Board Room

Board Room

The bottom line on school district audits

Kentucky School Advocate
November 2015 

By Madelynn Coldiron
Staff writer

Lengthy audit reports like those school boards receive annually are difficult for laypeople to grasp, said Whitley County school board Chairman Delmar Mahan. “Most people look at it and just stare at it and blank out, because it is overwhelming, and not just for a board member.”

And that’s the opinion of an accountant.

Mahan, a 25-year board member who works for Marr, Miller & Myers PSC certified public accountants in Corbin, and an experienced school district finance officer offered some tips as school board members begin to review their 2014-15 audits.

Mahan said he likes to zero in on whether the audit numbers line up with the district’s own end-of-year figures.

“The main thing, to me, is whether the numbers are reflective of what we finished the year with, where the finance officer said we were at, whether it’s close,” he said. “You can’t always be exact; there’s always going to be a few adjustments.”

“The contingency percentage is one of the most important things to me,” he added. School districts are required to have a 2 percent contingency.

Woodford County Schools Chief Operating Officer Amy Smith said there is no standard numerical figure for deciding whether there is too large a gap between the district-prepared general fund budget and the actual budget recorded by auditors. There are always variables, she said, and suggests looking at any gap as a percentage of the general fund.

Smith, a former president of the Kentucky Association of School Business Officials and a certified public accountant, advised members to pay close attention to the section of the audit called a statement of revenue, expenditures and changes in fund balance. “That will tell you whether there was an excess or deficit for that school year by showing the beginning fund balance and the ending fund balance,” she said.

A drop in the fund balance isn’t necessarily a signal for alarm if it was caused by a planned expenditure, she added. It’s also useful to look at those figures over a longer period of time. “Looking at prior years, at your trend of what your fund balance has done – whether it went up or down,” she said.

Mahan said the audit report is useful for looking ahead as well. “The audit report is used not only to see where you need to be or have a little extra for contingency, but what you are going to do for the coming year,” he explained. “It will give you a good idea for next year’s budgeting to see if there are any changes that might need to be made in the coming fiscal year.”

What it doesn’t do
The annual school district audit was never designed solely to detect fraud, Mahan said, adding, “It’s mainly just to see if the numbers are accurate.”

“If there’s a way people can find to manipulate your controls, they will. Then what you have to do after that is just go in and put in another step to try to eliminate that,” he said, speaking in general terms. “Where there’s a will, there’s a way, and when it comes to money people always find a way.”

In their work, auditors sample records according to specific formulas. If they find an “exception,” that is, something that seems amiss, they continue sampling records in that area to see if there is a pattern, Smith said.

“People are human, they make mistakes; it may be an isolated incident that we can deal with,” she said. “But if they continue to find those things, that’s when you get into them documenting that board procedures may not be being followed or that policies are not being followed, and then that’s what you’ve got to answer for in those situations.”

What else to look for
Mahan recommends checking the notes toward the end of the audit report, where auditors point out issues at the school and district levels.

Smith said the management letter accompanying the report should be read because if any problem is identified, the district has an opportunity to include its response or explanation. Board members may want to follow up with the finance officer and superintendent on any points raised, she said.

Smith also noted the importance of internal controls, which are one way of ensuring the district has systems in place to deter fraud and ensure accuracy. Those controls should be outlined in the district’s policies and procedures and are an area that auditors check. “There should not be any transaction that basically involves one person,” she said.

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