Subject School Boards to Outside Audits

The following viewpoint piece appeared
in Newsday on June 17, 2004

By Howard S. Weitzman
Nassau County Comptroller

The allegations in the Roslyn school district of serious financial misconduct - including embezzlement, using district property for personal purposes and steering contracts to individuals connected to the administration - has sent Long Island reeling.

The disclosures remind both school boards and the boards of other special tax districts that they have an obligation to guarantee the adequacy of their financial controls, including procedures for the prevention of fraud and theft.

School board members are responsible for ensuring that their districts establish, implement and monitor appropriate financial controls and management oversight. But while board members may be community leaders and parents very concerned about education, they are not necessarily trained in accounting or finance and, therefore, may not be equipped to provide the necessary financial oversight of multimillion-dollar budgets.

As a result, the boards often improperly rely upon annual audits conducted by outside accounting firms to detect fraud, theft or other financial irregularities. The primary purpose of these annual audits, however, is not to detect fraud or theft but to review the fairness of the presentation of districts' financial reports. Generally annual audits uncover fraud or theft only if it has a material impact on those reports, and even then only if there has been no collusion among school district employees.

Another type of audit, a forensic audit, is designed to uncover theft or fraud. These audits, however, are not done regularly and require specialized expertise. They are usually not cost-effective unless they address specific concerns.

There is no perfect answer to the problem of theft perpetrated by seemingly trustworthy individuals. There will always be people who will be tempted to dip into the public till. The question is how we can minimize the possibility of theft in a cost-effective manner.

The state education department and state comptroller are the oversight agencies authorized to audit school districts and establish the form in which their financial records are maintained. More frequent audits by these agencies would undoubtedly help, but the state would have to allocate more resources to do them. But there is something that boards can do now, drawing on the model I have established in Nassau County for an outside independent audit committee.

Our county audit committee follows guidelines established by the Government Finance Officers Association, the national organization, and uses as a model federal legislation enacted in the aftermath of recent corporate accounting scandals, requiring the establishment of audit committees by the boards of public companies (the Sarbanes-Oxley act of 2002, which requires all publicly traded companies to establish audit committees to oversee accounting, financial reporting and audits). Although the county's audit committee is not charged with uncovering fraud, its members, who are trained financial professionals, provide a skilled, outside look at our financial controls.

School boards - and particularly boards that lack financial and accounting professionals who can serve on an audit committee - can learn from this model and form their own outside audit committees. These committees can be free to look into areas that school boards might not question. Although it is not a panacea and no amount of oversight can replace the establishment and proper functioning of an appropriate system of internal controls, a qualified, independent audit committee can help ensure that proper controls exist for spending taxpayers' dollars.