J une 19, 2014

Board of Directors
Seattle School District
Seattle, Washington


Management Letter

This letter includes a summary of specific matters that we identified in planning and performing
our accountability audit of the Seattle School District from September 1, 2012 through August
31, 2013. We believe our recommendations will assist you in improving the Districts internal
controls and compliance in these areas.

We will review the status of these matters during our next audit. We have already discussed our
comments with and made suggestions for improvements to the District officials and personnel.
If you have any further questions, please contact me at (206) 615-0555.

This letter is intended for the information and use of management and the governing body.
However, this letter is a matter of public record and its distribution is not limited.

We would also like to take this opportunity to extend our appreciation to your staff for the
cooperation and assistance given during the course of the audit.

Sincerely,

Signature

J ames Griggs, CPA, Audit Manager

Attachment
Washington State Auditor
Troy Kelley

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388


Management Letter
Seattle School District
September 1, 2012 through August 31, 2013


The District does not have sufficient procedures in place to make sure that only authorized
supplemental compensation is paid to School Principals and Assistant Principals.

The District employed 191 employees who acted in the positions of Principal or Assistant
Principal during school year 2013 and received $19.4 million in compensation. Of the total 191
employees in these two job functions, 104 received supplemental pay for a total of $183,095.
This includes cell phone allowance of $46,000, certified administrative compensation of
$116,205, and national standard and K8 certification pay in the amount of $20,390.
Certified administrative compensation may be determined by the employees hourly rate and the
number of additional hours worked, or based on a stipend amount under the purview of a
collective bargaining agreement. During our audit we reviewed certified administration
compensation and noted that $16,645 out of $116,205 was not earned. The Human Resource
department is responsible for processing supplemental compensation pay and assuring that it is
authorized, approved and supported by appropriate documentation. We noted that the procedures
the department has currently in place are not sufficient to ensure supplemental compensation is
paid appropriately.

We recommend the District:
Implement procedures sufficient to assure that supplemental compensation paid is for
authorized activities and in proper amounts.
Provide training to Human Resource department employees on preparing and processing
documentation for supplemental compensation.

The District does not have sufficient controls in place to ensure that overtime and extra
time is properly authorized and the fringe benefit for personal use of vehicles is accurately
imputed.

The District employs 10 payroll analysts to review and process payroll of $475 million a year for
10,000 employees. The payroll department is responsible for processing overtime, pay under
supplemental contracts or extra time, and imputing fringe benefit compensation for personal use
of the Districts vehicles. The District anticipates that most errors in recording and authorizing
overtime and extra time pay will be detected at the departmental level by immediate supervisors
when approving timesheets. The District does not have policies or procedures in place for
paying overtime or extra time to exempt employees. In addition, the District does not have
sufficient controls to ensure that the fringe benefit for personal use of District owned vehicles is
imputed correctly in the employees wages.


Overtime
The District does not have a policy or procedure in place for paying overtime to exempt
employees. The District does not seek guidance from the Compensation Analyst when assigning
a pay rate for additional duties performed outside of an employees regular job function.

The District relies on the discretion of the employees immediate supervisor to determine when
overtime pay is due to exempt employees on a case by case basis. During our audit we noted 14
exempt level employees who received overtime pay of 1.5 times their regular rate for a total of
1,659 hours. In 11 instances we noted that overtime was paid for immediate duties and was not
properly authorized. In three instances we noted employees were paid overtime for performing
duties outside their immediate job function. These employees were paid one and a half times
their regular pay rate instead of the applicable rate for the job function. Also, we noted no
documentation showing that overtime was appropriate or necessary.


Supplemental Contracts
The District does not require written pre-authorization and justification for extra time from
supervisors. We noted insufficient documentation of extra duties and/or the duration of
additional assignments.

Extra time or supplemental pay is awarded to nonrepresented employees on a case by case basis
when an employee works outside the pay cycle or calendar days per the job function. We noted
nine non represented employees were paid extra time for a combined total of 509 hours for duties
performed outside the assigned work days. The payments were based on verbal agreements
made at the departmental level.


Fringe Benefits
Personal use of a district vehicle includes any activity that is not business related, including
commuting. If the employee does not have a vehicle log, and business versus personal use cannot
be substantiated, the IRS will assume the vehicle is used entirely for personal use. Any use of a
district vehicle that cannot be substantiated as business use is included in income. During the
audit period we noted a total of 14 employees were required to report imputed wages based on a
commuter benefit on their Form W-2. The imputed wages on the commuter benefit was
undervalued in 11 of the 14 instances. In three instances the imputed wages were undervalued
by a total of $2,414 due to the use of an incorrect valuation method. The imputed wages based on
eight commuter benefit amounts were incorrect due to insufficient records of vehicle usage. In
these cases Facility Operations did not keep records or respond to inquiries of total days
commuted by each of the eight employees. Based on the insufficient documentation we were
unable to determine the total of imputed wages under reported to the IRS.


We recommend the District:
Establish a district wide policy for overtime payments to non-represented exempt employees
and a policy for special assignments and/or dual assignments.
Require written pre-authorization and justification of extra time that would include a reason
for an additional assignment, pay scale and duration of duties.
Require supervisors to consult with the Human Resource Compensation Analyst for
appropriate pay scales when allowing employees to undertake additional job functions.
Provide training to Supervisors responsible for authorizing and approving timesheets.
Perform random payroll audits at the department level to bolster oversight and monitoring of
overtime payments.
Provide training to Payroll Analysts of IRS regulations (Publication 15B) and adopt a district
wide policy for personal use of District vehicles.
Establish a district wide policy for documentation and retention of commuter activity data for
reporting purposes to the IRS.

The District does not have sufficient documentation to support allocating the salaries of
eligible employees between the General Fund and the Capital Projects Fund.

The District charged approximately $8.3 million in salaries and benefits to the Capital Projects
Fund during the audit period. The District can charge employee salaries and direct expenditures
to that fund if the employees are hired or assigned to planning or construction management of
capital projects and technology projects to improve business including training and support to
students and teachers. The fund can also be charged to support academics including opening new
buildings to meet enrollment growth, and improvements to science and computer classrooms,
Special Education or other specialized classrooms and skill centers. The District may allocate
salaries of employees between the General Fund and the Capital Projects Fund based on the
percentage of time worked in each category.

During the current year audit we followed up on prior year recommendations for payroll charged
to the Capital Projects Fund.

We found the District does not have sufficient documentation to support allocating the salaries of
eligible employees between the General Fund and the Capital Projects Fund. Allocations are
based on estimates instead of actual charges. Individual departments calculate an estimated
workload of split-funded employees to be charged to the Capital Project fund during the annual
budget process. The Departments communicate the percent allocated to the budget office but do
not keep documentation to justify the workload on capital projects.

The District does not keep track of the actual payroll charges for split-funded employees. During
the year payroll costs are charged to the Capital Projects fund. At year end the District
reallocates part of the costs to the General fund using an estimated workload percentage.
We note that although the District went through a significant amount of turnover in the last year
that it remains committed to improve accounting for capital expenditures in accordance with the
Schools Accounting Manual.

We recommend the District:
Allocate actual split-funded salaries and benefits from the Capital Projects fund to the
General fund monthly rather than once a year.
Keep track of the actual payroll costs of split-funded employees charged to the capital
projects.
Maintain documentation for capital projects workload of employees who allocate their
salaries between funds.