Monday, December 22, 2014

What Board members need to know about the district audit

Shelby County Board questions auditor over fraud

 After years of flawless audits, $600 K missing

The contract approved by the state 
"specifically mentions in there that we’re not here to detect fraud.”

--Mike Jones, CPA

This from the Shelbyville Sentinel-News:  

In 2011, Shelby County Public Schools received a perfect audit report from Mike Jones of Mather & Co. CPAs, who said it was the first time in his 15 years of auditing where he had witnessed no material weaknesses. In 2012 and 2013, the district had similar reports stating the district’s financial department had no deficiencies or weaknesses in their reports.

How is it then that nearly $600,000 was fraudulently taken from the district over a period of seven years?
Mike Jones

This was the question on the minds of several board members Thursday evening during the district’s meeting when Jones returned to give his audit report for the 2013-14 school year.

This year, Jones reported another nearly flawless audit –with the exception of one major chunk of missing funds from the substitute teacher pay.

“One item that we found to be a material weakness, this deals with the funds that were misappropriated in the payroll department,” he said.

Board member Eddie Mathis was the first to speak up about the oversight, asking Jones how many years his firm had been working with the district.

Jones estimated that Mather & Co. has worked with the district for seven of the last eight years, which is the same timeframe in which it is suspected that former payroll manager Benita Anglin was slowly intercepting funds through a false employee’s account.

“And you never have been able to detect this fraud,” Mathis quickly asked.

According to Jones, however, this was not what Mather & Co. was paid to do.

“Well basically that’s because we were not engaged to do so,” Jones said. “We were engaged to do a financial audit, which is required in order to receive the KDE funding, your federal funding. If you read through our contract that we have with you – the contract’s approved by the state – it specifically mentions in there that we’re not here to detect fraud.”

Though Jones did add that if fraud had been detected, they would have informed the district.
He further explained that the audit is performed by selecting random employees and checking their timesheets, contracts, and salary.

“If that person [false employee] would have been selected in our sample, when you had to produce a would have been very, very difficult because they did not exist,” he said.

However, board member Karen Sams questioned how it was possible that no one noticed money missing from the bank statements.

Jones explained that the bank statements complied with the district’s payroll system, MUNIS, which reflected a balance.

That balance, however, was made possible investigators say, because Anglin was able to manipulate and override the payroll program.

Board member Brenda Jackson questioned how actual money could disappear without a trace.
“You reconcile at the end of a month, how could you be missing money that doesn’t show up because there were real dollars that were gone from the system,” Jackson asked. “We had actual dollars gone, you shouldn’t reconcile.”

Jones quickly interjected, explaining that the money was not taken without a trace, but was rather placed in a false account and was accounted for.

“...A reconciliation is taking the bank information – the bank had this much money come in and this much money go out – you reconcile that back to the financial statements – the financial statements show this much money came in this much money came out – they agree. That fictional substitute teacher is in your books as an expense.”

Jackson then asked that if the money was in fact going to a false account, why then was it not caught when W-2s were issued.

But Jones said a W-2 was never issued for the false employee.

“If you were to reconcile the W-2s back to the financial statements they would not [agree],” he said.
Jones said the auditors would not have checked the W-2s since they are produced by MUNIS, which apparently is alleged to have been overridden by Anglin.

“The biggest way this [fraud] could have been found, if you balanced the W-2s to the general ledger. There’s someone who didn’t get a W-2. So the 941s were manually overridden.”

Jones agreed with the comments made by the state auditors following their examination, who said that Anglin had too much access to the system.

“Benita [Anglin] had the ability to add and subtract employees,” Jones said, adding that that was something she should have never had access to.

He then added that the district should consider hiring an employee to verify the internal controls of the system are being used properly.

“Jefferson County...Fayette County...they have people on the staff who that is their job to look at the internal controls,” he said.

Sams questioned whether that responsibility should have been that of a Chief Financial Officer – the district’s former CFO, Greg Murphy, stepped down from his position in October.

But Jones said that responsibility should belong to someone separate from the financial department altogether.

“You’d want that as far away from the Chief Financial Officer as possible,” he said, noting that an individual cannot audit oneself.

Jones also explained that he felt the district should consider breaking down the monthly financial reports into departments, such as by schools, central office, transportation department, etc.

“Shelby County is a very, very big district...and I don’t think it’s possible for the finance officer to be able to look at a payroll report and determine that there was a name on there receiving funds that should not have done that. The district has just gotten too big for that,” he said.

“I think burden needs to be spread out amongst the district.”

The board accepted the 2013-14 audit 4-1, with Sams sternly voting no.

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