Audit reveals internal control issues with school board

Published 10:41 am Wednesday, February 24, 2016

An auditing firm finds that the Franklin City Public Schools School Board has several problems regarding internal controls, all which are considered to be a moderate or high-risk level. This was presented during the Franklin City Council meeting on Monday night by Davis & Associates for the City of Franklin’s Financial Statement Audit for the FY2015.

In contrast, the firm issued an Unmodified Audit Opinion for the primary government, and found that there were no material findings related to internal controls, there were no material findings related to compliance with laws and regulations; there were no material findings related to the SEFA; and there was no Management Letter issued.

“The primary government has a good focus on internal controls, which is essential to ensuring that any potential misstatements or errors are detected; keep these practices in place,” said Davis & Associates’ Audrey Davis. “The primary government personnel responsible for the accounting and finance functions within the City are well trained and knowledgeable; this is important for ensuring the proper management of this function.”

Although there were no discoveries relating to federal or state programs with the school board, the firm found five issues with the school board all relating to weaknesses or deficiencies in internal controls.

“The findings we saw were related to the school board. There needs to be a real focus on internal controls. We had not noted any of these kinds of issues in the prior audit, so this year it seems to be an issue with internal controls,” Davis said.

• The first finding was a material weakness in internal controls with the segregation of duties. Davis & Associates found the school board does not have the proper separation related to the approval of expenditures. The office of the Superintendent approves its own transactions and does not require an additional level of approval for these charges. The firm said the effect is that allowing one individual to both purchase and OK payments without additional approvals can result in the misuse of school funds, and significantly increases the opportunity for fraud to occur.

• The second finding was a material weakness in internal controls with the oversight over financial transactions. Davis & Associates found one instance that a certain school board personnel charged the cost of travel for their family on the school board’s credit card. The personnel then immediately provided a check to the school board to reimburse these improper travel charges; however there are no policies or regulations in place to prohibit the use of the purchase card in this manner. They said the effect of allowing approved cardholders to charge personal expenses to the school board’s accounts may result in improper charges being paid by the school board.

• The third finding related to significant deficiency in internal controls. The firm discovered instances in which school board expenditures were not accompanied by proper supporting documentation. Davis & Associates said the effect of failing to require a review of supporting documentation prior to the approval of all expenditures creates the opportunity for charges to be falsified and for fraud to occur.

• The fourth finding related to material weakness in internal controls with budget activity. During Fiscal Year 2015, the school board was forced to request a budget increase, as the pre-approved levels were found insufficient to meet its needs. The effect of this is the requests for budget increases during the fiscal year indicates a lack of proper planning and management methods in determining the budget, as well as a lack of management over adhering to the pre-approved budget levels.

• The fifth finding was material non-compliance in regard to procurement of services. Davis & Associates found that the school board selected two consultants without regard for the competitive negotiation process that is listed in Article 2 of the Virginia Public Procurement Act. The effect of failure to adhere to the procurement guidelines set forth in the Virginia Public Procurement Act may result in excessive charges for products and services to the City of Franklin over and above what the school board could be expected to pay in the open market.

Regarding the audit findings, Superintendent Dr. Willie Bell said, “Franklin City Public Schools, as well as other public school divisions in Virginia, participate annually with financial audits from the state, city/county (appropriating body), or local agencies. Typically, recommendations for improvements are provided by the auditors to school divisions at the conclusion of the audit process. Franklin City Public Schools, as well as other school divisions, review these recommendations to improve the efficiency of operations and practices that are aligned with their local School Board policies and procedures.

“Franklin City Public Schools has no findings of fraud from any auditing agency and best practices are being followed, adhered to and monitored monthly by staff as well as the governing body, Franklin City School Board.”

Along with individual recommendations for each of the findings, such as policy changes and improvements, Davis recommended that the school board have a re-education of the policies for internal controls.

“That’s why I think reeducation is so important. Just to talk to everyone in the school board and make sure they are aware of the proper controls. We went from not having any issues, to this year having quite a few issues,” she said.

Davis reiterated that it is never a good idea to have problems with internal controls.

“As part of what you do, will you communicate that to the school board, or is that our responsibility or management’s responsibility?” asked Ward 2 representative Benny Burgess.

She said that if council wants the firm to communicate with the school school board separately, they can certainly do that.

Mayor Raystine Johnson-Ashburn spoke up and said that she thought if anyone should communicate with the school board it needs to be the higher professional, meaning Davis.

City Manager Randy Martin said, “I had forwarded the document directly to the superintendent with findings … and he and I have had a conversation regarding it, but I have had no communication with the school board.”

Johnson-Ashburn added, “The superintendent said that no one from DOE [Department of Education] had challenged their polices as it relates to these [findings]. So it would probably be a good idea for you all to have a sit-down.”

Davis said that the audit is based upon clear standards.

Johnson-Asbhurn said that the school board’s policies are their own and the council doesn’t have the authority to implement anything as far as that is concerned. So the first step should be for the firm to communicate with the school board and that if a joint session between council and the board becomes necessary, they will have one.