Material Weakness Found, Auditor Says Error was Corrected; Some Board Members Call for More In-Depth Second Audit
By Paul Thompson
A recent audit of the Grandview C-4 school district’s 2010-2011 financial operations revealed a “material weakness”-- a revelation that has some board members wanting to pursue further inquiries into the matter.
The district’s annual audit presentation took place last Thursday, January 19th at the Board of Education’s regularly scheduled meeting. During the presentation, certified public accountants Cynthia Byous and John Daniel revealed the material weakness to the board.
A material weakness suggests that the internal controls put in place by an organization to monitor finances have proven to be ineffective. Ostensibly, a material misstatement could occur and a company’s valuation effected if the weakness is not rectified.
In the case of the C-4 district, the material weakness was a result of account reimbursements that were not made in a timely manner. Auditors found no funds to be missing, but some accounts were simply not balanced.
The district has an operating procedure in which it makes debt service payments from a general operations checking account, and then transfers a reimbursement from their debt service savings account. But the audit revealed that this procedure has not been followed with sufficient regularity.
“During the year that ended June 30, 2011, these reimbursements were not made in a timely fashion,” the auditors’ letter to district officials stated. “This was related to the lack of reconciliation of the Debt Service Fund escrow and trust accounts, which has been reported as a material weakness in our report on internal controls...We recommend that, along with timely reconciliation of all bank accounts, monthly reimbursements of debt service expenditures be made from the debt service savings account to the general operations checking account.”
According to the document, “the operating account was out of balance by approximately $749,000, and Debt Service Fund cash was overstated in the general ledger by $6,134,000” when the auditors began their work. After reconciling the districts’ accounts, the auditors noted that the result was a “prior period adjustment of the District’s Debt Service Fund cash in the amount of $221,524.”
“The problem was some entries had not been posted,” said C-4 Finance Director Ann-Marie Cook. “In the case of the bank showing more than the district did, at that time, we had revenues that we had not recorded yet.”
The bulk of the $6.134 million overstatement in the general ledger resulted from over $5.8 million in bonds that became callable last March. A callable bond allows the issuer, in this case the C-4 district, to buy back the bonds at a previously set call price. When the district took that call, they should have recorded that money as outgoing from an escrow account, but failed to do so. The $221,524 is essentially the difference between the price of the call versus the $6.134 million that was still shown in the district’s ledger.
“We should have recorded the funds going out the door. It was an account held in escrow by a bond trustee to pay off the remaining bonds when they became callable,” said Cook. “We had not recorded those transactions when the auditors began their work.”
The district concurred with the findings of the audit and has created a template to keep track of all reimbursements that need to take place between accounts. The template will theoretically help tighten up recording practices not just for the general fund but also for escrow accounts being maintained by a third party. Because the district took the necessary steps to correct the problem, the auditors still provided the district with a ‘clean’ audit.
In the wake of the disclosure of material weakness, board member Ann Fisher asked the CPAs if it might be prudent to look at the financials with a keener eye.
“You could ask us to go beyond what we are required to do for a standard audit. We could look over every potential control that could be there that you don’t have in place,” answered Byous. “But you have to look at the cost versus benefit whenever you are considering internal control issues.”
Board member Don Fisher asked the board to consider an in-depth, full-scale audit of the financial department.
“I think it’s the public perception,” said Fisher. “We need to show the public that we are doing everything that we can do to find out what this problem might be.”
Board member Ann Fisher agreed that another audit would be a sound decision.
“When you’ve had several people leave, we have to make sure that the people who are still here aren’t working under the burden of mistakes made previously,” said (Ann) Fisher.
C-4 Board secretary Kathy Meyers pointed out that any suggestions for improvement made previously in audits were not considered to be material weakness.
“We’ve never had a material weakness before. I just don’t want there to be a misperception,” said Meyers.
Board President Rachel Casey said the wording of Mr. Fisher’s request was too vague to make a decision.
“We don’t have any idea what that means,” said Casey in response to Don Fisher’s request for a “full scale audit” of the financial department. “It’s a pretty broad statement. We have no idea what it would cost. Our audit was considered clean, and the problem that was found has been corrected.”
A discussion about a second audit was put on the agenda for the board’s next meeting.
The last time a second audit of the district’s financials was conducted was in 2005, as a “petitioned audit.” At the time, 1,353 registered voters requested a second audit of the district’s 2003-2004 financials. The petitioned audit, finished in Nov. 2005, was conducted by then State Auditor Claire McCaskill and cost the district $19,700. McCaskill’s report focused on bidding practices, credit card expenditures, the district’s budget, mobile phones, and a telephone and computer contract with the city of Grandview. The audit did not find any material weaknesses, fraud, embezzlement, theft, or Sunshine Law violations.