Office of Shared Accountability MONTGOMERY COUNTY PUBLIC SCHOOLS Rockville, Maryland April 3, 2009 MEMORANDUM To: Dr. Alan Goodwin, Principal ‘Walt Whitman High School From: Roger W. Pisha, Supervisor, Internal Audit Dafiihe Subject: Report on Audit of Independent Activity Funds for the Period March 1, 2007, through October 31, 2008 This audit report presents the results of our examination of the financial records, reports, and internal accounting controls relating to the Independent Activity Funds (IAF) for Walt Whitman High School for the period March 1, 2007, through October 31, 2008. The examination was made to determine the adequacy of accountability over these funds, compliance with applicable Montgomery County Public Schools (MCPS) policies and procedures, and effectiveness of [AF management. Ei gs and Recommendations We appreciated the opportunity to mect with you, Mr. James E. Campbell, business manager, and Mrs. Joy Garett, financial assistant, on March 6, 2009, to discuss the results of our audit. At our meeting we discussed conditions that represent weaknesses in controls over IAF and recommendations to improve these conditions. The substance of our discussion is summarized below. Management of IAF must be in accordance with sound business practices, including accounting procedures and internal controls (see AF manual, p. 2). As recorded in the financial records, the school checking account had a negative balance in the amount of $122,443 at June 30, 2008, resulting in a management letter recommendation from Clifton Gunderson LLP, external auditors, to the Board of Education of Montgomery County Public Schools. Contributing to this negative balance was the school’s misunderstanding that checks could not be written in the new fiscal year until the financial records had been closed as of June 30. Although $150,000 was deposited June 30, the bank statement at June 30, 2008, reflected an overdraft of $5,262 since the bank did not credit the account until July 1 for that deposit. We noted four other occasions when the account was overdrawn. Factors that contributed to the overdrafts included delays in recording receipts and the existence of both a checking and savings account recorded in the same account in the financial records, resulting in confusion over the actual checking account balance. ‘Also, the previous bank automatically transferred funds between checking and savings accountsDr. Alan Goodwin -2- April 3, 2009 that did not continue upon change of banks. We understand that the bank savings account has been closed, that receipts are now recorded as they are received and deposited, and that checks will be dated the day they are written. We further recommend that financial staff schedule regular meetings to assess the school’s financial position and ensure that the checking account balance is always sufficient to pay checks presented. Monthly reports of IAF transactions should be prepared and furnished to the principal by the 20" day of cach month, and should be initialed and dated to signify your review. Staff members who sponsor events involving the collection and disbursement of IAF should likewise receive a copy of their account report for each month in which transactions are recorded. We noted that monthly reports were not prepared in a timely manner, and sometimes bore no evidence that they had been reviewed. Particularly noteworthy was the lack of evidence of routine review and certification of account activity by staff members who collect and deposit monies into the IAF. Those sponsor reports that were returned were not filed, therefore no follow-up on missing Teports was possible. We recommend that reports be printed and reviewed in a timely manner, and a system be established to ensure sponsors have verified that all transactions have been correctly recorded (see IAF manual, pp. 10, 12). Bank reconciliations should be prepared by a staff person who does not sign checks or have access to the financial records of the school (see IAF manual, p. 9). We noted that the financial assistant prepared and signed checks as well as completed the monthly bank reconciliation. Preparation of the bank reconciliation by a staff member who does not routinely record financial transactions, and review of the reconciliation by the principal, will strengthen internal control. Disbursements from the [AF must be controlled in a number of ways. All disbursements must be approved in advance and in writing using MCPS Form 280-54, Request for a Purchase. Any disbursement of more than $6,500 or any contract with an anticipated aggregate expenditure of more than $6,500 requires the prior written authorization of the chief operating officer (COO). After a purchase is completed, the recipient of the goods or services should submit the invoice or documented evidence of purchase, noted to indicate the satisfactory receipt of the goods or services, to the financial assistant. A check may then be drawn and must bear two signatures, one of which is that of the principal or acting principal. We found numerous instances, described below, in which controls over purchases were weakened. Of the 67 disbursements we sampled: * MCPS Form 280-54, Request for a Purchase, was not signed by the principal in advance of the purchase for 38 disbursements (58 percent); * Documentation was missing or not adequate to assure proper internal control of purchases in 24 instances (37 percent); * Documentation was not marked by recipient to indicate purchased goods or services were satisfactorily received for 10 disbursements (15 percent);Dr. Alan Goodwin -3- April 3, 2009 © Some contracts were signed by sponsors, rather than the principal, without written delegation on file; ‘© Accontract for $16,750 to maintain the athletic fields was not approved in advance by the coo; ‘© Some staff members were routinely being reimbursed for purchases made on personal credit cards, instead of using the school’s purchasing card or direct payment to the vendor. Action is needed to correct these conditions and bring purchasing into conformity with MCPS requirements (see IAF manual, p. 8). MCPS purchasing card users must record purchases on transaction logs and submit logs monthly with invoices and receipts attached for review and approval by the principal. Monthly summary reports from American Express are to be reviewed, signed and dated by the principal to ensure that purchases are appropriate and within established limits, We found that no logs and only some summary reports were signed to indicate review by the principal. Also, some purchases lacked certification of receipt of goods or services. We recommend purchasing cardholders be required to comply with the requirements of the MCPS Purchasing Card User Guide, pp. 3-5 (see also the Principals Handbook). Payments for personal services must comply with federal tax requirements regarding the reporting of income and the withholding of taxes. In accordance with MCPS Regulation DIA- RB, Payments for personal Services from School Independent Activity Funds, payments to independent contractors must be reported to the Division of Controller (DOC) using MCPS Form 280-47A, Report of Payments to Independent Contractors (see also IAF manual, p. 19). No payments should be made to independent contractors without first obtaining a completed IRS Form W-9, Request for Taxpayer Identification Number and Certification. We found that payments to independent contractors were not reported to DOC with identifying information such as taxpayer ID or address, We recommend that payments for personal service be made and reported in compliance with the applicable regulations and procedures. Field trips must be conducted in accordance with MCPS Regulation IPD-RA, Travel-Study Programs, Field Trips and Other Student Organization Trips. Trip approval forms signed by the principal (and community superintendent, when required), should be retained. The financial assistant should establish a separate account in the IAF for each trip. Sponsors should record cost and fee information for each field trip on MCPS Form 280-41, Field Trip Accounting, or equivalent, and submit the data to the financial assistant when a trip is completed (see IAF manual, p. 13). ‘The record of the names of participants and sums collected strengthens intemal controls by enabling the reconciliation of receipts to sums recorded in the field trip account. Review of field trip activities revealed several weaknesses: