimum level of positive fund balance is designated as assigned

Funds 17 and 20 do not meet GAAPs, but have been authorized in statute and are not expected to be closed

54External Audits – Findings

A typical audit finding is:

A weakness found in the internal control system

An irregularity that has been discovered

An instance of noncompliance with applicable laws and regulations

A combination of any of the above three

55External Audits – Findings

The auditor is required by GAAS to classify findings into one of three categories:

Reportable Conditions – significant deficiencies

Material Weaknesses – a serious reportable condition in which the error could result in a material misstatement of the financial statements

Management Comments (i.e., management letter) – general recommendations that either are not a deficiency or are insignificant in relationship to the financial statements

This is included in the annual audit report

Charter School Audits

58Audits of Charter Schools

Are charter schools required to have an audit?

What factors might trigger an audit?

What type of audit should be performed?

What is the audit scope, and how do youdetermine appropriate audit tests?

59Applicable Laws and Regulations Governing Charter Schools

Charter schools are generally exempt from “laws governing school districts”

Charter schools are not exempt from:

Annual instructional minute requirements

Independent study provisions – E.C. 51745

CSR requirements

Record keeping requirements for attendance

Provisions of the charter itself

Provisions for any programs requiring application for funding

60Applicable Laws and Regulations Governing Charter Schools

Charter schools may not be exempt from the Government Code, the Public Contracts Code, the Health and Safety Code, the Penal Code, the California Tax Code, and so forth

Charter schools organized as nonprofit corporations

Charter schools also are not exempt from federal laws

Identify applicable laws and regulations that could have a material effect on the financial statements, and design appropriate audit tests of compliance

61Charter School Audit Regulations

ADA based on Second Principal Apportionment

Verify that all documentation is available to support reports filed by the state

Classroom

Confirm that students are engaged in educational activities under the immediate supervision of a charter school employee who holds a valid teaching certification (E.C. 47605)

Nonclassroom-Based Program (Independent Study)

Verify that written policies for this type of program are in place

Determine that the ADA reports that were filed with the CDE and funded are correct and accurate

62Charter School Audit Regulations

Determination of funding for a nonclassroom-based program

Verify what percentage of ADA was generated through the nonclassroom-based program

Funding determination was obtained from the CDE for the year audited

Verify revenues and expenditures used in the funding determination as they relate to instruction

Review pupil-teacher ratios

Determine how outside contracts are paid – based on per ADA or another method

63

Grade Level Minutes

Kindergarten 34,971

Grades 1-3 48,960

Grades 4-8 52,457

Grades 9-12 62,949

Instructional Minutes

Charters are required to offer a minimum number of minutes annually

ABX4 2 (Chapter 2/2009) provides for the reduction of minutes based on flexibility

Charter School Audit Regulations

64Building Fiscal Accountability into aCharter School Agreement

Fiscal accountability over charter schoolsSeparate legal entityBoard revocation powers

Charter petition provisions to help monitor fiscal healthRequirements for an annual audit Ability to physically inspect the financial records and/or perform internal audits, upon requestSubmission of a current business planThe establishment of adequate fiscal reserves and cash balancesAbility to discontinue charter if the requirements of the charter agreement are not metDivision of liability between sponsoring school district and charter school

65Building Fiscal Accountability into a Charter School Agreement

Memorandum of Understanding (MOU)

Oversight requirements of sponsoring district

Monthly enrollment reports

Monthly financial reports (i.e., balance sheet, profit and loss)

Annual financial reports

66Auditing the Charter School Under GAAS

Conduct a pre-audit meeting

Review the charter school petition and the terms and conditions of the agreement

Review internal controls and develop standard audit procedures

Key is that all state apportionments currently flow through the sponsoring school district’s records to the charter school or are directly funded as a block grant

Federal and State Compliance Issues

68Federal Time Accounting Requirements

OMB Circular No. A-87 prescribes cost principles

For 100% federal-paid positions:

Need only normal payroll records and semi-annual certification

Signed by employee and supervisor

100% state-paid positions need only normal payroll records


Time accounting is expanded for anemployee funded partially by federaland partially by state, i.e., multifunded,or part direct cost and part indirect cost

Personnel activity reports

Account for total time after the fact

May be a detailed timesheet or a monthly recap of the percentage of time spent on each objective

Budgeted estimates must be revised to actual costs at least quarterly


OMB Circular No. A-87 permits the use of alternative systems

United States Department of Education (USDE) approval is needed

CDE obtained approval of a system for statewide use as it pertains to the School-Based Coordinated Program (SBCP) and Students With Disabilities (SWD)

CDE sent letters to the field on this topic dated August 28, 1997; June 26, 1998; March 22, 2000; and June 8, 2000

See CD-ROM for OMB A-87 and CDE letters


American Recovery and Reinvestment Act (ARRA) funding – State Fiscal Stabilization Funding (SFSF) is not subject to the same time accounting requirements under OMB A-87 as other federal funds

USDE has provided guidance that the SFSF dollars are considered general aid funding

All other ARRA funding is required to follow the time accounting guidelines under OMB A-87

See www.ed.gov/programs/statestabilization/auditor-guidance.doc

In contrast, the Federal Education Jobs (Ed Jobs) funding is subject to the time accounting requirements under OMB A-87

See CD-ROM for Fiscal Report article, “Changes for Federal Education Jobs Funds Compliance Guidelines” and the Ed Jobs Guidance

72Interest on Federal Funds – Cafeteria

In late January 2011, the CDE reissued guidance to clarify the interest earned on the cafeteria account/fund – dated July 2009

The December 2008 letter directing LEAs to remit interest earned on federal funds to the CDE does not apply to nonprofit school service funds.

Therefore, do not send interest funds to the CDE

Federal and state regulations define interest as revenue that should be used for the operation and/or improvement of the School Food Service

See CD-ROM for the Management Bulletin, “Interest Earned on the Cafeteria Account/Fund”

73Interest Earned on Federal Funds

Code of Federal Regulations, Title 34 Education requires interest over $100 per year to be submitted to the federal government

Interest funds over $100 must be returned at least quarterly

It is prohibited to offset or net the interest earnings for temporary use of non-federal funds

Applies to all school agencies – districts, charter schools, and county offices of education

74State Compliance Requirements

State funding is not bound by the Single Audit Act

However, the Legislature has shown similar intent

Additional requirements may be added for testing without the deletion of previous requirements

How compliance requirements are selected:

Is compliance a “condition of apportionment”?

Is compliance testing by the auditor a requirement of law?

Have there been a lot of findings in past years?

Is there reason to believe broad noncompliance might be found?

The K-12 Audit Regulations contain the state requirements and required audit procedures

752010-11 Audit Programs/Procedures

Amendments to the 2010-11 Audit Regulations

There were no additions or deletions related to the 2010-11 fiscal year

76State Compliance – 2011-12Pending Items

EAAP will take action to approve the Audit Regulations for 2011-12 before June 30, 2011

We will continue to monitor and report on the approved regulations since the landscape appears to be moving continually

Meanwhile, continue diligent efforts throughout the year to prepare for the audit, since all of the major components of the audit still remain (i.e., attendance, instructional minutes, etc.)

Additions

Juvenile Court Schools

Days – 175

Minutes – 240 minimum


Changes/Clarifications

Technical changes to report components to meet American Institute of Certified Public Accountants (AICPA) requirements, definitions related to auditing standards

Notation to auditors to include other programs for attendance testing (i.e., opportunity schools, adults in correctional facilities, and county community schools) using materiality levels

Teacher Certification misassignments – valid certification documents will be reviewed

Clarify P-2 ADA versus annual ADA for revenue purposes


ASES programs modify testing to include:

Charters

Students attending less than full day – process for priority

No financial penalty, but is a compliance issue

Student fees

Instructional time

79Student Fees

In September 2010, the American Civil Liberties Union of Southern California (ACLU) filed a class action lawsuit against the state and Governor Schwarzenegger for imposing student feesThe ACLU is claiming that school districts charging fees to students goes against the California Constitution’s guarantee of a free public education

Several school districts are mentioned in the complaint; however, to date, no school district has been sued

The suit claims that the state has “looked the other way” while districts have charged students for lab fees, textbooks, workbooks, and physical education uniformsThe ACLU is not pursuing monetary relief, but instead, seeks the following two outcomes from the court:

A declaration that the fees are against the lawAn injunction mandating that the state enforce the existing law to ensure that all students have access to a free public education

80Considerations for Districts and Student Fees

Compare your district’s practices and procedures with the information in Fiscal Advisory 97-02* and immediately amend or discontinue all charges to students that are prohibited by law

The CDE is in the process of updating its guidance

The rules for student fees are a complex area – do not hesitate to seek the guidance of your district’s legal counsel

See CD-ROM for Fiscal Management Advisory 97-02

81Class-Size Maximums and Penalties

Districts with excessive class sizes in grades K-8 are subject to significant revenue limit apportionment penalties (E.C. 41376, 41378, and 41382)

Penalty applies to class sizes in excess of:

Grades Standard CommentKindergarten Single class over 33

District average over 31 These standards are easily met by districts with K-3 CSR fully implemented

Grades 1-3 Single class over 32District average over 30

Grades 4-8 Pupil-teacher average ratio of 29.9 or 1964 district average, whichever is greater

Junior highs or middle schools that don’t serve 6th graders are excluded from average

82Class-Size Penalty Waivers

If districts exceed the class-size maximums, class-size penalty waivers, which can waive the apportionment penalty, can be granted by the SBE

The SBE continues to approve class-size penalty waivers at a 33:1 pupil-teacher ratio cap

17 waivers were approved at the September 2010 meeting, and more than 40 waiver requests have been approved since September 2009Retroactive waivers can be granted for 2009-10 or to the beginning of the 2010-11 school yearWaivers are granted for a period of two years less one dayOctober 22 – waivers submitted after February 2011 will be agendized in the next fiscal year

83AB 2756/AB 1200 – School Fiscal Oversight

AB 1200 and AB 2756 (Chapter 52/2004) provides the authority and provisions to county offices of education for fiscal oversight

On the CD-ROM, we have outlined all of the points related to the two pieces of legislation

See CD-ROM for AB 2756/AB 1200 – School Fiscal Oversight

84AB 2756 – School Fiscal Oversight

FCMAT’s 15 Characteristics of Districts in Financial DifficultyGovernance crisis Inaccurate revenue and

expenditure estimates

Absence of communication to educational community

Poor cash flow analysis and reconciliation

Lack of interagency cooperation Bargaining agreements greater than state COLA

Failure to recognize year-to-year trends

No integration of position control and payroll

Flawed ADA projections Limited access to timely (and accurate) payroll and budget data

Failure to maintain reserves Escalating general fund encroachment

Insufficient consideration of long-term effects of bargaining agreements

Lack of regular monitoring

Flawed multiyear projections

Audit Findings and

Resolutions

86Types of Findings

The auditor is also required by the SCO to classify findings as to type:

AttendanceInventory of equipmentInternal controlState complianceSTRSFederal complianceMiscellaneousClassroom teacher salariesInstructional materialsTeacher misassignmentsSchool Accountability Report Card

87Types of Findings

For the 2008-09 fiscal year, there were 675 compliance findings reported statewide

516 related to state compliance (76%)

159 related to federal compliance (24%)

Of the total compliance findings, 151 related to attendance/ADA issues (22.4%)

882007-08 and 2008-09 Compliance Findings Summary

169

51

176

43 46

29 28

51 51

63

238

74

63

127

46 36

60

19

50 49

0

151

0

50

100

150

200

250

300

350Ot

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eral

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89Findings for Years 2001 Through 2009Fi

ndin

gs

1,14

8

1,01

6

987

803

1,11

4

1,00

8 1,05

2

946

675

0

300

600

900

1,200

1,500

1,800

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

90Fewer Audit Findings are Better

Consider that:

SCO tracks findings

Resolution is often long, costly, and difficult

Significant findings don’t create good press

Methods to reduce the number of findings:

Clearly written policies and procedures

Staff training

Internal audit procedures

Timely resolution of past findings

Engage a quality audit firm that can help you shore up your system where it is weakest

91How Findings are Written Up

Auditors are required by the Yellow Book to include the following elements in their writeup, whenever applicable:

A statement of condition

The criteria

The cause of the problem

The effect of the condition

Quantification of the error is required, whenever possible, with the auditor reporting:

Number of items examined

Number of errors found

Potential fiscal impact of errors found

92How Findings are Written Up

Extrapolation of the error is not required

E.C. 14503 requires:

The auditor to quantify all ADA exceptions, when applicable

The auditor to specifically and separately address each state compliance requirement and whether or not the school agency is in compliance

The district must correct the findings and/or prepare a corrective action plan

Plan must be provided to CDE by March 15

93Conditions of ApportionmentUnderlying premise is that:

“The Superintendent of Public Instruction cannot approve apportionment of state funding if he or she has substantial reason to believe that the ADA reported as the basis for the apportionment is from a program that has not been operated in compliance with statutory requirements that are conditions of apportionment.”

SBX3 4 (Chapter 12/2009) included amendments that removedcompliance requirements for many programs (set to sunset in 2012-13)

Governor’s latest proposal extends the above flexibility through 2014-15

Citation: Ref. CDE Management Advisory 94-08

94Conditions of Apportionment

Conditions of apportionment can be identified through two means:

The Education Code explicitly states: “As a condition of apportionment . . .”

It is also implied, since performing the specific activity is how funding is generated

There is no master list of conditions of apportionment, but most can be located through the following resources:

SCO’s Audit Guide

E.C. 46000 et seq., with few exceptions

E.C. 35160.5


By way of example, current law states either explicitly or implicitly that, as a condition of apportionment, you must:

Verify residency of the pupils enrolled

Adopt policies on open enrollment

Have a Board policy for the independent study program

Complete an agreement that contains required elementsfor all independent study arrangements

Not provide independent study students with funds or things of value that are not provided to students who attend regular classes

Use the CDE agreement form to retain kindergarten students


Not offer adult education classes that supplant the high school program

Not have more than 10% of pupils in a continuation high school in independent study

Not claim full hours for laboratory-type classes in adult education

Rather, claim minutes

Hold a counseling session for high school students concurrently enrolled in the adult education program

Meet various time requirements for both regular ADA and incentive funding


Claim community school and independent study funding for students residing only in your county or a contiguous county

Expend community school funding only for community school purposes

Develop a school site plan for receipt of consolidated application funding

Also consider that, both inside and outside the Education Code, there are myriad funding requirements for special apportionments, entitlements, and grants

98Findings and Resolutions

Easy audit findings

Internal control

Hard audit findings

Compliance

Program requirements can be complicated and also difficult for auditors to understand

Fraud

May be difficult to detect and prove

Involves legal issues

99Findings Resolution – School District Responsibilities

When a finding arises as a result of an audit, the school district has certain obligations:

To prepare an appropriate response for inclusion in the audit report

If the finding has been corrected, specify the actions taken

If the finding has not been corrected, specify in detail the plans to correct the problem

If you still do not agree with the auditor’s finding, state that position in the response and your plans to resolve the disagreement

100Findings Resolution – School District Responsibilities

If the school district is unable to include a complete response when the audit report is issued, then the district may respond to the COE no later than March 15 following the previous annual audit

Follow through and make certain the plans to resolve the finding are carried out

Be prepared to defend any uncorrected finding

101When You Disagree with a Finding – What Happens Next?

Try to resolve the disagreement before the finding becomes part of the final audit report

Insist on receiving a draft of all findings

Request, when appropriate, changes to the draft for clarification or to present new and relevant information

SCO audits will typically provide a 30-day period for you to review the draft and respond

Prepare your district’s response

102When You Disagree with a Finding –What Happens Next?

Once the report is finalized, it will not be changed

Your only options for resolution, then, are to:

Drop the disagreement

Appeal the finding

Obtain a waiver of law – not always an option

Seek a legislative change in law, or seek adjudication through the courts

Assess which of those options should be your next course of action

103Resolution of Audit Findings –County Responsibilities

County offices must determine whether the following types of audit findings have been corrected or that an acceptable corrective action plan is in place

The claiming and accounting of ADA, including:

Revenue limit ADA

Adult education ADA

Independent study ADA

Inventory of equipment

Internal control

Miscellaneous items: any items not obviously related to federal and state compliance requirements


The county office is to notify the school district that it must submit a plan no later than March 15

The county office is to review the plan for adequacy

Evidence of correction of a finding should be provided

By May 15, the county superintendent certifies to the Superintendent of Public Instruction (SPI)

Each school district with attendance-related audit exceptions that have a fiscal impact must be identified


Counties should list and categorize audit findings:

Unresolved findings

Audit findings and adequate corrective action plans

Findings and either no correction plan or an inadequate correction plan

The auditor will follow up in the subsequent year on the status of prior-year findings

The county office remains primarily responsible for resolution of uncorrected findings


It is important that county offices document procedures in reviewing audit reports

SCO has responsibility to audit county office procedures and actions

Resolution of apportionment exceptions:

Withhold certification of attendance reports

Work with districts through the appeals process

Work with the CDE when there is reason to believe the exception applies to previous years as well

See CD-ROM for Troubleshooting Potential Audit Exceptions

107Resolution of Audit Findings –State Responsibilities

The SPI remains responsible for certain audit exceptions

Federal and state compliance

Any uncorrected exceptions certified by May 15

Repeat audit exceptions not assigned to the county for follow up

COE audit findings

108

The auditors are required to code the findings as follows:

Code Finding Type Responsible Agency10000 Attendance County Office20000 Inventory of Equipment County Office30000 Internal Control County Office40000 State Compliance State41000 STRS County Office50000 Federal Compliance State60000 Miscellaneous County Office61000 Classroom Teacher Salaries County Office70000 Instructional Materials County Office71000 Teacher Misassignments County Office72000 School Accountability Report Card County Office

Resolution of Audit Findings—Summary

109Audit Findings – Repayment

E.C. 41344 established certain provisions related to audit findings and repayment of funds by LEAs, as well as establishing an audit appeals processWhen there is an apportionment-related audit finding, the following items will now occur (E.C. 41344):

SPI/CDE and DOF must establish a repayment schedule within90 days of the final audit reportSPI/CDE and DOF must notify the SCO of the repayment scheduleOnce notified, SCO will either withhold the finding amount from the next principal apportionment or in accordance with repayment schedule

Repayment cannot exceed eight-year periodRepayments accrue interest at the rate earned by the state’s short-term pooled investment fund

110Audit Findings – Repayment

If SPI/CDE and DOF cannot agree on a repayment schedule, SCO must withhold the entire finding amount at the next principal apportionment

Summary Review Appeal Process for LEAs

Must be filed within 30 days of receipt of final audit report

“Final” – after acceptance by SCO

Must identify each finding for which a review is being requested

Must identify the reasons that the district believes it is in substantial compliance with the applicable Education Code provision (i.e., error is “minor and inadvertent”)

111Audit Findings – Appeals

Formal Appeals Process for LEAsDistricts can appeal apportionment-significant audit findings within 60 days of final audit report or 30 days from decision of summary reviewAppeals panel consists of SPI/CDE, DOF, and the Chief Administration Officer of FCMATPanel must hold hearing within 90 days of the date on which appeal was receivedSchool must identify to the panel:

Errors of factErrors of interpretation of lawSubstantial compliance

Repayment does not start until panel makes a determination

112Audit Findings – Appeals Federal appeals process

Judicial route

Legislation

See CD-ROM for Other Appeals Options

113Waivers

General waiver authority is provided by E.C. 33050, but apportionment-related code sections are largely excluded

There are three other code sections providing waiver authority:

State Board of Education (SBE)

E.C. 46206 and E.C. 44669 for instructional time issues

SPI

E.C. 58509 for any provision in code when an alternative school is operated

It appears these other sections may still be available to LEAs if the waiver is not being requested as a result of an audit finding – but this issue has not been addressed and is not certain

Internal Audit and

Controls

116Internal Control

Elements of Internal Control

Control in an electronic environment

Internal Audit Function

Objectives of an Internal Control System:

Efficiency and effectiveness of operations

Reliability of financial reporting

Compliance with applicable laws and regulations

Compliance with policies and procedures

117Internal Control

There are four basic elements of a good internal control system:

Segregation of Duties

Supervision

Security of Assets

Accountability

118Internal Control

Segregation of Duties

Example of duties to be segregated:

Creation of a purchase order

Receipt of merchandise

Payment of invoice

Supervision is crucial in small districts with a limited amount of staff

In larger districts, duties are often segregated by department

But remember . . . no internal control system is fail proof

Collusion can override the best control systems

Human error can and will occur

119Internal Control

Documentation of the internal control system is as important for business administrators and internal auditors as it is for the external auditor

Remember that internal control system improvements should accomplish one of the following:

Prevent and detect errors and omissions

Prevent and detect fraud

Prevent waste

120Internal Control

The benefits of a good internal control system are clear; the costs incurred to maintain the system are less clear

Don’t assign too many people to a single problem

Don’t ignore the problem – it won’t go away

Try to strike a balance between the costs and the benefits to be realized

121Internal Control

Associated Student Body (ASB) Funds

High-Risk Areas

Environmental Controls

Minimum job skill requirements

Interview panels for new hires

Regular performance evaluations

Appropriate levels of supervision

Regular internal audits

ASB charter, bylaws, and policiesSee CD-ROM for Internal Controls

Fraud Prevention and

Detection

124Fraud

Definition

Encompasses an array of irregularities and illegal acts characterized by intentional deception

Workplace characteristics that create opportunity to steal:

Inadequate segregation of duties

Weak supervisory control

No mandatory vacation policies

No job assignment rotations

Little cross training

Online authorizations via computer

125Fraud

Found in School Districts

High-Risk Areas

Student Body Funds

Cafeteria Funds

Revolving Funds

Theft of supplies, inventory, and equipment

Travel Expenses

Timesheet Fraud

126Fraud

Other Areas of Risk in School Districts:Payroll abusesAccounts payableAccounts receivableExpense reports to agencies

Prevent fraud through good internal controls:Segregation of dutiesSupervision and cross-checksPhysical securityKeeping accounting records up to datePasswords (requiring, expiring)Dual custody

127Fraud

Detect fraud by:

Knowing the profile of the perpetrator

Recognizing red flags

Knowing types of fraud

Learning from real-life mistakes

128Fraud

Profile of the Perpetrator

Personal financial pressure

Short vacations and unexplained hours

Personal issues, such as substance abuse, gambling

Extravagant purchases or lifestyle

Ongoing transactions with a related party

Increased stress

Internal pressure to meet budgets

Side businesses by employees

Sole knowledge of how a process works

129Fraud

Common Red Flags

Accounting records are not up to date or are out of balance

Missing documents

Employee doesn’t take time off

Evidence of altered documents

Inconsistent, vague, or implausible responses to inquiries

Unusual fluctuations in accounts

Multiple corrections

130

How Were the Frauds Discovered in Governmental Agencies?

Source: 2008 and 2010 Association of Certified Fraud Examiners (ACFE) Report to the Nation onOccupational Fraud & Abuse.

Combating Fraud—Know the Facts

Notified by Police

External Audit

Internal Controls

Internal Audit

By Accident

Tip

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

3.2%

9.1%

23.3%

19.4%

20.0%

46.2%

1.4%

7.4%

0.4%

15.1%

5.3%

46.3%

20102008

131Combating Fraud—Know the Facts

Occupational Fraud Schemes in the Education Industry

Source: 2008 and 2010 Association of Certified Fraud Examiners (ACFE) Report to the Nation onOccupational Fraud & Abuse.

Register Disbursements

Payroll

Cash Larceny

Fraudulent Statements

Cash on Hand

Expense Reimbursement

Check Tampering

Non Cash

Skimming

Billing

Corruption

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

0.0%

10.0%

12.2%

1.1%

7.8%

16.7%

7.8%

12.2%

21.1%

42.2%

24.4%

Education

132Remedies Where Fraud is Discovered

Three primary remedies:

Criminal prosecution

Civil actions for damages

Recovery from insurance policies

133Fraud Policy

Consider a District Fraud Policy

A fraud policy can:

Provide a roadmap of what needs to occur when there is an indication of a problem

Ensure that everyone is treated consistently

Communicate the district’s leadership expectations

Punitive theme/value

Employees who view their leaders as honest and ethical people are more inclined to emulate that behavior

See CD-ROM for Sample Fraud Board Policy

Thank you for attending!

Documents

Michele A. Huntoon , CPA Associate Vice President Lewis W. Wiley, Jr. Director, Management Consulting Services