11/04/2013 – FY 2012 State Audit

Georgia Department of Audits and Accounting
Mr. Brad Freeman, Deputy Director
Ms. Claire Arnold, Director
Ms. Jennifer Thomas, Audit Supervisor
Brad Freeman
We have folders to hand out.  We’ll go over the contents.

Management’s and Auditor’s Responsibilities [00:04:45]
Management is responsible for producing the financial statements themselves along with supplemental information.  The auditors audit those financial statements to see if they are fairly presented.  We let the material drive the scope of the engagement.  We test by targeting risky areas, sampling, and analytics.
During the engagement we gain understanding of internal controls.  We don’t give an opinion on your financial statements nor internal controls.  We don’t audit your accounting process.  We strictly give an opinion of your financial statements, whether or not they are fairly presented.
We do audit your major federal programs.  We give an opinion on whether or not the district fairly complied to those major federal programs.  We also report any deficiencies that come to our attention.
First tab – Opinion to the financial statements
Second tab – Yellow book letter that reports on control deficiencies or non compliance with laws, regulations, or contracts that we notice.  We noted two material weaknesses this year.  The first finding is related to budget preparation and execution.  The second is related to internal controls – accounting procedures.  We found a non compliance to the education technology state grants.
David Campbell
Is there a concern that the financial statements were adequately presented?
Brad Freeman
No.  All significant adjustments were corrected.  As far as the ending balances go, we feel like they are fairly presented.
4th tab starts the findings.  The first finding is budget preparation and execution.  We noted the school district reported an unassigned fund balance in the their general fund of $13.9 million dollars for FY12.  That means the school district was in a deficit of $13.9 million dollars in the general fund balance.  In addition to the general fund balance there was an additional $2.4 million dollar deficit.  It’s just over 1% of the general fund expenditures.
In FY 2012 the fund balance decreased by $56.3 million dollars.  We are concerned with internal controls and monitoring that budget.  The biggest problem is that over budget expenditures were reported to the board monthly, however the correction wasn’t implemented.
The second finding is related to the general accounting procedures.  I want to focus on the call section.  Page 4, under the calls section.  The county did not have an adequate succession plan for key financial positions. Accounting procedures and processes are not well documented.  You must have qualified staff and enough of them to do the job correctly.
John Coleman
You said management agreed with this assessment, is that correct?  I believe we demonstrated that we have taken significant measures in some of those control categories since FY 2012.
Dr. Bell
Managements response is attached to the audit report.  Management concurred in every case.  We listed specific steps that had been taken to better the situation observed.

Is the accounting department properly staffed?

Dr. Bell
No.  We need 4 – 6 more people.

Brad Freeman
The third finding is related to the technology state grant. This is the federal program that we gave a qualified opinion on. It is related to grant management. This also speak to the training of staff, the quantity of staff. The administration of this grant was not adequately planned.  It speaks to the problems here.
All the grants have to be tracked separately.  Each grant has its own budget.  Certain programs are only allowed by that budget.  When you don’t have enough adequately trained staff or the correct accounting procedures in place, the funds can get commingled.  That’s what happened with this grant.  It has since been corrected and everything is fine.
That’s our federal finding related to 2012.  Any questions?
The next tab is the management letter.  In the auditor’s report we report deficiencies that we consider significant deficiencies or material weaknesses.  Items that don’t rise to that level are put in the management letter comment or verbal comment.
We had a couple items to report in the management letter.  Some are repeated from the previous year.  The first one is related to your accounting controls.  We assessed IT controls.  We tested your IT controls related to your TERMS system and your school foods point of sales system.  Within both systems we found weaknesses in your logical assets and change management.  These items are confidential due to security.  My understanding is that they are addressed or are currently being addressed.
Thad Mayfield
What step comes after the management letter?  How much does our new staff mitigate that escalation?
Brad Freeman
We just evaluate and report.  We would evaluate and report that corrective action was not taken.  Everything that we have reported, we feel the district has at least taken steps to correct.
Dr. Bell
To give you an idea, when I came in I worked with the management letter and results report.  I created a compliance plan that covered twenty observations.  Given what we have here, that’s a substantial improvement.
John Coleman
I think we’ve made a lot of progress.  What are some of the most important areas we need to improve?
Dr. Bell
We need to beef up our accounting software and put in place an encumbrance system such that if you vote on an item, we can encumber and track against it.  Currently, the department puts in a requisition.  That requisition is turned into a Purchase Order and the department is responsible for not overspending it.
I need additional experienced staff to move us to monthly reconciliation.  We try to do it quarterly and certainly by the end of the year.  Mr Freeman recommends we reconcile it monthly.
Brad Freeman
The second management letter comment is the business continuity plan.  It’s a repeat from previous years.  If a disaster struck, this entails how you would meet payroll, get textbooks to children, etc.  Bits and pieces are there, but there’s no one plan all wrapped up.
The third management letter is related to school activity counts.  It speaks directly to staffing levels and cost benefit.  You don’t have necessarily enough people at the schools to have a separation of duties on all the fronts.  It’s common but should be addressed.
The forth management letter is related to agency funds.  Most agency funds are related to school activity accounts.  If the french club or a field trip is classified as an agency fund, which means the school holds those funds custody and is responsible.  We prefer to see an agency fund agreement where it defines what the money is used for.  What happens with money left over.  It’s a protection document.
The last management letter comment is related to purchase card transactions.  We did anomaly testing on the P-Card.  So we looked for things that looked odd and focused testing on that.  Not a whole lot came to our attention.
The last tab is significant adjustments and uncorrected in-material misstatements.  We present these to you guys, but we don’t go over each one in detail.  We’ll just go over the high points if we see something that is particularly alarming.  There is nothing of that nature here.  These are common adjustments due to reconciliation.  Misstatements are common with financial reporting.
That’s all I have.
Thad Mayfield
How do you finance these corrections?  Are there items in this audit that could trigger sanctions?
Dr. Bell
Our DE46 filed for ’12 showed a negative $14.4.  The first material weakness of this report shows the deficit was actually $13.9.  It’s a little better than we thought.  That number is now a positive $10.8 million.  In FY ’13 it appears we took in $26 million more than we spent in the general operating budget.  So, that $26 million has overcome that negative $14.4 and put us $10+ to the good.  There is substantial evidence things have improved.
We have underlining liabilities related to staffing issues.
There’s been a tremendous amount of discussion about the bloated staff at central office.  This report provides uncontrovertible evidence that we have been working on a skeleton staff.  It is all but impossible for Dr. Bell to do his work.  I’ve been accused of being too optimistic sometimes.  We are still on life support, but we are out of the emergency room.  We’re still in I.C.U.
We have to very careful about the decisions we make that might affect the fiscal stability of this district.  We have little or no room for error.
Dr. Morley
I’d like to piggy back on what Thurmond said.  We have to look at the top.  We have to look at providing the appropriate staff who can do the job that needs to be done.  We have to get them what they need.  We have to make sure the top is strong so the rest of it is strong.