School District Accountability
Pursuant to Chapter 263 of the Laws of 2005 (A6082-A/S5050-A)
September 12, 2005
School districts should establish systems and processes that provide for transparency and accountability in the conduct of district business, as well as, provide for adequate oversight. Legislation was enacted to strengthen oversight and increase accountability of school district finances.
The legislation addresses seven key areas including:
- Requirements for training of school board members,
- Establishment of an internal audit function,
- Clarifications related to the position of claims auditor,
- Enhancements related to audits,
- Establishment of an audit committee, and
- The requirement to use a request for proposal (RFP) for the procurement of the annual audit of the financial statements, and
- Audits of school districts and BOCES by the Office of the State Comptroller.
This document provides an overview of the new requirements and effective dates. The Department is preparing regulations and more detailed guidance including Q & As which will be issued shortly.
The Legislation A6082-A or S5050-A can be found at http://assembly.state.ny.us/leg
Required Training for School Districts and BOCES Board Members – Effective for board members elected or appointed to a term beginning on or after July 1, 2005.
The law was amended to require all newly elected or appointed school district or BOCES board members, within the first year of their term, to complete a minimum of six hours of training on the financial oversight, accountability, and fiduciary responsibilities of a board member.
The training curriculum should address, at a minimum, roles and responsibilities of school boards, required policies and procedures, planning, key positions in school districts, internal controls, external and internal audits, fiscal planning and budget management, risk assessment, financial condition, preventing fraud and waste, and required reports. The Commissioner of Education must approve the training curriculum in consultation with the State Comptroller. The Commissioner is also charged with approving all training providers. In approving providers, the Commissioner will consider the applicant’s understanding of the education environment, the roles of trustees and boards of education, and the experience of the applicant in delivering such training.
All requests for approval should be sent to Christina Coughlin, Office of Educational Management, New York State Education Department, Room 475 EBA, Albany, New York 12234 or faxed to (518) 474-1983.
Once the training is completed, there is no requirement to repeat the training. Each board member should file with the district clerk a certificate of completion of training provided by the individual or organization that conducted the training.
The requirement does not apply to the City School District of the City of New York as long as it has a training program that meets or exceeds these requirements.
Internal Audit Function – Effective July 1, 2006 with an operational date for the internal audit function of December 31, 2006.
The law was amended to require each school district to establish an internal audit function, except for school districts with less than eight teachers, less than $5 million in general fund expenditures in the previous school years, or less than 300 () enrolled students in the previous year. Any district exempt from this requirement must annually certify to the Commissioner the basis for the exemption. This certification should be sent to the Office of Educational Management, Room 475 EBA, Albany, New York 12234 or faxed to (518) 474-1983. The internal audit function should assist the board in ensuring the necessary controls are in place and risks are minimized. The internal auditor should report directly to the board.
The function must include:
(1) An initial risk assessment of district operations including, but not limited to, a review of school district business policies and procedures,
(2) An annual review and update of such risk assessment,
(3) Periodic testing and evaluation of one or more areas of the district’s internal controls, and
(4) Preparation of reports, at least annually or more frequently as the trustees or board may direct, which identify significant risks and recommended changes for strengthening controls and reducing risks.
Each district must consider its size and particular circumstances in establishing an internal audit function. A smaller district may hire an independent contractor to conduct the internal control review whereas it may be more appropriate for a larger district to hire permanent staff for its internal audit function. The number of areas reviewed and reports issued should be a function of risk, control weakness, size, complexity of operations, etc.
Any staff conducting internal audits, reviews, or risk assessments should follow
professional auditing standards established by either the Government
Accountability Office or the Institute of Internal Auditors. It is important
that the auditor:
(1) Be independent of district business operations,
(2) Have the requisite knowledge and skills to complete the work, and
(3) Meet the other general standards, fieldwork standards, and reporting standards for audits, as appropriate.
Adhering to the standards will help ensure the integrity of the auditor’s work and district operations.
To fulfill this function, districts may use (1) district staff (with no responsibility for business operations), (2) inter-municipal cooperative agreements, (3) shared services (BOCES), or (4) independent contractors. However, the individuals or organization providing the service must meet all professional auditing standards including those related to independence and competence. The law, as currently written, does not specifically permit the payment of BOCES aid for this service.
Claims Auditor – Effective July 19, 2005
The law was amended to require the board to audit and approve each claim (except contracted wages and debt service) or appoint a claims auditor to perform this function on its behalf. The law was amended to require that the claims auditor report directly to the board of education. The law also states that the claims auditor is under the supervision and direction of the superintendent. The claims auditor should report to the full board on the result of the audits of claims and report to the superintendent for administrative issues such as work space, supplies, etc. It is no longer required that the claims auditor be a resident of the district. The claims auditor is now classified as an exempt title for civil service purposes, although anyone currently in a civil service title will maintain that status.
The claims auditor position may not be held by an individual holding certain
other positions including:
(1) a member of the board of education,
(2) the clerk or treasurer of the board of education,
(3) the superintendent of schools or other official of the district responsible for business management,
(4) the purchasing agent, or
(5) clerical or professional personnel directly involved in accounting and purchasing functions of the school district.
A board may delegate the auditing of claims by using (1) a district employee that is not prohibited from being the claims auditor, (2) an inter-municipal cooperative agreement (3) shared services (BOCES) or (4) independent contractors. The individual appointed to the position should be independent, qualified to audit the claims, and should receive any necessary training. The law, as currently written, does not specifically provide for the payment of BOCES aid for this service
Effectiveness of the Annual Audit of the Financial Statements – Effective July 19, 2005
The law was amended to require that the independent accountant present the results of the annual audit of the financial statements to the full board. It is recommended that a copy of the audit report including the management letter be provided to each board member. The law also requires that the district prepare a corrective action plan in response to any findings contained in the annual audit report, a management letter or a final audit report issued by the State Comptroller. While not specifically mentioned in the law, districts should prepare a corrective action plan in response to any finding in any audit report including those issued by the district’s internal auditor, the State Education Department (Department), the federal government, and others. Action should be taken to implement the recommendation as soon as practical. The corrective action plan including the expected or actual date of implementation should be filed with the Department.
The due date for the submission of the independent audit of the financial statements to the Department has been changed from October 1 to October 30. Districts are encouraged to submit the independent audit of the financial statements before the due date.
Districts must reconcile key data on the financial statements to the financial report (ST-3). Any resulting changes to the ST-3 or the State Aid forms must be changed via entry of the data in the State aid Management System (SAMS). The timely submission of these changes is imperative, since the information may be used in the calculation of the State aid estimates prepared in support of the Executive Budget. District’s State aid payments are also dependent on timely submission of the audited financial statements. District’s payments will be withheld if the report has not been filed within 30 days of the due date.
Audit Committee – Effective January 1, 2006
The law was amended to require every school district, except those employing
less than eight teachers, to establish by board resolution an audit committee to
advise and make recommendations to the board. The primary role of the audit
committee is to assist the board in its oversight role in order to ensure
financial accountability. The audit committee’s charge should be enumerated in a
charter and should include:
(1) providing recommendations regarding the appointment of the external auditor and internal auditor for the district;
(2) meeting with the external auditor prior to commencement of the audit;
(3) reviewing and discussing with the external auditors their risk assessment of the district’s fiscal operations;
(4) receiving and reviewing the draft annual audit report and accompanying draft management letter, working directly with the external auditor, and assisting the trustees or board of education in interpreting such documents;
(5) making a recommendation to the trustees or board of education on accepting the annual audit report;
(6) reviewing every corrective action plan developed by the district in response to any findings identified in an audit report or management letter;
(7) assisting in the oversight of the internal audit function;
(8) reviewing the findings and recommendations of the external auditor and internal auditor;
(9) monitoring the school district’s implementation of such recommendations; and
(10) evaluating the performance of the internal audit function.
The members of the audit committee should collectively possess knowledge in
accounting, auditing, financial reporting, and school district finances. The
audit committee should consist of at least three members and it may be
structured as a committee of:
(1) some board members,
(2) the whole board,
(3) all non-board members, or
(4) any combination, thereof.
Each member of the audit committee should be independent and not be employed by the school, or be an individual who previously provided or currently provides contractual services to the district, or be the owner of a company providing goods or services to the district, or be a family member of an employee or contractor providing services to the district. The member need not be a resident of the district, but is considered an officer of the district for purposes of Sections 3811 through 3813 of the Education Law related to liability for actions arising out of the exercise of authorized powers or the performance of duties of the position.
The audit committee should hold regularly scheduled meetings and report to the
board on the activities of the audit committee on an as needed basis, but not
less than annually. The report should address or include:
(1) the activities of the audit committee;
(2) summary of the minutes of the meetings;
(3) significant findings brought to the attention of the audit committee;
(4) any indications of suspected fraud, waste, or abuse;
(5) significant internal control findings; and
(6) activities of the internal audit function.
The requirement does not apply to the City School District of the City of New York as long as it has an audit committee that meets or exceeds these requirements.
Request for Proposal (RFP) for Audit Services – Effective Date July 1, 2005
The law requires each school district, except those employing fewer than eight teachers, to obtain an annual audit of its records by an independent certified public accountant or an independent public accountant. The law was amended to require districts, except the City School District of the City of New York, to utilize a competitive RFP process when contracting for the annual audit and to limit the agreement to a maximum of five consecutive years. However, nothing would preclude the auditor under contract from submitting a proposal or being awarded a contract or agreement for a subsequent period or periods. The RFP process should include an evaluation of the education and experience of the audit firms and thereby help ensure a qualified accounting firm is hired.
Some districts use a multiyear agreement for the annual audit services to provide for greater continuity, and lock in cost and services with the understanding that the board will contract for the service on an annual basis. The multiyear agreement can be voided at any time. The legislation does not specifically address the validity of a contract or multiyear agreement existing prior to the enactment of the legislation. However, it is our interpretation that the intent of the law is not to void any existing agreements or contracts except for those that may be for periods greater than five years. Therefore, contracts and multiyear agreements of five or less years existing prior to the legislation being enacted can be honored.
School districts are required to establish purchasing policies and procedures pursuant to Section 104-B of the General Municipal Law. Those policies and procedures should be amended to reflect this change.
Auditor rotation is not required by the legislation. However, districts should strongly consider periodic auditor rotation to help ensure the independence and objectivity of the auditors and then help ensure accountability over public funds.