Does the Muscogee County School District need a 'top-to-bottom' or forensic audit?
Ten months ago, IRS agent John Thomas called for a "top-to-bottom audit" of the Muscogee County School District when he announced his candidacy for the school board.
Thomas used that campaign plank to beat 28-year incumbent John Wells in the District 2 race. Frank Myers, an attorney and consultant who helped launch Thomas into local politics, used the "top-to-bottom audit" theme in his own campaign to oust four-year incumbent Beth Harris in District 8.
Myers and Thomas repeated the "top-to-bottom audit" demand in a Sept. 22 joint letter to superintendent David Lewis after the district's leader told them he planned to ask the board in January to authorize a referendum on renewing the Special Purpose Local Option Sales Tax, which expired Dec. 31. Thomas and Myers insisted they wouldn't support another SPLOST until such an audit was conducted. They argued the board wouldn't have the necessary credibility to ask voters to tax themselves again if the district couldn't provide "true transparency and greater accountability to our citizens."
Nonetheless, the board approved Lewis' SPLOST referendum request Tuesday night. The board's vote was 7-2. Myers and Thomas were the opposition, reciting the "top-to-bottom audit" mantra as a quid pro quo, although now they also use a more technical term: "forensic audit."
Columbus voters will decide March 17 whether a 1 percent sales tax again will help fund the district's capital projects, this time totaling about $192 million for another five years. Meanwhile, the questions linger:
What is a "top-to-bottom" or forensic audit?
Does the school district need one?
What types of audits are being conducted in the school district?
How does MCSD's auditing compare to other districts?
The Ledger-Enquirer looked into it. We learned from experts that a forensic audit is a more extensive and expensive investigation of suspected illegal financial transactions, such as fraud or embezzlement, and it isn't used as a routine inspection of financial accounting. We also learned that MCSD is audited internally and externally at and beyond what is required by law and professional standards, and that, for more than two decades, the district has earned the top level of achievement for its financial statements from two national organizations.
Policies and procedures
Sharon Adams was MCSD's chief financial officer since 2007 before retiring in November. In a December interview, she answered the L-E's questions about how the school district accounts for its money. Lewis, whom the board hired in July 2013 from Polk County, Fla., participated in the interview with Adams.
"We have policies and procedures in place that we're required to follow, internal controls, and what we can and cannot do with money," Adams said. "Each one of the grants has different policies, procedures and guidelines for what you can and cannot do with that money. So what we do is we make sure we follow those procedures and guidelines."
Expenditures are monitored by software and staff. Budgets are prepared annually for the general fund, capital projects, debt service and school nutrition, as well as the SPLOST if one is being used. Budgets for grants are prepared as they are awarded.
The board must approve all budgets, and those budgets serve as the spending plan for the district.
State law requires each public school district to have an annual financial audit. The Georgia Department of Audits and Accounts is responsible for those audits, but a district can use a certified public accounting firm instead if the department approves. For fiscal year 2013, the latest figures available, the department audited 154 of the state's 180 public school districts. The rest, including MCSD, used an independent firm.
MCSD uses Robinson, Grimes & Company P.C. of Columbus, selected in 2013 through a request for proposals to be the district's external auditor, a process which occurs every five years.
The annual cost of the audit is about $75,000, Adams said.
"The Department of Education requires the firms we use to have the track record and the ability to conduct an audit of that magnitude," Lewis said, "so there are only a handful of firms in the state that they trust."
Comprehensive report
Known as the CAFR, the comprehensive annual financial report comprises audits of the district's finances, internal controls and compliance. When the district has a SPLOST in place, an audit of that spending also is included.
The most recent report, as well as every CAFR dating back to 2002, are available on the district's website.
MCSD chooses to use an external auditor each fiscal year instead of the state auditor "because they are so far behind," Adams said. "They're still auditing FY13, and we just finished FY14."
The external auditor's team of three or four certified public accountants works from June to November inspecting the district, Adams said.
"We've got a lot of eyes on it," she said.
The firm rotates some of the accountants but keeps others working on the district's CAFR each year so nobody gets too comfortable, yet continuity remains.
"We get the benefit of familiarity and fresh eyes at the same time," said Jay Pease, a partner with Robinson Grimes who has been involved in the MCSD annual audit for more than 20 years.
Even the external auditor's audit is audited.
"The Department of Audits is required to do a desk review of the work that the outside auditor does," Adams said.
Every three years, the state audits each of the federal grants the district receives, Adams said.
"What they're looking for is did we spend the money like we said we were going to, were they appropriate expenditures and did we follow the guidelines," she said.
"Anytime we have a grant that closes out, there's a complete detailed audit, both federal and state," Lewis said. "In between, we've done desktop audits."
Adams added, "The years the state doesn't do an audit, the grants are required to do a self-assessment report, and it's sent to the Department of Education."
Internal auditing
In addition to the external auditing, the district employs an internal auditor to regularly monitor spending.
A school is audited when it changes principals, and a central office department or division is audited when there is a leadership change, Adams said.
"I just left," she said, "so they audited what I had control over in the treasurer's office."
But the internal auditor doesn't wait for a staff change, the superintendent said.
"It's systematic," Lewis said. "Everyone is covered over a period of years. Any time we see an anomaly, we require the principal to report back the corrective action taken and how to shore that up, and then we will go back at another designated point within six months and do a follow-up audit."
Adams added, "That's to see how they're complying with their corrective action plan."
According to MCSD records, the internal audit department has conducted 185 activity fund audits and 115 property audits at schools and other locations in the district the past three fiscal years. Every school or location, except Aaron Cohn Middle School, which opened in August 2013, has had its activity fund audited at least once during that span, some as many as four times. As far as the property audit, the same holds true, except Aaron Cohn Middle already has had one, and the most at any location during that span has been three.
Lewis provided documents, with names redacted, as examples of the internal audits:
A Nov. 22, 2013, audit of the after-school enrichment program at an undisclosed location found an employee was overpaid because the timesheet was miscalculated by 30 minutes. "Timesheets should be checked for accuracy by an Administrator before being submitted to payroll," says the report, prepared by internal audit technician Keocha Evans.
In the Jan. 8, 2014, written response, the principal says, "Proper procedures for calculations of time worked have been reviewed with all employees of the program, and the assistant principal is responsible for verifying all calculations before time sheets are submitted to Payroll for payment."
A July 9, 2014, property audit at an undisclosed location found that an unspecified piece of equipment was moved from one school to another without the proper form completed before the transfer.
A Nov. 4, 2014, audit of the activity fund at an undisclosed location found that "weekly readers" were bought for more than $4,000 without prior approval, which is required from the treasurer for purchases of $2,500 or more. The audit also noted improvements in the areas of concern listed among the nine findings in the previous audit, conducted March 21, 2014.
'Watching it more now'
Lewis said the district has been better able to examine the details since the beginning of this school year, when three region chiefs were hired and made responsible for their third of the district's schools.
"They get those reports as I do," Lewis said, "and we sit down and talk about them at our Monday meetings."
It amounts to direct accountability, Lewis said.
"That's because you've got somebody who can look at it more frequently, someone who can bring attention to it, someone who can follow up on a fairly routine basis and really monitor the situation," he said. " I don't want to give the impression we had a widespread problem before -- it wasn't -- but we just have somebody watching it more now and there's a lot more emphasis."
Lewis described how the district responds to employees' financial anomalies.
"The corrective actions we take are everything from bringing it to their attention to submitting an action report," he said. "We follow up on it, and it ultimately becomes a part of their evaluation. It can lead to, like any other disciplinary infraction, a letter of concern, a letter of reprimand, suspension and ultimately termination."
The superintendent explained how he determines the proper response.
"If it's a one-time thing but it's severe enough, that can get you done in a hurry," he said. "But beyond that, I always like to try to work progressively. We want to retrain. It's just the ethical and moral thing to do. But after we provide retraining and it's not happening, we either have to find a different job for them or tell them this isn't for you."
Two employees fired
In his 1½ years as MCSD's superintendent, Lewis said, he has fired two employees, one on the district level and the other based at a school, for reasons directly or indirectly related to a problem uncovered by an audit.
"They didn't abscond with dollars," he said. "It was just a lack of good accounting, acceptable practice."
The problems were detected internally and externally, Lewis said.
"There was no surprise there," he said. "Corrective action was taken. It did not result in the acceptable level of correction. There are occasions, just like any other company of this size, where you have to deal with taking some strong measures occasionally when people choose to not do things according to policies, procedures or ethics."
From the alert to the termination, the process took about six months for one employee and a little less than a year for the other, Lewis said. That shows the district fairly but proactively investigates questions about its finances, he said.
"It says that we have internal controls and we're willing to address the situation, provide retraining where it's appropriate," he said, "and if it's not, if the level of training does not prove to be successful and it's inherently a problem with the individual, we have to take correction beyond that, which means reassignment or termination."
"I monitor budgets throughout the year," he said. "So when I start to see a downtick that causes me concern, I bring in their supervisor and say, 'OK, why is this happening? What are we doing to correct it? What are we going to do differently? And how will I know?"
Proper level of scrutiny
Asked whether the district already is audited "top to bottom," Adams said yes. "When Robinson Grimes comes in and does their audit, they do random sampling," she said. "It doesn't matter the cost of an invoice. They randomly pick stuff all over creation. But they do not pull every invoice. That would be impossible to do."
Pease concurred.
"An audit of any organization is always based on a risk evaluation," he said. "How risky do you assess a transaction to be and if it had fewer internal controls than it should. Some if it is dictated according to the law and some by standards."
Asked whether there is a higher level of scrutiny for school districts that MCSD could be achieving, Adams said, "Not that I know of."
Pease's firm has done audits for dozens of school districts. He said he never has seen a forensic audit done without cause and never has needed to do one in MCSD.
"There really is not another routine audit for organizations other than what we already do," said Pease, a certified public accountant for 37 years. "It's the same audit that Synovus gets and TSYS gets."
State Auditor Greg Griffin, in an email from Jessica Parent, his department's professional standards and practices director, said public school districts do forensic audits when "there is a need to examine financial information for internal purposes or for evidence in the court of law."
In September 2013, Columbus Council approved a salary of about $65,000 to hire an internal forensic auditor for the city government.
"I think this position is going to pay for itself many times over," Councilor Glenn Davis said at the time.
The city hired Joan Perin for the job.
John Redmond, the Columbus Consolidated Government's internal auditor and compliance officer for seven years, said Friday that Perin's work indeed already has paid for her salary in savings for the city in the 13 months she has been on the job. The Columbus Civic Center's concessions contractor threatened to sue the city, but Perin's forensic audit scared them off, Redmond said, and the company agreed to pay the city about $170,000 to settle their dispute.
The city's internal forensic auditor position, Redmond said, was approved in 2011. Newly elected Mayor Teresa Tomlinson noticed then, Redmond said, "that I had several audits end up becoming criminal investigations and prosecutions. Because some ended up in litigation, she felt we needed skills on staff to produce audited evidence that would stand up in court."
Redmond said the more appropriate audit to determine an organization's efficiency -- and answer the call from Thomas and Myers -- is an operational audit, not a forensic audit.
"It digs into what's really going on," he said. " It's more interested in looking at the decisions that were made by the executives and the actions the board took, whether they were reasonable and appropriate."
Redmond estimates he has conducted about half a dozen operational audits on city departments since he was hired in 2008.
"They improve efficiency by analyzing workflow and best practices," he said.
Because the operational audits were conducted internally, he said, it's unclear how much they would have cost if an external firm did them.
Pease said his firm doesn't conduct operational audits or performance audits -- the term he is more familiar with -- so he couldn't estimate the cost of a system-wide operational audit. Adams, however, said the district indeed has had operational audits, conducted internally and externally, but they all have been examinations of individual departments or divisions. "One encompassing the entire operation of the school district," she said, "it would be in the several hundreds of thousands of dollars."
The Muscogee County School Board has an audit committee that meets quarterly and oversees the district's audits. Hoping to satisfy the call from Myers and Thomas for more accountability while encouraging them to support the SPLOST, Shannon Smallman, the Muscogee school board's District 7 representative, said Monday that she planned to propose during Tuesday's meeting the establishment of a citizens audit committee. But she didn't make the proposal on Tuesday, explaining in an email, "After some consideration I felt it was more appropriate to bring it up at the next work session."
'Waste of money'
If MCSD officials decide to do a system-wide forensic audit, they might want to first talk with folks in Macon and benefit from their experience.
The Macon Telegraph reported on Aug. 11, 2012, that the Bibb County School District's system-wide forensic audit cost about $413,000 -- about 4½ times the $90,000 the new superintendent told board members it would cost in December 2012. The superintendent requested the audit "over concerns about employees' use of school discount cards, warehouse memberships, building activity funds and credit cards, as well as over service agreements and a complaint by one terminated employee about overtime pay," the Telegraph wrote.
Sharon Roberts, the 24,000-student Bibb County district's executive director of accounting for the past 18 years, said the system-wide forensic audit was "a waste of taxpayers' money" because it didn't uncover anything that wasn't already known. The six-month investigation also hurt employee morale, she said.
The scope of Bibb's forensic audit should have been limited to the "areas where you suspect some wrongdoing," Roberts said.
The Savannah-Chatham County Public School System is similar in size to MCSD. Muscogee has 33,385 students; Chatham has approximately 38,000 students. In 15 years as its full-time or interim chief financial officer, Rebecca McClain said, she never has had a forensic audit conducted in her district.
"We've had occasion to believe someone had stolen money or deposited money inappropriately, and we went through the process we needed, but we did not go to that extent," she said.
It isn't feasible to spend the time and money to inspect each financial transaction in a school district without cause, McClain said.
"In a regular audit, the purpose is to express an opinion on whether the financial statements are stated fairly, substantially correct," she said. "They'll never say 100 percent. They can't look at everything."
'Above and beyond'
The Muscogee County School District has received the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association for 28 straight years and from the Association of School Business Officials for 21 straight years.
Steven Solomon, deputy director of the GFOA's technical services center in Chicago, explained the significance of his organization's award.
"You've gone beyond the minimum levels that are required by general accounting principles to prepare a CAFR that maximizes transparency and has full disclosure of financial information," he said. " It's the highest level of recognition that a governmental financial statement can receive."
Only 50 school districts have earned the GFOA's top honor annually for as long as Muscogee County, he said.
"I think it would tell you that, for a very sustained period of time," Solomon said, "you've had the right people managing your program and have kept current with all the new requirements and constantly provided above and beyond transparency and disclosure."
Mark Rice, 706-576-6272. Follow Mark on Twitter@MarkRiceLE.
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This story was originally published January 24, 2015 at 9:54 PM with the headline "Does the Muscogee County School District need a 'top-to-bottom' or forensic audit?."