STATE OF DELAWARE OFFICE OF AUDITOR OF ACCOUNTS R. THOMAS WAGNER, JR., CFE, CGFM, CICA ‘Aupiror OF ACCOUNTS '302-7395055. R-THOMAS. WAGNER@STATE.DE.US July 6, 2016 Mr. Anthony Pullella Commandant Delaware Military Academy 112 Middleboro Road Wilmington, DE 19804 Dear Mr. Pullella, As you know, my office began reviewing the use of petty cash accounts at various charter schools earlier this year. Overall, we found that these charter schools were not following the State’s petty cash policy as set forth in the State of Delaware’s Budget and Accounting Manual (BAM). Petty Cash Account Approvals The Division of Accounting must approve the establishment of a petty cash fund and the Office of the State Treasurer must approve the opening of the bank account used.' The names and signatures of the authorized petty cash check signers must be on record with the Secretary of Finance. We found no evidence that Delaware Military Academy's petty cash account was properly approved by any of these entities. Petty Cash Account Management Compliance Petty cash, by definition, is a small amount of money kept in an office to pay for small value items.? It ean be maintained in the form of cash or a checking account. Petty cash allows the processing and payment of expenditures to occur outside the normal accounting environment. However, while the use of such an account is convenient, itis important to recognize that the overuse of petty cash minimizes public transparency and increases the risk of control overrides, inaccurate accounting, and misappropriation of funds, Per the BAM, organizations* may use petty cash when acquiring and paying for small value purchases. Generally, the maximum authorization is not greater than $2,000; however, amounts not "BAM, Section 7.12.1, v.26 2 BAM, Section 7.12.2, v4.26 (5) > Per hiip/www.merriam-webster.com/dietionary/Petty®420cash, on March 2, 2016. “The BAM defines “organization” as State of Delaware agencies (both merit and non-merit), school distrets, charter schools, and higher education. BAM, Section 1.7, v2.9 401 FEDERAL STREET * TOWNSEND BUILDING ¢ SUITE ONE * DOVER, DE 19901 MAIN OFFICE: 302:730-4241 FRAUD HOTLINE: 1-80055FRAUD \Vistt OUR WEBSITE TO VIEW, DOWNLOAD, OR PRINT AUDIT REPORTS AND OTHER INFORMATION, LHITP1/ / AUDITOR, DELAWARE. GOVMr. Pullella Page 2 July 6, 2016 exceeding $5,000 may be requested where exceptional circumstances exist.’ Section 7.12 of the BAM also sets forth additional guidelines for the operation of petty cash accounts within the State, including that all petty cash receipts and supporting documentation must be kept by the organization for audit purposes.° The following table summarizes Delaware Military Academy's compliance with these requirements during the Fiscal Year ended June 30, 2015 (Fiscal Year 2015). Delaware Military Academy Petty Cash Account Management Compliance Written Policies and Procedures for Petty Cash Checks were drawn in consecutive numerical order (BAM, Section 7.12.2.1, v4.26) \x ‘Account reconciliations were performed by the Account Custodian (BAM, Section 7.12.24, 4.2) The school compared the check register to the bank statements periodically to ‘gauge the financial position of the account; however, a formal and static reconciliation was not prepared. x Checks were signed by two employees (the Account Custodian may not be a check signer) (BAM, Section 7.12.22, v4.26) Although the school had two signatures on each check, the account custodian was a signer on all checks. No petty cash checks were drawn in exeess of $500.00. (BAM, Section 7.12.28, v4.26) The school processed 30 checks, totaling $114,111.08, that were in excess of the $500.00 threshold. Maintained a Petty Cash account within the $5,000 limit throughout the period (BAM, Section 7.12, v4.26) The average monthly balance was $20,589.31, with an ending balance of $31,956.65 on June 30, 2015. § BAM, Section 7.12, v.4.26 © BAM, Section 7.12.3, v4.26Mr. Pullella Page 3 July 6, 2016 We also identified a check for $1,000 that was processed in August 2014. The school explained that this check was used to reimburse LuAnn Muller for annual Lunch Program start-up expen however, the school was unable to provide all receipts or invoices for items purchased. In previous communications with my office, you originally stated that Delaware Military Academy *...did not deem ...the account as a petty cash account.” However, we considered this a petty cash account since it was used for ongoing operational items, such as NJROTC expenses and field trip costs during Fiscal Year 2015. Delaware Military Academy's petty cash account was one of the most voluminous of the charter school accounts we reviewed at this time. As stated above, we caution the school’s overuse of a petty cash account since these accounts may be viewed as a way of transferring funds from the State into external bank accounts that lack continual State oversight. ‘The petty cash restrictions in the BAM are meant to reduce the various risks associated with the use of petty cash, and users of the State’s accounting system must abide by these restrictions, in addition to developing and implementing entity-specific petty cash controls. While AOA recognizes that some charter school accounts may have been operating prior to the implementation of these BAM guidelines, we encourage all charter schools to periodically review the BAM to ensure compliance with all ofits financial processes. We also recommend using a State-issued procurement card (PCard) or direct claim through First State Financials when possible, Regardless of the method of payment, supporting documentation must be maintained for all transactions. Please feel free to contact me at (302) 739-5055 with any further questions you may have. ow R. Thomas Wagner, Jr., CGFM, CICA, CFE State Auditor wcerely, ce: Dr. Steven H. Godowsky, Secretary, Department of Education Mr. Kenneth J. Rivera, President of the Red Clay Consolidated School District Mr, Edward Capodanno, Chair of the Board of Directors