San Diego County Office of Education - San Ysidro School District Report

San Diego County Office of Education regarding the San Ysidro School District Extraordinary Audit June 8, 2018 Michael H. Fine Chief Executive Officer Fiscal crisis & ManageMent assistance teaM June 8, 2018 Paul Gothold, Ed.D., Superintendent San Diego County Office of Education 6401 Linda Vista Road San Diego, CA 92111-7319 Dear Superintendent Gothold: On November 15, 2017, the Fiscal Crisis and Management Assistance Team (FCMAT) and the San Diego County Office of Education entered into a study agreement to provide an Assembly Bill 139 extraordinary audit of the San Ysidro School District located in San Ysidro. Specifically, the agreement states that FCMAT will perform the following: The COE has requested FCMAT to assign professionals to conduct an AB 139 Extraordinary Audit. This audit will be conducted pursuant to Education Code Section 1241.5 (b). The COE has developed information regarding possible fraud, misappropriation of funds or other illegal fiscal practices at the San Ysidro School District and is requesting that FCMAT review employee compensation (all payroll related expenses) and any additional payments made outside of payroll (including, but not limited to, salary, expense allowances, housing allowances, insurance buyouts, off-schedule payments, retro payments, vacation payments, deferred compensation payments, termination payments, commercial warrant reimbursements, revolving cash reimbursements and petty cash reimbursements), and relevant internal controls related to the former superintendent Julio Fonseca and former interim superintendent/deputy superintendent Jose Arturo Sanchez- Macias (collectively the “Scope of Work”). The primary focus of this review is to determine, based on the testing performed, whether (1) the district’s reporting and monitoring of payroll and other payment transactions related to employee compensation (all payroll related expenses) and payments made outside of payroll (including but not limited to, salary, expense allowances, housing allowances, insurance buyouts, off-schedule payments, retro payments, vacation payments, deferred compensation payments, termination payments, commercial warrant reimbursements, revolving cash reimbursements and petty cash reimbursements) have adequate management and internal controls, and (2) based on that assessment, whether fraud, misappropriation of fund or other illegal fiscal practices may have occurred. Management controls include the process for planning, organizing, directing, and controlling program operations, including systems for measuring, reporting and monitoring performance. Specific audit objectives will include evaluating the establishment, implementation and effectiveness of policies, procedures and internal control activities through the review of financial transactions recorded by the district relating to the Scope of Work. The team will review and test recorded transactions for fiscal year 2015-16 through 2017-18 to date, to determine if fraud, misappropriation of funds or other illegal fiscal activities may have occurred. Testing for this review will be based on a sample of transactions and records for this period. Testing and review results are intended to provide reasonable but not absolute assurance regarding the accuracy of the district’s financial transactions and activity to accomplish the following: 1. Provide reasonable assurance to management that the internal control system is established, implemented and monitored. 2. Prevent internal control activities from being overridden by management. 3. Help identify and correct inefficient processes. 4. Ensure that employees are aware of the proper internal control expecta- tions. This final report contains the study team’s findings and recommendations in the above areas of review. FCMAT appreciates the opportunity to serve the San Diego County Office of Education, and extends thanks to all the staff for their assistance during fieldwork. Sincerely, Michael H. Fine Chief Executive Officer Fiscal crisis & ManageMent assistance teaM i TABLE OF CONTENTS Table of Contents About FCMAT ........................................................................................ iii Introduction ...........................................................................................1 Background .....................................................................................................1 Study and Report Guidelines (AB 139 Authority) ................................2 Conducting a Fraud Audit ..................................................................3 Fraud Audit Fieldwork ..................................................................................3 Scope and Procedures ..................................................................................3 Transaction Sampling ...................................................................................4 Study Team ......................................................................................................4 Responsibilities and Overview of Fraud .......................................5 Fraud ..................................................................................................................5 Occupational Fraud .......................................................................................5 Internal Controls .............................................................................................5 Fiduciary Responsibilities ............................................................................9 Gift of Public Funds .......................................................................................9 Findings .................................................................................................11 Internal Control Deficiencies ...................................................................11 Employment Contracts, Payroll Irregularities and Absence Tracking ...........................................................................................................12 Procurement and Accounts Payable Transaction Testing ..............26 Summary of Findings .........................................................................31 San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt ii Conclusion .............................................................................................32 Potential for Fraud .......................................................................................32 Judgements Regarding Guilt or Innocence ........................................32 Recommendation ........................................................................................32 Appendix ................................................................................................33 Fiscal crisis & ManageMent assistance teaM iii ABOUT FCMAT About FCMAT FCMAT’s primary mission is to assist California’s local K-14 educational agencies to identify, prevent, and resolve financial, human resources and data management challenges. FCMAT provides fiscal and data management assistance, professional development training, product development and other related school business and data services. FCMAT’s fiscal and manage- ment assistance services are used not just to help avert fiscal crisis, but to promote sound financial practices, support the training and development of chief business officials and help to create efficient organizational operations. FCMAT’s data management services are used to help local educational agencies (LEAs) meet state reporting responsibilities, improve data quality, and inform instructional program decisions. FCMAT may be requested to provide fiscal crisis or management assistance by a school district, charter school, community college, county office of education, the state Superintendent of Public Instruction, or the Legislature. When a request or assignment is received, FCMAT assembles a study team that works closely with the LEA to define the scope of work, conduct on-site fieldwork and provide a written report with findings and recommendations to help resolve issues, overcome challenges and plan for the future. FCMAT has continued to make adjustments in the types of support provided based on the changing dynamics of K-14 LEAs and the implementation of major educational reforms. Studies by Fiscal Year 90 80 70 60 50 40 30 20 10 0 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 FCMAT also develops and provides numerous publications, software tools, workshops and professional development opportunities to help LEAs operate more effectively and fulfill their fiscal oversight and data management responsibilities. The California School Information Services (CSIS) division of FCMAT assists the California Department of Education with the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS). CSIS also hosts and maintains the Ed-Data website (www.ed-data.org) and provides technical expertise to the Ed-Data partnership: the California Department of Education, EdSource and FCMAT. FCMAT was created by Assembly Bill (AB) 1200 in 1992 to assist LEAs to meet and sustain their financial obligations. AB 107 in 1997 charged FCMAT with responsibility for CSIS and its state- wide data management work. AB 1115 in 1999 codified CSIS’ mission. San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt seidutS fo rebmuN iv ABOUT FCMAT AB 1200 is also a statewide plan for county offices of education and school districts to work together locally to improve fiscal procedures and accountability standards. AB 2756 (2004) provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. In January 2006, Senate Bill 430 (charter schools) and AB 1366 (community colleges) became law and expanded FCMAT’s services to those types of LEAs. Since 1992, FCMAT has been engaged to perform more than 1,000 reviews for LEAs, including school districts, county offices of education, charter schools and community colleges. The Kern County Superintendent of Schools is the administrative agent for FCMAT. The team is led by Michael H. Fine, Chief Executive Officer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies. Fiscal crisis & ManageMent assistance teaM 1 INTRODUCTION Introduction Background The San Ysidro School District is located south of San Diego along the southern border of California and serves approximately 5,230 students in grades K-8 at five elementary schools, two middle schools and a preschool and child development program. The district has struggled with leadership instability for more than a decade. In 2015, the acting superintendent vacated his position to serve as interim county superintendent for San Diego County Office of Education. At that time, the board sought a replacement and recruited a new superintendent from the Bassett Unified School District. A three-year contract for his services was executed on June 9, 2015. At the time of the new superintendent’s hiring, the district’s administrative position responsible for overseeing the business operations of the district was vacant. Under the leadership of the new superintendent the district sought and filled a new chief operating officer position to fulfill these duties; this position title was subsequently revised to deputy superintendent. The candidate selected for this position was recruited from the Bassett Unified School District. During the August 13, 2015 board meeting a contract was executed for this position with an official start date of September 1, 2015. Both of these administrators served in the San Ysidro School District less than two and one-half years. During the course of their employment numerous revisions were made to the contracts of both administrators. On September 1, 2017 the superintendent resigned from his position. Less than 30 days later the deputy superintendent resigned. Upon the resignation of the superintendent, the board designated the deputy superintendent to act as interim superintendent in conjunction with his regular duties until such time as the district appointed a new superintendent. In the capacity of deputy superintendent, he was tasked with overseeing the administration of the separation agreement of the former superintendent. The approach and the additional vacation payout requested by district staff when processing the separation payment to the former superintendent raised numerous questions by the county office of education, after which district and county office staff worked together in determining the method for processing and correcting payments. The questions raised through this process led the county office to request an AB 139 audit. It is standard practice of the county office to conduct routine review of payments processed using the commercial warrant (accounts payable) process for districts countywide. It is not the standard practice of the county office to conduct routine reviews of employment contracts and payroll transactions. Due to the size of the payment, and the inclusion of approximately 192 days of vacation in addition to separation salary, the county office requested supporting documentation from the district sufficient to validate the amount being paid. The district was unable to provide adequate documentation to support the initial payment being processed, which elevated the concerns regarding contract payments over the duration of employment. This concern subse- quently extended to payments made to the former deputy superintendent as well. Because the district was not forthcoming with supporting documentation, the county office began an internal review and reconciliation of the contractual agreements of the former super- intendent and deputy superintendent and their compensation. Based on its review, the county San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 2 INTRODUCTION office believed there was cause for concern regarding possible fraud, misappropriation of funds or other illegal fiscal practices at the San Ysidro School District. On November 7, 2017, the Fiscal Crisis and Management Assistance Team (FCMAT) received a request from the county office for an Assembly Bill (AB) 139 extraordinary audit of the San Ysidro School District. Under the provisions of Education Code Section 1241.5, on November 15, 2017, FCMAT entered into a contract with the county office to conduct an AB 139 extraor- dinary audit to determine if fraud, misappropriation of funds or other illegal fiscal activities may have occurred at the district. Study and Report Guidelines (AB 139 Audit Authority) Education Code Section 1241.5 (b) permits a county superintendent of schools to review or audit the expenditures and internal controls of any school in the county if he or she has reason to believe that fraud, misappropriation of funds, or other illegal fiscal practices have occurred that merit examination. This review or audit is known as an AB 139 extraordinary audit. Because the purpose of an AB 139 extraordinary audit is to determine if fraud, misappropriation of funds or other illegal fiscal activities may have occurred, it is considered a fraud audit. Education Code Section 42638 (b) states that on completion of the fraud audit, “If the county superintendent determines that there is evidence that fraud or misappro- priation of funds has occurred, the county superintendent shall notify the governing board of the school district, the State Controller, the Superintendent of Public Instruction, and the local district attorney.” The foundation of a fraud audit is to determine if sufficient evidence exists that fraud, misappro- priation of funds, or other illegal fiscal acts may have occurred and to document the findings for referral to the local district attorney’s office and further investigation by law enforcement. In writing its reports, FCMAT uses the Associated Press Stylebook, a comprehensive guide to usage and accepted style that emphasizes conciseness and clarity. In addition, this guide empha- sizes plain language, discourages the use of jargon and capitalizes relatively few terms. Fiscal crisis & ManageMent assistance teaM 3 CONDUCTING A FRAUD AUDIT Conducting a Fraud Audit Fraud audits have many components including fieldwork, obtaining and examining available orig- inal source documents, when possible corroborating documents and information through third party sources, interviewing potential witnesses, gaining an understanding of internal controls applicable to the scope of the fieldwork, and assessing factors such as intent, capability, opportunity, and possible pressures or motives. The fraud audit is conducted based on the team’s experience and judgment. Although there are many different types of fraud, occupational fraud, including asset misappro- priation and corruption, may occur when employees are in positions of trust and have access to assets. Embezzlement occurs when someone who is lawfully entrusted with property takes it for his or her personal use. Common elements in all fraud include the following: • Intent, or knowingly committing a wrongful act • Misrepresentation to accomplish the act • Reliance on weaknesses in the internal control structure • Concealment to hide the act Fraud Audit Fieldwork Fraud audit fieldwork consists of gathering information and documentation pertaining to specific allegations; establishing an audit plan, interviewing potential witnesses and assembling evidence from internal and external sources; performing various audit procedures to determine whether fraud may have occurred; evaluating the loss associated with the alleged fraud; and determining who was involved and how it may have occurred. FCMAT visited the San Diego County Office of Education and San Ysidro School District on January 17-19 and February 5, 2018 to conduct interviews, collect data and review documents. FCMAT interviewed district board members, current administrative personnel, business office staff, and COE staff to obtain information related to general business practices and events that transpired during the period under review, including financial mismanagement, abuse or fraud. During inter- views FCMAT asked questions about the allegations; policies and procedures; transactions and activi- ties; authorization levels; job duties; and the internal control structure including control activities and lines of authority and oversight of district business activities. Open ended questions were designed to elicit information about other possible irregularities regarding the scope of the engagement. The fieldwork focused on determining whether there is sufficient evidence to indicate that fraud misappropriation of funds, or other illegal fiscal activities may have transpired through transactions compensating the former superintendent and deputy superintendent, and processed by management and key employees using the payroll and commercial warrant systems of San Ysidro School District. Scope and Procedures FCMAT reviewed, analyzed, and tested records that included employee compensation processed through the district’s payroll system and any additional payments made outside of payroll including those processed using the commercial warrant system, revolving accounts, clearing accounts and petty cash. Transactions reviewed included but were not limited to payments associ- ated with contracted salary, expense allowances, relocation stipends, moving expense allowances, insurance buyouts, off-schedule salary increases, retroactive salary, vacation payouts, employer San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 4 CONDUCTING A FRAUD AUDIT paid deferred compensation, and separation pay. FCMAT also reviewed transaction authoriza- tions, employment contracts and addendums, board minutes and audio files, board policy and administrative regulations. Transactions were examined for proper authorization, compared to employment contracts, reviewed for completeness, and compared to board policy. To investigate the allegations, FCMAT study team members evaluated policies, procedures, and other internal control activities and tested transactions recorded by the district to verify the compliance and effectiveness of those controls. Transaction Sampling FCMAT developed and conducted audit procedures to analyze and evaluate the allegations and potential outcomes. Fraud audit scope, objectives, and substantive transaction testing was based on the audit team’s experience and professional judgment and did not include the testing of all available transactions and records. The sample population is represented by the documents and other evidence and information provided by the district and county office of education that were available for review as related to the study objectives. FCMAT reviewed all identifiable payments made to the former superintendent and former deputy superintendent. Transaction testing and examination results are intended to provide reasonable but not absolute assurance on the accu- racy of the transactions and financial activity and/or identify if fraud, misappropriation of funds or other illegal fiscal acts may have taken place during the period under review. FCMAT identified transactions for review based on recorded data in the district’s detailed general ledger, warrant register, vendor history reports, payroll registers, and other reports for the 2015- 16, 2016-17, and 2017-18 (through January 5, 2018, respectively) fiscal years. These source reports were exported from the district’s PeopleSoft and legacy financial systems by the county office. Specific selected disbursement checks from the accounting reports were identified, and supporting documentation was requested and examined. Transactions selected were analyzed and compared with board policy, administrative regulations, operational procedures and industry standard or best practice procedures. Transactions were compared to contract terms, documentation of receipts for expenditures, and evaluated for proper authorizations and reasonableness based on the team’s judgment and technical expertise in school district business operations, internal controls, and accounting practices. FCMAT’s findings are the result of the above audit procedures, and interviews with district board members, current administrative personnel, business office staff, and county office staff. Study Team The FCMAT study team was composed of the following members: Jennifer Noga, CFE Marisa A. Ploog, CPA, CFE, CICA, CGMA FCMAT Intervention Specialist FCMAT Intervention Specialist Bakersfield, CA Bakersfield, CA Ellen Bolding Laura Haywood FCMAT Consultant FCMAT Technical Writer Coarsegold, CA Bakersfield, CA Each team member reviewed the draft report to confirm its accuracy and to achieve consensus on the final recommendations. Fiscal crisis & ManageMent assistance teaM 5 RESPONSIBILITIES AND OVERVIEW OF FRAUD Responsibilities and Overview of Fraud Fraud Fraud can include an array of irregularities and illegal acts characterized by intentional deception and misrepresentations of material facts. A material weakness is a deficiency in the internal control process whereby errors or fraud may occur or can be a violation of specific law or regula- tion. Because of the weakness, employees in the normal course of business may not detect errors in time to correct them. Although all employees have some degree of responsibility for internal controls, the board, district superintendent and senior management are ultimately responsible for those controls that employees under their supervision are expected to follow. Occupational Fraud Occupational fraud occurs when an organization’s owners, executives, managers or employees use their occupation to deliberately misuse or misapply the employer’s resources or assets for personal benefit. The three main types of occupational fraud are asset misappropriation, corruption, and financial statement fraud. Asset misappropriation fraud includes the theft or misuse of district assets and may take place in the form of cash skimming, falsifying expense reports and/or forging company checks. Corruption schemes involve an employee(s) using his or her influence in business transactions to obtain a personal benefit that violates that employee’s duty to the employer or the organization; conflicts of interest fall into this category. Financial statement fraud includes the intentional misstatement or omission of material information in the financial reports. Occupational fraud is one of the most difficult types of fraud and abuse to detect; the most common method of detection comes from tips, which help prevent occupational fraud three times as often as any other detection method. According to the 2018 Report to the Nations conducted and published by the Association of Certified Fraud Examiners, asset misappropria- tion causes the smallest median loss of $114,000 but is the most common form of occupational fraud, occurring in more than 89% of 2,690 reported cases. Corruption schemes accounted for 38% of the cases reported, with a median loss of $250,000. Based on this study, there is a direct correlation between the perpetrator’s position and authority in an organization and the losses incurred. The report notes that losses from fraud by owners and executives are six times higher than those from fraud by managers and 17 times higher than losses incurred as a result of fraud by employees. Proper monitoring and effective oversight are also highly effective at preventing fraud. Internal Controls Internal controls are among the most important aspects of any fraud prevention program. Managers in a position of authority have a higher standard of care to establish the ethical tone and serve as examples to other employees. Employees with administrative responsibility have a fiduciary duty to the organization in the course of their employment to ensure that activities are conducted in compliance with all applicable board policies, laws, regulations, and standards of conduct. Management personnel are entrusted to safeguard assets and ensure that internal controls function as intended. San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 6 RESPONSIBILITIES AND OVERVIEW OF FRAUD The accounting industry defines the term “internal control” as it applies to organizations, including school agencies. Internal control is “a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.” [The Committee of Sponsoring Organizations of the Treadway Commission - May 2013] The reference to achievement of objectives fundamentally refers to an organization’s work of planning, organizing, directing, and performing routine tasks relative to operations, and monitoring performance. An organization establishes control over its operations by setting goals, objectives, budgets and performance expectations. Several factors influence the effectiveness of internal control, including the social environment and how it affects employees’ behavior, the availability and quality of information used to monitor the organization’s operations, and the policies and procedures that guide the organization. Internal control helps an organization obtain timely feedback on its progress in meeting operational goals and guiding principles, producing reliable financial reports, and ensuring compliance with applicable laws and regulations. Internal control is the principal mechanism for preventing and/or deterring fraud or illegal acts. Illegal acts, misappropriation of assets or other fraudulent activities can include an assortment of irregularities characterized by intentional deception and misrepresentation of material facts. Effective internal control provides reasonable assurance that operations are effective and efficient, the financial information produced is reliable, and the organization complies with all applicable laws and regulations. Internal control provides the framework for an effective fraud prevention program. An effective internal control structure includes the board policy and administrative regulations established by the board and operational procedures used by staff, adequate accounting and information systems, the work environment, and the professionalism of employees. The five integrated components of internal control and their summarized characteristics are included in the table below. Internal Control Component Characteristics The set of standards, processes and structures providing the basis for carrying out internal control across an organization. Comprises the integrity and ethical values of the organization. Commonly referred to as the moral tone of the organization, the control environment includes a code of ethical conduct; policies for ethics, hiring and promotion guidelines; proper assignment of authority and responsibility; oversight by management, the board or an audit committee; investigation of reported concerns; and effective disciplinary Control Environment action for violations. Identification and assessment of potential events that adversely affect the achievement of the organization’s Risk Assessment objectives and the development of strategies to react in a timely manner. Actions established by policies and procedures to enforce the governing board’s directives. These include actions by management to prevent and identify misuse of the district’s assets, including preventing employees Control Activities from overriding controls in the system. Ensures that employees receive information regarding policies and procedures and understand their respon- Information and sibility for internal control. Provides opportunity to discuss ethical dilemmas. Establishes clear means of Communication communication within an organization to report suspected violations. Ongoing monitoring to ascertain that all components of internal control are present and functioning; ensures Monitoring Activities deficiencies are evaluated and corrective actions are implemented. The five components of internal control are supported by 17 underlying principles that help ensure an entity achieves effective internal control. Each of the five components listed above and their relative principles must be present and functioning in an integrated manner to be effective. Fiscal crisis & ManageMent assistance teaM 7 RESPONSIBILITIES AND OVERVIEW OF FRAUD An effective system of internal control can provide reasonable but not absolute assurance that the organization will achieve its objectives. While the board and all employees in the district have some responsibility for internal controls, the superintendent, board and other key management personnel have a higher ethical standard, fiduciary duty and responsibility to safeguard the assets of the district. Control Environment The internal control environment establishes the moral tone of the organization. Though intan- gible, it begins with the leadership and consists of employees’ perception of the ethical conduct displayed by the board and executive management. The control environment is a prerequisite that enables other components of internal control to be effective in achieving the goals and objectives to prevent and/or deter fraud or illegal acts. It sets the tone for the organization, provides discipline and control, and includes factors such as integrity, ethical values and competence of employees. The control environment can be weakened significantly by a lack of experience in financial management and/or comprehension of internal control. Control Activities Control activities are a fundamental element of internal control and are a direct result of policies and procedures designed to prevent and detect misuse of a district’s assets, including preventing any employee from overriding system controls. Transaction control activities are implemented to reduce the risk in specific business processes. Examples of control and transaction control activi- ties include the following: 1. Performance reviews, which compare actual data with expectations. In accounting and business offices, this most often occurs when budgeted amounts are compared with actual expenditures to identify variances and followed up with budget transfers to prevent overspending. 2. Information processing, which includes the approvals, authorizations, veri- fications and reconciliations necessary to ensure that transactions are valid, complete and accurate. 3. Physical controls, which are the processes and procedures designed to safe- guard and secure assets and records. 4. Supervisory controls, which assess whether the transaction control activities performed are accurate and in accordance with established policies and procedures. 5. Segregation of duties, which consists of processes and procedures that ensure that no employee or group is placed in a position to be able to commit and conceal errors or fraud in the normal course of duties. In general, segregation of duties includes separating the custody of assets, the authorization or approval of transactions affecting those assets, the recording or reporting of related transactions, and the execution of the transactions. Adequate segre- gation of duties reduces the likelihood that errors will remain undetected by providing for separate processing by different individuals at various stages of a transaction, and for independent review of the work. San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 8 RESPONSIBILITIES AND OVERVIEW OF FRAUD Independent auditors’ reports on internal control over financial reporting are based on an audit of financial statements performed in accordance with government auditing standards. In plan- ning and performing independent financial audits, auditors consider internal control over finan- cial reporting to determine audit procedures that are appropriate in the circumstances. Therefore, they may express their opinion on the financial statements, but not on the effectiveness of an organization’s internal control. The auditors’ consideration of internal control is not designed to identify all deficiencies in internal control that might be a material weakness or significant deficiency, which means that material weaknesses or significant deficiencies may exist that were not discovered during the audit. The following is a partial list of deficiencies and omissions that can cause internal control failures: • Failure to adequately segregate duties and responsibilities related to authorization. • Failure to limit access to assets or sensitive data (e.g. cash, fixed assets, personnel records). • Failure to record transactions, resulting in lack of accountability and the possibility of theft. • Failure to reconcile assets with the correct records. • Failure to detect unauthorized transactions, resulting in skimming, embezzlement or larceny. • Lack of monitoring or implementation of internal controls by the board and management, or because personnel are not qualified. • Collusion among employees where little or no supervision exists. A system of internal control consists of policies and procedures designed to provide the board and management with reasonable assurance that the organization is achieving its objectives and goals. Traditionally referred to as hard controls, these include segregation of duties; limiting access to cash; management review and approval; and reconciliations. Other types of internal control, typically referred to as soft controls, include management tone, performance evaluations, training programs, and maintaining established policies, procedures and standards of conduct. Fraud and the misuse of physical or cash assets occur when three factors converge: pressure, opportunity, and rationalization. This is known as the fraud triangle. When two of the three factors are present, the probability that fraud will occur increases. When all three factors are present, the potential for fraud to occur is high. Employees should be regularly trained in what constitutes fraud and how it damages the organization. Employees should have several avenues for reporting improprieties and should be encouraged not to ignore warning signs. Risk awareness training about suspicious situations that merit reporting will help create a districtwide culture that supports appropriate reporting. The district should also implement common fraud detection methods such as a third-party anon- ymous tip hotline, surprise audits or fraud risk assessments. Knowing that someone is checking or could anonymously report suspicious behavior can deter fraudulent activity. Fiscal crisis & ManageMent assistance teaM 9 RESPONSIBILITIES AND OVERVIEW OF FRAUD Fiduciary Responsibilities A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty is typically referred to as the principal or the beneficiary. (source: https://www.law.cornell.edu/wex/fiduciary_duty) A fiduciary also may be a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). In other words, a fiduciary takes care of money or other assets for another. District board members, administrators and management are examples of those who have fiduciary responsibilities or a fiduciary duty. The Cornell law source further describes several components of fiduciary duties, which FCMAT summarizes and applies to districts as follows: Duty of Care: Before making a decision, collect all evidence and information available. Do your “due diligence” and review all the information and evidence available – don’t just accept the information as it is presented. Assess information with a critical eye and ask the questions: who, what, when and where. A fiduciary’s responsibility is to protect the assets of the district. Duty of Loyalty: You cannot use your position in the organization to further your private inter- ests. Avoid anything that might injure the district. Duty of Good Faith: Advance the interests of the district. Do not violate the law. Fulfill your duties and responsibilities. Duty of Confidentiality: Keep confidential matters confidential and never disclose confidential information to avoid personal liability. Duty of Prudence: Be trustworthy to a degree of care and skill that a prudent board member, member of management, or fiduciary would exercise. Prudent means acting with wisdom and care, including exercising good judgment. Duty of Disclosure: Act with complete candor. Be open, sincere, honest and transparent. Disclose all financial interests on Form 700, Statement of Economic Interests. Gift of Public Funds Article 16, Section 6 of the California Constitution specifies that the state Legislature cannot authorize any county, city, or other political subdivision to make any gift of public funds to an individual or corporation. Basically, Article 16 states that in the absence of a statute granting local educational agencies (LEAs) the legal authority to make a special expenditure (e.g., for food, clothing, awards, etc.), the legality of any expenditure is determined by the “gift of public funds” provision in the California Constitution, Article 16, Section 6. This constitutional provision prohibits making any gift of public money to any individual (including public employees), corporation, or other government agency. It states, “... the Legislature shall have no ... power to make any gift, or authorize the making of any gift, of any public money or thing of value to any individual ... whatever ...” In general, the constitutional prohibition of the gift of public funds is not an issue when a direct and primary public purpose is accomplished so that the public receives a benefit from the expen- diture. However, if the gift is to an employee or other individual, and there is no benefit to the public as a result, it can be considered a gift of public funds. On the other hand, it is also well established that expenditures of public funds that involve a benefit to private persons (including public employees) are not gifts within the meaning of San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 10 RESPONSIBILITIES AND OVERVIEW OF FRAUD the California Constitution if those funds are expended for a public purpose. This means that public funds may be expended only if a direct and substantial public purpose is served by the expenditure and private individuals are benefited only incidentally to the promotion of the public purpose. To justify the expenditure of public funds, an LEA’s board must determine that the expenditure will benefit the education of students in its schools. Expenditures that most directly and tangibly benefit students’ education are more likely justified. Expenditures driven by personal motives are not justified even if they have been a longstanding local custom or are based on benevolent feelings. If the LEA’s board has determined that a particular type of expenditure serves a public purpose, courts will almost always defer to that finding. Therefore, if a district has a board policy stating that specific items are allowable, there is more certainty that the expenditure might be considered allowable. The constitutional prohibition of gifts of public funds is designed to obstruct the misuse of public money. Gift of public funds violations occur under many circumstances. FCMAT’s experi- ence regarding gift of public funds is that misuse often occurs under two circumstances. 1. Noble or Virtuous Purpose - An example of a noble or virtuous purpose that may be considered a gift of public funds is the purchase of flowers from district funds for the funeral of a student or family member of a board member. 2. Moral or Justifiable Obligation - A moral or justifiable obligation is the most common form of gift of public funds resulting from a desire to convey some form of gratitude. Often, staff members who are not formally trained in school district and governmental policies and procedures unknowingly participate in giving gifts of public funds because of a moral or justifiable obligation. For example, a coach may be grateful to a number of individuals who have helped with the sports program, or to individuals who are consid- ered high-value stakeholders, well-known contributors, longtime friends of the program, contributed countless hours of assistance to the sport, or may not be able to afford attending an event. The coach may offer them free event tickets or distribute unsold tickets or other items. Without a district policy that has been adopted by the board and approved by the district’s legal counsel specifically approving the expenditure of district funds for noble, virtuous, or moral considerations such as those described above, expenditures of this type may be considered a gift of public funds. Fiscal crisis & ManageMent assistance teaM 11 FINDINGS Findings Internal Control Deficiencies The weakness or absence of fundamental internal control elements has created an environment with considerable risk for fraud, misappropriation of funds and misuse of district assets at the district. FCMAT identified significant weaknesses in multiple areas of internal control because of ineffective or complete lack of formalized procedures. Among these weaknesses were improper segregation of duties, improper application and/or enforcement of board policy, weak manage- ment and oversight of business activities, management override of limited control activities that were established, lack of oversight of internal control by the board and failure to detect unauthorized transactions, potential failure to record transactions and potential collusion among administrative staff. During FCMAT’s review, the team identified several circumstances that included all three factors of the fraud triangle. The opportunity for fraud varies throughout the district depending on the duties assigned to an employee but includes the administrative and executive staff. Pressure existed for the two former administrators to improve the district’s fiscal position and its adminis- tration, both of which suffered considerably over the decade preceding their employment. These perceived improvements to both the district’s fiscal condition and administrative leadership were used to rationalize the numerous revisions to their contracts that resulted in significant personal financial benefit to each administrator. Executive staff used the board’s lack of fiscal knowledge and placed people in positions for which they were not fully qualified, or pressured them, so that executive staff could use the district’s resources for their personal benefit. While the district lacks formally established operational procedures for most disciplines, staff responsible for procurement and accounts payable activities report they attempt to follow prac- tices consistent with industry standard. However, FCMAT’s review of documentation supporting recorded expenditure transactions demonstrated a lack of consistency in applying the procedures described by staff. Details of FCMAT’s findings are outlined in the procurement and accounts payable transaction testing section of this report. Reports obtained during interviews and observations made through the review of transaction documentation support assertions that the administration may have used their position and influence in making business transactions in ways that appear to deliberately misuse or misapply district resources for personal benefit. FCMAT found that the former superintendent and the former deputy superintendent commonly bypassed all controls and reduced the span of authority and control in key positions. They also circumvented procedures relating to payroll, purchasing, transaction processing and contract management by human resources staff, as well as board policy and/or industry best practices. This was evidenced by: • Extensive use of a personal credit card by the former deputy superintendent for numerous district expenditures, most of which should have been processed using the district’s purchase order authorization and vendor payment process. Reimbursement requests related to these credit card charges were not supported by approved purchase orders or other advanced authorization documentation. Additionally, the former deputy superintendent personally benefited as the credit card account accrued points up to five San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 12 FINDINGS times the value of district expenditures that could be exchanged for items and services that provide a personal benefit, including travel expenditures and gift cards. • Both the former superintendent and the former deputy superintendent routinely bypassed the purchasing and accounts payable processes by using the clearing account, the petty cash account, and the revolving cash account to make purchases and reimbursements to themselves without proper documentation. • Because the purchase order process was routinely bypassed by using a personal credit card for expenditures and/or using the clearing, petty cash, or revolving account, the ability to determine budget availability before making the expenditure was negated. The coding of an expenditure and determination of board approved budget availability frequently took place after purchases were made. Employment Contracts, Payroll Irregularities and Absence Tracking Management has the unique ability to perpetrate fraud due to its ability to directly influence the decisions of board members and/or manipulate accounting transactions and records. Fraud may be concealed by withholding or misrepresenting information in response to inquiries (board members, staff, COE, FCMAT) or by falsifying documents (contracts and addendums). Fraud may also be perpetrated through collusion among management, employees and/or third parties. Over the period of employment the contracts of both the former superintendent and the former deputy were amended multiple times; the terms of each similarly benefited each party. Those amendment dates were as follows: Former Superintendent Former Deputy Superintendent Initial Contract June 9, 2015 August 13, 2015 First Amendment September 24, 2015 September 24, 2015 Second Amendment March 11, 2016 March 11, 2016 Third Amendment (mistitled as First Amendment) December 14, 2016 December 14, 2016 Addendum No. 2 Separation September 1, 2017 September 11, 2017 During interviews, board members provided conflicting reports relative to the content of contracts, addendums and the explanations and content of changes of each prior to board approval. Several board members questioned the content of contract addendums presented for approval and those presented for signature subsequent to deliberation and approval by the board, stating that the language in the addendum(s) presented for signature subsequent to the board meeting differed from what was presented and explained to the board at meetings. Furthermore, board members gave inconsistent reports as to how the content was described for consideration and who was present and explained the content of each addendum to the board for consider- ation: legal counsel, the former deputy superintendent or both. FCMAT was provided with one addendum by a board member that contained conflicting language with the final executed addendum, suggesting that the final version was different from the version provided to the board. Management has the ability to direct employee actions or solicit their help in perpetrating fraud. This may take the form of directing employees to perform tasks or process transactions in ways that are inconsistent with industry standard or best practice. In an environment of weak internal Fiscal crisis & ManageMent assistance teaM 13 FINDINGS control, management has the ability to override existing controls, providing opportunity to commit and/or conceal fraud. Interviews with district and county staff revealed that the former superintendent and the former deputy superintendent exploited their position to influence the actions of employees, including those relative to human resources, procurement, payroll and accounts payable transactions, some of which resulted in their own personal benefit. The separation of duties between human resources and payroll is essential to internal control over position management and payroll. The human resources department is responsible for the development of board authorized positions including duties and responsibilities, salary schedule placement or rate of pay, minimum qualifications and experience and ensuring qualified candi- dates are employed in those positions. This role is most commonly separated from the business services department where payroll transactions are processed. The former deputy superintendent was responsible for overseeing the activities of both human resources and payroll, providing a greater opportunity for management override over control activities associated with personnel matters and payroll. FCMAT found several areas in contract and addendum language for the former superintendent and former deputy superintendent positions to be inconsistent with industry standard language. For example, language addressing continuing health care coverage or gap coverage, often referred to as Other Post-Employment Benefits (OPEB), was added to contracts through addendum and required the district to set sufficient funds aside in a trust account each year to fund the future obligation. Subsequent contract addendums modified this language to disburse the funds for the annual set-aside directly to the former superintendent and former deputy superintendent at their request. Another example included contract amendments revising traditional language for employer paid term-life insurance coverage to extend an option to forgo district paid term life insurance and instead direct the amount allocated for the monthly term life insurance premiums into an employer paid deferred compensation account on their behalf; in the application of the language the value contributed to the deferred compensation far exceeded the value of the premiums and the term-life insurance coverage was never terminated. Both of these items will be discussed in length later in the report. The contract amendments were primarily associated with changes relative to compensation and fringe benefits, and language was reworded in ways that maximized personal benefit and provided for the most immediate access to cash contrary to language or practices used for all other employees. In three circumstances where original contract language called for payments to be made directly to a vendor on behalf of the administrator, administrators initiated contract revisions to obtain cash payment personally. In two of the three cases, the benefit value was also increased. Revisions to contract language and/or directions given to employees to process duplicate payments manipulated the standard methods for processing transactions in ways that produced the most favorable net cash payment to the former superintendent and former deputy superin- tendent, without regard for the appropriateness and in conflict with the administrators’ fiduciary duty to protect the assets of the district. Each administrator directly influenced the development and communication of their contract and addendum language to board members, giving the appearance of collusion. The revisions to contract language in subsequent addendums benefited both administrators in the same manner. Both administrators contributed to interpreting the application of the language for processing payments made directly to them or to vendors on their behalf. The effectiveness of internal controls was reduced and the risk for fraud increased as these two administrators exerted their influence over routine processes, overriding internal control activities by directing employees to San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 14 FINDINGS process transactions in ways inconsistent with industry standard and best practices, including processing transactions through the payroll process, bypassing board authorization for specific transactions including vacation payout, and use of position power to influence the actions of board members and staff. FCMAT conducted an analysis of the payments processed through payroll to the former superin- tendent and of the language in board approved contracts and amendments. FCMAT found that base salary monthly compensation payments and monthly expense allowance payments for use of personal vehicle, cell phone and laptop aligned with the terms of those agreements. FCMAT’s analysis of the payments processed through payroll to the deputy superintendent for base salary as compared to the board approved contract and amendments identified incon- sistencies. The first amendment to the contract made appropriate corrections relative to the designation of this position as classified management and PERS eligibility. A second amendment to the contract dated March 11, 2016 modified the position title from chief operating officer to deputy superintendent and referred to changes to the salary schedule presented in Exhibit A; however, there was no language detailing what changes were made to the exhibit and the district was unable to provide a revised Exhibit A . No evidence supports the addition of two new steps to the salary schedule, expanding it from a three- to five-step schedule, nor is there evidence of board authorization of such increases. FCMAT did not identify any board authorized changes to the Exhibit A salary schedule in any of the contract amendments for the former deputy superintendent. Based on identifiable board approved documentation, the table below shows what should have been paid during fiscal years 2016-17 and 2017-18 without the two additional steps. Fiscal Year 2016-17 Period Salary Paid Step 4 Board Authorized Step 3 JUL M01 $17,378.59 $16,710.18 AUG M02 $17,378.59 $16,710.18 SEPT M03 $17,378.59 $16,710.18 OCT M04 $17,378.59 $16,710.18 NOV M05 $17,378.59 $16,710.18 DEC M06 $17,378.59 $16,710.18 JAN M07 $17,378.59 $16,710.18 FEB M08 $17,378.59 $16,710.18 MAR M09 $17,378.59 $16,710.18 APR M10 $17,378.59 $16,710.18 MAY M11 $17,378.59 $16,710.18 JUNE M12 $17,378.59 $16,710.18 Total FY 16-17 Earnings $208,543.08 $200,522.16 Excess Compensation - $8,020.92 Fiscal crisis & ManageMent assistance teaM 15 FINDINGS Fiscal Year 2017-18 Period Salary Paid Step 5 Board Authorized Step 3 JUL M01 $18,615.94 $17,211.49 AUG M02 $18,615.94 $17,211.49 SEPT M03 $18,615.94 $17,211.49 OCT M04 $18,615.94 $17,211.49 NOV M05 $2,538.54 $2,383.13 Total FY 17-18 Earnings $77,002.30 $71,229.09 Excess Compensation - $5,773.21 Based on FCMAT’s analysis, the former deputy superintendent appears to have been overpaid $8,020.92 in fiscal year 2016-17 and $5,773.21 in fiscal year 2017-18. Additionally, the board authorized an off-schedule salary increase of 2% at its September 14, 2017 meeting that was paid in September on an off-cycle payroll. This payment was based on the higher unsubstantiated salary resulting in an additional overpayment of $337.06 that is not included in the annualized monthly amounts summarized above. The administration initiated duplicate payments and/or revisions to contract language after trans- actions were attempted or processed through appropriate payment methods for the transaction type when less desirable net payments resulted due to income tax and retirement contribution withholdings. Expense Allowance The former superintendent’s original contract included a clause that provided for an expense allowance of $600 per-month. The allowance was to be attributed to the use of the superinten- dent’s personal automobile, cell phone, computer and internet services for business purposes. FCMAT did not identify any questionable matters relative to the processing of this allowance. Relocation Stipend The former superintendent’s contract language stated that the superintendent was to receive a relocation stipend of $10,000 to assist him with finding a new residence. The stipend was origi- nally appropriately processed through the payroll system in July 2015, generating income tax and retirement withholding and a net check of less than $10,000. On September 10, 2015, less than one month after the hiring of the deputy superintendent, a commercial warrant was processed duplicating the payment to the former superintendent; this warrant was subsequently canceled when the county office questioned the method of processing. The deputy superintendent then directed the payroll technician to process a second $10,000 payment through the September 30, 2015 payroll after adjusting the allowance for dependents from 4 to 99, resulting in lower tax withholding and a greater net cash payment. The duplication of payment was intentional and resulted in overpayment of compensation to the former superintendent that was not immediately repaid. The district reclaimed the full amount of the excess compensation over a 15-month period beginning in January 2016. This was processed as a voluntary payroll deduction of $600 per month, the same monthly amount due to the super- intendent as a monthly expense allowance, and a final payment in March 2017 of $1,600. San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 16 FINDINGS Moving Expense In addition to the relocation stipend noted above, the original contract for the former super- intendent provided for the payment of moving costs up to $7,500, to be paid by the district directly to the moving company with the lowest of three bids. A first amendment to the former superintendent’s contract was prepared, presented to the board at its September 24, 2015 meeting and executed by the board president on that same date. The first contract amendment revised the contract language for moving costs to permit a reimbursement of actual expenditures, up to $3,500, paid directly to the former superintendent upon submission of pertinent backup documentation and/or receipts. Review of payments made to the former superintendent revealed one payment of $306.96 was processed using the commercial warrant system on July 10, 2015. This payment was supported by receipts; however, payment was made prior to board authoriza- tion of the contract amendment providing for reimbursement. A second payment of $2,662.90 was processed as a (nontaxable) “housing allowance” through the payroll system on October 2, 2015; the district could provide no supporting documentation for this payment. Continuing Coverage-Gap Coverage Insurance No language relative to gap/ongoing health insurance benefits was included in the superinten- dent’s and deputy superintendent’s original contracts. Language in section 11B of the original contracts simply states that they both shall be offered the same health insurance benefits offered by the district to its management employees. On March 11, 2016 amendments were made to both the former superintendent’s and the former deputy superintendent’s contracts. Each amend- ment added provisions for continuing coverage/gap coverage for health insurance. The language in each contract amendment was the same and provided for the accrual of two years continuing health benefit coverage for every full year of service up to a maximum accrual of 10 years. The sole purpose of the coverage was to provide continuing health insurance for the period, if any, between retirement or other qualifying event and eligibility for Medi-Cal and/ or Medicare for a period of no more than 10 years. Language of this nature is not uncommon and is most commonly referred to as Other Post Employment Benefits (OPEB). Standard provi- sions similar to OPEB were also included in the new language added through the addendums, including provisions requiring the district to accrue the sufficient funds in a trust account to satisfy the future obligation to provide benefits. Additional language states that upon notifica- tion from the superintendent/deputy superintendent the district shall provide the continuing coverage. Lastly, language was included stating that balances in the account set aside to fund the obligation revert to the district once the superintendent/deputy superintendent become eligible for Medicare and the district would no longer be responsible for coverage. At the direction of the former administrators, staff attempted to disburse the funds set aside for the OPEB liability directly to each of the two former administrators. The county office denied final processing of the payments as they did not coincide with the contract language. Subsequent to that failed attempt additional contract amendments were drafted. During the board’s review of the new contract amendments, questions were raised as to why the amendments were necessary. The former superintendent stated that the county office’s business service department felt the contract language was ambiguous. He then quickly shifted focus of the discussion to point out that none of the other 41 districts in the county was having its contracts reviewed; no additional clarity regarding the purpose and effect of revised contract language was provided. Ultimately, the ongoing/gap insurance language was subsequently revised through addendums for both the former superintendent and former deputy superintendent on December 14, 2016. The language in the amendment was revised to say that the district shall disburse the funds directly to the Fiscal crisis & ManageMent assistance teaM 17 FINDINGS superintendent and deputy superintendent rather than set it aside in a trust account to fund the future benefit costs. As a result, both administrators were paid an amount equal to two years of coverage in 2016-17 and 2017-18; $18,000 and $19,000 to each in each respective year. Many times, a district will offer OPEB as part of the total compensation to attract and retain services of qualified employees. However, these benefits are not typically received until after their employment with the district ends and the employee meets the conditions of eligibility, which often requires the employee to serve in the district for a defined duration of time and to be of retirement age. These benefits often terminate once the retiree is eligible for Medicare. Although the language clearly states that the district shall disburse the payment directly to the said employee, subsection B (iii) still states that the district shall provide the continuing or gap coverage to both employees, up to the accrued amount of time. FCMAT confirmed that the district continues to provide health insurance benefits to the former superintendent. To provide ongoing benefits after paying out the financial value of those benefits directly to the employee is a duplication of compensation. Life Insurance / Deferred Compensation Contribution Election The contracts of both former administrators contained provisions for group term life insurance during their employment with the district. The benefit amounts included in the former superin- tendent’s and former deputy superintendent’s contracts were $100,000 and $75,000 respectively. The benefit amount in both contracts exceed the statutory maximum of $50,000, making a portion of the premiums paid on their behalf taxable compensation. In the contract amendments for the former superintendent and the former deputy superinten- dent executed on March 11, 2016, the benefit amount for the term life insurance was increased to $125,000 and $100,000 respectively. The contract amendments were approved by the board at its March 10, 2016 board meeting. Prior to approval only the increases to each administrator’s term life insurance benefit amount were discussed. No discussion was held about the additional language added regarding the administrators’ option to “… elect to forgo term life insurance and instead deposit monthly into a deferred compensation account the amount District allocated for the monthly term life insurance premium.” [emphasis added] During FCMAT interviews it was noted that most parties involved in activities that required interpretation of this section of the contract were confused; some understood it to mean that the deferred compensation contributions should match the monthly district paid premium amount of $8.20 and $6.15, while others interpreted it to mean that the full benefit value of the term life insurance policy was to be contributed into the accounts. FCMAT listened to audio files of the March 10, 2016 and December 14, 2016 board meetings. At no time does the board discuss the alternative options that are in the contract. The language in the amendments clearly states that the amount to be deposited is “the amount District allocated for the monthly term life insurance premium.” While payments are input by district staff into the commercial warrant system, deferred compensation plans and guidance are administered through the county office’s Fringe Benefit Consortium, which operates at the county office. As district staff worked to implement the elections of the former superintendent and former deputy superintendent, county office represen- tatives questioned the interpretation of the language and sought confirmation with the district’s board president. Through this process the county office was informed that through conversation between the former interim county superintendent and the San Ysidro School District board San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 18 FINDINGS president it was determined that it was the board’s intent to pay out the benefit value of each life insurance into a 401(a) deferred compensation plan. With this understanding in mind, and due to contribution limits established by Internal Revenue Code, it was determined that it would take three years to contribute the full benefit value for the former superintendent’s contribution and two years for the former deputy superintendent’s contribution. FCMAT identified two payments processed by the district for contributions into the accounts established for the former administrators as follows: Superintendent Deputy Superintendent Date Vendor Total Contribution Contribution 4-18-16 FBC Nationwide $53,000 $53,000 $106,000 1-20-17 FBC Empower Retirement $54,000 $47,000 $101,000 $107,000 $100,000 $207,000 The contract language clearly defines the amount to be set aside as the monthly premium payments made on behalf of said employees, not the benefit value of the policy. The monthly premiums for the term life insurance coverage for the former superintendent and the former deputy superintendent were $8.20 and $6.15, or total annual premiums of $98.40 and $73.80, respectively. Furthermore, the language clearly states the employee forgoes term life insurance if they elect to have the monthly premiums deposited into a deferred compensation account. Analysis of each former administrator’s pay stubs and review of documentation supporting the payment of the premiums to the third-party administrator reveals that the district life insurance premiums continued until separation from employment. To provide ongoing life insurance benefits to each administrator after each exercised the option to defer the monthly premiums into a deferred compensation account is a clear misappropriation of funds. Furthermore, the benefit that resulted as a result of the applied interpretation resulted in a direct financial benefit to each administrator that would not have otherwise occurred because life insurance only provides a benefit to the beneficiary of each employee upon their death if employed by the district at the time of death. At that point the insurance company, not the district, covers the cost of the benefit value. Both the former superintendent and the former deputy superintendent failed their fiduciary duty to ensure that proper administrative steps were taken to remove them from the policy from which they received alternative compensation based on their elections. As mentioned earlier in the report, the two former administrators continually revised or added language to their contracts in ways that maximized personal benefit and provided for the most immediate access to cash. Per Government Code 53262, all contracts of employment with a superintendent and deputy superintendent of a local agency shall be ratified in an open session of the board body and shall be reflected in the board minutes. Additionally, copies of any contract of employment shall be available to the public upon request. During the March 10, 2016 board meeting, after meeting in closed session, the board reported out that it conducted annual evaluations for both the former administrators. The audio file of the meeting revealed that the two former administrators worked with the interim superintendent who preceded the former superintendent and left the district to lead the county office and with legal counsel to negotiate revisions to their current contracts. The board president reported out that full disclosure of the newly negotiated contracts for the former superintendent and former deputy superintendent was not available and that both contracts were contingent upon review by Fiscal crisis & ManageMent assistance teaM 19 FINDINGS legal counsel and full execution. It was further stated that once the contracts were fully executed, they would be available as a public document. During open session of this same meeting, two contracts of the former administrators were listed on the agenda for board approval. When the agenda item was motioned and discussion ensued, the only dialogue regarding the contract amendments was that the contract durations were extended and that there was a title change from chief operating officer to deputy superintendent for the one administrator. At no time in open session did the board discuss the major revisions advancing both former administrators to step 3 of their current salary schedules, the addition of gap coverage providing each with two years of future health insurance for each year worked, or the option to forgo term life insurance and opt for a district funded deferred compensation account. Additionally, while the board stated that the employment agreements were not available for public review, the execution date of both contracts is March 11, 2016, the very next day after the meeting. Board members, management and employees with oversight and administrative responsibility have a fiduciary duty to ensure that activities are conducted in compliance with all applicable board policies, laws, regulations, and standards of conduct. Because internal controls include policies, procedures, and checks and balances, if those entrusted to set the oversight and ethical tone fail, the entire organization may be compromised. Vacation Payout The former superintendent’s contract provides for the accrual of two days of vacation per month of service. The contract does not limit the allowable vacation accrual balance. The contract stipu- lates that in the event employment is terminated the superintendent shall be entitled to compen- sation for unused vacation days at the rate of pay effective during the school year in which the vacation credit was earned. No other terms are provided for the payout of accrued vacation. It is uncommon for a certificated superintendent to accrue vacation. It is more consistent with industry standard for this position to serve under a positive work year calendar based on total service days to be rendered, most commonly 221-225 days depending on the number of workdays in the calendar year and the number of paid holidays recognized by the district. For example, in a fiscal year that has 260 total possible workdays where the district recognizes 15 paid holidays and 24 compensated nonwork days, the total workdays is 221. The former superinten- dent’s contract is silent relative to holidays and simply states that the former superintendent is to render service that corresponds to 248 paid service days. Considering the accrual of 24 paid vacation days this would be 224 paid service days, which is consistent with industry standard. The former superintendent provided 26 months of service during his employment in the district from July 1, 2015 through September 1, 2017, accruing 52 days of vacation during this time frame. The following table reflects the accrual of vacation benefits, the use of those benefits as documented in either the district’s absence tracking system (AESOP) or through email commu- nications to the board for authorization/notification, and the reduction of benefits corresponding with payments processed through the district payroll system. San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 20 FINDINGS Earned Vacation Vacation Days Ending Pay Date Balance Notes (Days) Paid Out Used Balance Jul-15 0 2 2 Aug-15 2 2 4 Sep-15 4 2 6 Oct-15 6 2 8 Nov-15 8 2 10 Dec-15 10 2 12 Jan-16 12 2 12 2 (a) Feb-16 2 2 4 Mar-16 4 2 2 4 (b) Apr-16 4 2 14 2 -10 (c) (d) May-16 -10 2 -8 Jun-16 -8 2 -6 Jul-16 -6 2 -4 Aug-16 -4 2 48 -50 (e) Sep-16 -50 2 5 -53 (f) Oct-16 -53 2 -51 Nov-16 -51 2 2 -51 (g) Dec-16 -51 2 -49 Jan-17 -49 2 -47 (h) Feb-17 -47 2 -45 Mar-17 -45 2 -43 Apr-17 -43 2 -41 May-17 -41 2 -39 Jun-17 -39 2 24 -61 Jul-17 -61 2 -59 Aug-17 -59 2 -57 Sep-17 -57 0 -57 Total in Days 52 98 11 -57 Notes Description (a) 12 days paid for vacation payout (b) 2 days of vacation taken from March 30 - April 4 (per email) - 2 days in March (c) 14 days paid for vacation payout (d) 2 days of vacation taken from March 30 - April 4 (per email) 2 days in April (e) 48 days (384 hours) paid for vacation payout - (f) 5 days of vacation requested Sept 12-16 and approved by board 2 days of vacation; email states he will be out of town Nov. 11-15; the 11th is Veterans Day counted as a holiday; 12-13 (g) are the weekend; only accounted for 2 days of vacation (h) 24 days (192 hours) paid for vacation payout Fiscal crisis & ManageMent assistance teaM 21 FINDINGS Transactions recorded in the district’s PeopleSoft payroll system from July 1, 2015 through September 1, 2017 indicate the former superintendent was paid for vacation as follows: Date Paid # Units Paid Rate Paid Amount Paid 1/29/2016 12 days $ 813.69 per day $9,764.25 4/29/2016 14 days $ 880.09 per day $12,321.26 8/31/2016 384 hours (48 days) $ 120.27 per hour $46,183.68 6/30/2017 192 hours (24 days) $ 120.27 per hour $23,091.84 Total Paid $91,361.03 With the exception of separation from employment, no provision in the former superintendent’s contract or any of its amendments provides for the payment of accrued vacation balances or the advance of unearned vacation. FCMAT also found no evidence that the board authorized the deviation from the contract. The former superintendent was compensated for 57 days over his contracted allowance; further- more, the rates paid did not follow the terms of the contract, which specifies that in the event of termination unused accrued vacation is to be paid at the salary rate effective during the school year in which the vacation credit was earned. FCMAT requested but the district was unable to provide documentation supporting the amounts paid to the former superintendent for vacation pay. Had no payments been made prior to separation from employment, the maximum vacation payout the former superintendent would have been entitled to would have been $35,534.31, calculated as follows: Days Earned Days Taken Balance Daily Rate Total 2015-16 24 -4 20 $815.78 $16,315.60 2016-17 24 -7 17 $899.31 $15,288.27 2017-18 4 0 4 $982.61 $3,930.44 Total $35,534.31 Actual Payments ($91,361.03) Amount of Overpayment ($55,826.72) The daily rate of pay is calculated by taking the annual salary, dividing it by 2,080 hours and multiplying it by an eight-hour day. In 2017-18 the daily rate includes the 2% off-schedule increase. On August 17, 2016 the former superintendent requested in a letter on district letterhead to no addressee, to “issue the total of 48 vacation days (fringe benefit under contract agreement) for the payroll to be issued on August 31, 2016 in accordance with Ed Code 45197 et al. for covering fiscal years 2015-16 and 2016-17.” Only four months earlier, on April 29, 2016, the former superintendent received a payment for 14 days of accrued vacation and three months prior to that on January 29, 2016 he received payment for 12 days accrued vacation. While the August 17 letter concludes by stating that the superintendent understood that the payment of accrued vacation for 2016-17 had not yet been earned and that he would be responsible for repayment of any excess should separation of employment occur under any circumstance, it is reasonable to conclude that he was already aware he had been extended payments beyond his potential earnings. At the time of the August 17, 2016 directive for the payment amounting to double the San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 22 FINDINGS maximum vacation accrual benefit, his balance of accrued vacation was already fully exhausted. This was followed by taking five vacation days less than two weeks later for which he had no available balance. The former deputy superintendent’s contract provides for the accrual of two days of vacation per month of service. The contract also states that any unused vacation days will roll over to the next year but shall be capped at 40 vacation days maximum in any one year. The contract states that in the event employment is terminated, the former deputy superintendent shall be entitled to compensation for unused vacation days at the rate of pay effective during the school year in which the vacation credit was earned. No other terms are provided for the payout of accrued vacation. While it would not be questionable for a district to implement a positive work year calendar based on total service days to be rendered for a classified administrator, it is more common and consistent with industry standard for classified administrators to accrue vacation. The work year of a classified administrator is dependent on the number of workdays in the calendar year and the number of paid holidays recognized by the district. For example, in a fiscal year that has 260 total possible workdays where the district recognizes 15 paid holidays, the work year, excluding the utilization of accrued vacation, is 245 days. It is consistent with industry standard to observe an accrual of vacation equivalent to four weeks (20 days) for classified administrators. If all 20 days are utilized the work year is 225 days. The former deputy superintendent’s contract provides for 24 days of vacation accrual each year; if fully exercised the work year of his position would be 221 days. The former deputy superintendent provided 26 months of service during his employment in the district from September 1, 2015 through November 3, 2017, accruing 52 days of vacation during this time frame. The following table reflects the accrual of vacation benefits, the use of those benefits as documented in the district’s absence tracking system, and the reduction of bene- fits corresponding with payments processed through the district payroll system. (See next page.) Fiscal crisis & ManageMent assistance teaM 23 FINDINGS Pay Date Balance Earned (Days) Vacation Payout Used Per Email Ending Balance Notes Sep-15 0 2 2 Oct-15 2 2 4 Nov-15 4 2 6 Dec-15 6 2 8 Jan-16 8 2 10 0 (a) Feb-16 0 2 2 Mar-16 2 2 4 Apr-16 4 2 30 -24 (b) May-16 -24 2 -22 Jun-16 -22 2 -20 Jul-16 -20 2 -18 Aug-16 -18 2 48 -64 (c) Sep-16 -64 2 -62 Oct-16 -62 2 -60 Nov-16 -60 2 -58 Dec-16 -58 2 -56 Jan-17 -56 2 24 -78 (d) Feb-17 -78 2 -76 Mar-17 -76 2 -74 Apr-17 -74 2 -72 May-17 -72 2 -70 Jun-17 -70 2 -68 Jul-17 -68 2 -66 Aug-17 -66 2 -64 Sep-17 -64 2 -62 Oct-17 -62 2 -60 Nov-17 -60 0 -60 Total in Days 52 112 0 -60 Notes Description (a) 10 days (80 hrs) paid for vacation payout (Rate paid $84.08 per hour) - brings him to a zero balance (b) 30 days (240 hrs) paid for vacation payout (Rate paid 90.95 per hour) - has a negative 24 days (192 hrs) (c) 48 days (384 hrs) paid for vacation payout - (Rate paid $100.26 per hour) – has a negative 64 days (512 hrs) (d) 24 days (192 hrs) paid for vacation payout - (Rate paid $100.26 per hour)- has a negative 78 days (624 hrs) San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 24 FINDINGS Transactions recorded in the district’s PeopleSoft payroll system from Sept 1, 2015 through November 1, 2017 indicate that the former deputy superintendent was paid for vacation as follows: Date Paid # Units Paid Rate Paid Amount Paid 1/29/2016 80 hours (10 days) $84.08 per hour $6,726.40 4/29/2016 240 hours (30 days) $90.95 per hour $21,828.00 8/31/2016 384 hours (48 days) $100.26 per hour $38,499.84 6/30/2017 192 hours (24 days) $100.26 per hour $19,249.92 Total Paid $86,304.16 As with the former superintendent’s contract, with the exception of separation from employ- ment, no provision in the former deputy superintendent’s contract or any of its amendments provides for the payment of accrued vacation balances or the advance of unearned vacation. The cap imposed on vacation accrual balances is intended to prevent an uncontrolled liability to the district for outstanding benefits and serves to ensure administrative employees take at least some vacation each year. FCMAT found no evidence that the board authorized the deviation from the contract. The former deputy superintendent was compensated for 60 days over his contracted allowance; similar to the superintendent, the rates paid did not follow the terms of the contract, which specifies that in the event of termination unused accrued vacation is to be paid at the salary rate effective during the school year in which the vacation credit was earned. FCMAT requested but the district was unable to provide documentation supporting the amounts paid to the former superintendent for vacation. A comparison of the accrual balances and amounts paid through the district’s payroll system is shown in the table below. Had no payments been made prior to separation from employment, the maximum vacation payout the former deputy superintendent would have been entitled to would have been $38,923.52, calculated as follows: Days Earned Days Taken Balance Daily Rate Total 2015-16 12 0 12 $674.40 $8,092.80 2015-16 (Step 3) 8 0 8 $730.00 $5,840.00 2016-17 24 0 24 $771.20 $18,508.80 2017-18 8 0 8 $810.24 $6,481.92 Total $38,923.52 Actual Payments $86,304.16 Amount of Overpayment $47,380.64 The daily rate of pay is calculated by taking the annual salary, dividing it by 2,080 hours and multiplying it by an eight-hour day. In 2017-18 the daily rate includes the 2% off schedule increase. Separation Pay The former superintendent resigned from his position on September 1, 2017 at a special board meeting. The report out from closed session documented in the minutes from that meeting state that the board accepted the resignation of the superintendent effective immediately by a vote of 5 Fiscal crisis & ManageMent assistance teaM 25 FINDINGS to 0. The minutes further state, “… in exchange for 18 months of compensation and release of all claims.” The separation agreement was executed by all parties on the same date. The former superintendent’s contract provides for a payout in the event of termination by the board based on “just cause” or without cause. The contract states that the board can terminate the agreement with six months prior written notice without cause and that the superintendent would be compensated for the remaining term of the agreement, with a maximum cash settle- ment equal to the monthly salary multiplied by the number of remaining months of the contract term with a maximum of 18 months; this language was consistent with Government Code in effect at the time of execution. The former superintendent’s contract also contains language stating that termination of the agree- ment can be made by mutual agreement at any time or by the superintendent with a 90 calendar day advance written notice. There is no language relative to payment of compensation under either of these terms in the contract. On September 2, 2015, Assembly Bill 215 was passed amending previous Government Code 53260, reducing the maximum allowable payout of compensation of a superintendent’s contracted salary from amounts equal to 18 months of the superintendent’s salary to 12 months. This amendment applies to contracts executed on or after January 1, 2016. The former superin- tendent entered into his original contract on June 8, 2015. However, through the execution of the second amendment to the former superintendent’s contract on March 11, 2016, the term of the contract was revised from three years to five years. It may be argued that broadening the term of the agreement effectively institutes a new agreement. As stated above, any amendments to contracts executed on or after January 1, 2016 are subject to the maximum cash settlement amount equal to the monthly salary of the employee multiplied by 12. Since the gap coverage language was added in the second amendment it could be further argued that it is subject to the limits on health and welfare benefits contained in Government Code 53261, which refers back to the time limitations in Section 53260; therefore, the maximum period is 12 and not 18 months. While it is allowable to add coverage to a contract, it seems reasonable that it would be held to the new Section 53261, which would then only allow the district to pay a maximum of 12 months for health and welfare benefits. Anything beyond the maximum of 12 months could be considered a gift of public funds. FCMAT reviewed the termination agreement and supporting documentation supporting the payments processed for termination pay. Termination payout was initially processed using the district’s off-schedule payroll cycle for the period ending September 7, 2017. Off-cycle payrolls produce a paper warrant and do not deposit automatically into the employee’s bank account. Payroll warrant #13116485 processed for this off-cycle payroll included 18 months termination pay of $405,450.04 and a payment for vacation of $24,737.28; total net pay of $339,159.46 after taxes and withholding. This warrant was not distributed to the former superintendent and was voided on September 29, 2017. A commercial warrant was processed on September 8, 2017 for the 18 months salary but excluded the amount for vacation; commercial warrant #14-304673 was issued for a net pay of $314,806.05. When the commercial warrant is processed the net payment is recorded in a clearing account that is cleared when the transaction is processed through the payroll system. The district appropriately processed the separation payment through the September 30, 2017 end of month payroll cycle to account for the gross salary and all appropriate payroll taxes and other withholding, and recognized the commercial warrant payment in the payroll ledgers. This payment included additional wages of $5,009.38 for the 2% off schedule salary increase afforded San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 26 FINDINGS to all employees for the 2017-18 fiscal year that had not yet been processed. This resulted in a net payroll deposit into the former superintendent’s account of $3,816.51; the revolving clearing fund was credited to clear the net pay advanced through the commercial warrant process. Procurement and Accounts Payable Transaction Testing Besides the concerns raised with regard to the former employees’ payroll compensation, addi- tional concerns were raised regarding any further payments made to them outside of payroll, such as commercial warrants and revolving and petty cash reimbursements. To accomplish this testing, FCMAT was provided the district’s general ledger transactions for fiscal years 2015-16, 2016-17, and for 2017-18 from July 1, 2017 through December 31, 2017. From this FCMAT was able to identify all warrants paid to both former employees and began to preview those transactions. Previewing transactions means that all were reviewed in total and individually to determine if any should be examined further by reviewing the detailed supporting documentation. Transactions Tests FCMAT selected transactions for testing to evaluate the internal control structure including established operational procedures and to verify the validity and appropriateness of expenditures. FCMAT requested and obtained from the district reports for the 2015-16, 2016-17 and 2017-18 (7-1-17 to 1-5-18) fiscal years. FCMAT selected transactions from the warrant payment export files for each year. Transactions for both the former superintendent and the former deputy super- intendent were selected for audit. FCMAT requested from the district all supporting documentation for each transaction selected and reviewed documentation to determine that: 1. Authorization was obtained and documented in advance of the expenditure consistent with industry best standards. 2. Expenditure was appropriate, in accordance with district policy and allowable by law. 3. Documentation included evidence that goods or services were received, and an obligation was incurred. 4. Transactions were processed timely, accurately and properly recorded. FCMAT selected and reviewed supporting documentation for transactions attributable to 78 disbursement checks drawn by the district from July 1, 2015 through January 5, 2018, many of which contained multiple transactions. The value of all transactions reviewed was $579,207.71. The table below summarizes the exceptions noted during review of documentation provided for transactions selected for testing. Fiscal crisis & ManageMent assistance teaM 27 FINDINGS Number of Occurrences 2017-18 Exceptions Noted: 2015- 2016- % Total through Total 16 17 Review 1/5/18 1 No purchase order 16 33 14 63 80.8% 2 PO and/or authorization dated after receipt of goods or services 0 0 0 0 0.0% Service contract not signed by both parties (district signatory and 3 consultant) 1 5 2 8 10.3% 4 No detailed receipt or invoice attached 7 13 7 27 34.6% 5 No receiving document or payment authorization noted 10 11 5 26 33.3% 6 No advance authorization for travel or reimbursement 6 8 3 17 21.8% 7 Travel costs exceeded district policy limits 11 8 1 20 25.6% 8 Incorrect account coding for expenditure type 1 5 1 7 9.0% 9 No board approval provided 0 5 1 6 7.7% 10 No backup documentation provided 0 2 0 2 2.6% 11 No exceptions noted 1 0 0 1 1.3% Totals 53 90 34 177 FCMAT found exceptions in all but one of the transactions reviewed (99%); most transactions lacked advance authorization and/or should have been processed through the purchase order system to ensure board approved resources were available in the budget for expenditure. Deficiencies noted by FCMAT during the review of transactions include the following: • Transaction documentation reviewed for 70 out of 78 disbursements lacked a purchase order or other documented authorization, including travel requests. • Transaction documentation for 29 disbursements lacked detailed receipt(s), vendor invoices and/or other appropriate supporting documentation. • Transactions in 20 disbursements exceeded district travel policy limits. • Transactions included in 7 disbursements were not coded correctly based on the Standardized Account Code Structure. FCMAT also noted through the review of documentation transactions that included the following: • Flight and hotel charges of $3,336.77 for the former superintendent were prepaid on the former deputy superintendent’s personal American Express card and reimbursed to him on 8-10-17. Staff reported during interviews that the former superintendent did not attend the activity for which these funds were expended. Cancellation of flights and room reservations may have resulted in credits back to the personal credit card of the former deputy superintendent. FCMAT did not find evidence of reimbursement to the district. • April and May 2018 hotel costs for an employee were prepaid on the former deputy superintendent’s American Express credit card and reimbursed on 9-1-17. Should these trips be canceled, the credit would go straight to the credit card and not the district. • On 9-7-17, the former deputy superintendent was reimbursed $9,803.32 for damage to his car while on campus. The payment was based on an auto repair estimate and a car San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 28 FINDINGS rental summary receipt. No detailed receipts were provided. If he had auto insurance coverage, which is likely, the district only should have reimbursed him the deductible amount if the district was liable for the damage. The documentation supporting the payment was inconsistent with the all of the requirements outlined in Government Code Section 910 and only included a letter requesting a settlement payment, a release of all claims, estimates for repairs and the cost of a rental car to the account technician from the former superintendent authorizing a payment to be issued to the former deputy superintendent in the amount of $8,880.24 for the repair of the vehicle and $923.08 for the car rental. The board approved the expenditure under the consent agenda as part of its approval of warrants at its October 12, 2017 meeting. • The 12-14-16 travel costs reimbursed to the former superintendent were overpaid by $20. Additionally, two receipts were missing and a tip of 51% was paid on a cab fare. The district’s board policy does not contain guidance pertaining to limitations on gratuity; however, 51% is inconsistent with industry standard. • Reimbursement of $2,859.45 on 4-15-16 to the former superintendent for a board member to attend the NSBA conference is over the board approved maximum of $2,000 approved by the board on 8-13-15. • The former superintendent was reimbursed $67.92 on 2-24-16 for a lunch meeting he had with a board member. The lunch receipt shows one person had a filet/lobster combo for $28. The board approved lunch allowance is $12 per person. Furthermore, the IRS limits the employee reimbursement for meals when the amount paid exceeds the allowable board approved rate. • The former superintendent was reimbursed $24 on 10-7-15 for parking at Spreckles Theatre. FCMAT verified with Spreckles that the company name on the parking receipt is the company they use and that the rate for overnight parking is $24. No documentation was present supporting the business purpose of the transaction. Revolving Fund Per BP 3314.2(a)(b), the board has established by resolution a revolving cash fund for use in paying for goods, services and other charges, including supplemental payments required to correct any payroll errors. The established amount for the revolving fund is $1,000. Revolving fund accounts provide resources to pay for goods and services if an urgent need arises that cannot reasonably wait to move through the traditional purchasing procedures. Revolving funds should not be utilized for convenience or to bypass the traditional purchasing or advance approval process. The district frequently processes routine expenditures through this revolving fund. During FCMAT’s review the following was noted: • The former deputy superintendent was reimbursed $605.04 (check 1120 dated 8-28-15) for a conference meeting at the Westgate Hotel. Charges included room rental, three flip charts, lunch, service charges and tax. There were four attendees. Lunch cost including a $39.20 tip totaled $176.82 ($44.20 per person). The board approved lunch allowance is $12. There is no agenda, no list of attendees, and the only approval was the former superintendent’s signature on the Invoice and Receipt for Payment from Revolving Cash Fund form. Fiscal crisis & ManageMent assistance teaM 29 FINDINGS • The former deputy superintendent was reimbursed $75 for three employees to attend a 12-3-15 San Diego Housing Federation roundtable. The purchase order was dated 12-14-15 and the agenda item went to the board on 12-10-15. The former deputy superintendent was not an attendee. • The former deputy superintendent was reimbursed $56.87 for meeting with CA Financial Services. No attendee names were noted, and no agenda presented. Food receipt appears to be for three to four people. • The former deputy superintendent was reimbursed $257.50 for an EPA ID verification fee. The questionnaire was completed 11-30-15 and it was signed and dated 12-17-15 to be submitted with payment. The former deputy superintendent paid the fee with his American Express card on 12-23-15. This was not an emergency payment. • The former deputy superintendent was reimbursed $326.34 to renew a Survey Monkey membership and a two-year domain name registration. Membership went to the board on 1-21-16. The invoice was paid on 3-5-16 and purchase order dated 3-7-16. This was not an emergency payment. • The former superintendent was prepaid $100 for meals at the December 3-5, 2015 CSBA conference. There was no approval signature on the revolving cash fund request form or the reimbursement request form. There appears to be no reconciliation of the total cost of the conference, matching prepaid amounts to actual costs paid. • The former superintendent was reimbursed $56.58 for a Promise Neighborhood Initiative lunch on 11-16-15. There is no approval signature on the revolving cash fund request form or the reimbursement request form, and the receipts are partially illegible. There is no attendee list and no agenda. The receipt shows three guests, which means the expense was over the approved $12 per for lunch. • The former superintendent was advanced funds of $775.82 for a three-night stay for the Superintendent’s Symposium on 1-27-16 to 1-29-16. The conference request was not signed/approved. There appears to be no reconciliation of actual costs to the prepaid costs. • The former superintendent was reimbursed $314.10 for an additional night’s stay for the Superintendent Symposium (1-29-16). The travel request form was not dated. Backup documentation did not include the required detailed receipt and did not have the name or address of the hotel on it. • The revolving fund Board Policy 3314.2 states, “The Superintendent or designee shall provide regular reports to the Board regarding the use of revolving funds … .” FCMAT did not find evidence that the board was receiving this information. Clearing and Petty Cash Accounts FCMAT reviewed the clearing and petty cash account documentation for any payments processed to the former administrators in fiscal years 2015-16 and 2016-17, and transactions from July 1, 2017 through December 31, 2017. The purpose of the clearing account is to tempo- rarily hold deposited monies until they have cleared the bank account they were drawn from. Once the checks have cleared they are transferred to the county treasury. The petty cash fund is a relatively small amount of cash kept on hand for making immediate payments for small expenses. San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 30 FINDINGS Approved detailed receipts are required to reimburse this fund from the district’s account. The board approved maximum for petty cash is $200. In August 2017, a payment in the amount of $4,049.44 was issued as a reimbursement to the former deputy superintendent to reimburse hm for two $100 gift cards, two $500 gift cards, a tablet, an iPad, and four televisions used as giveaways for a start of year breakfast. The giving of gifts has a personal as opposed to public character, and gift cards are not an allowable expense with public funds. Additionally, gift cards are considered cash equivalent. Without the verifica- tion of purchases and documentation that all funds were used appropriately, the purchases are considered an inappropriate gift or a misappropriation of public funds. FCMAT did review the account for proper procedures and application and found numerous instances of insufficient internal controls such as untimely deposits; neither account had been reconciled on a routine and regular basis; and these accounts were used to circumvent the stan- dard purchasing and accounts payable process. Fiscal crisis & ManageMent assistance teaM 31 SUMMARY OF FINDINGS Summary of Findings Strong leadership, a strong ethical tone at the top, board members and management who fully under- stand their fiduciary duties, and sound internal controls are essential to an organization’s success in maintaining the public’s trust. If the board and management are not perceived as following the rules as set forth by their board policies and administrative regulations and are not regarded as looking out for the best interests of the district, the ethical tone or culture of the organization breaks down and fails. Without a strong internal control system and proper checks and balances, further breakdowns in following the rules may occur, the risk for fraud increases, and the ability to detect and deter fraud is undermined. More importantly, with the breakdown of internal controls, it is more difficult to protect employees from the appearance of fraud and being accused of fraud. FCMAT identified numerous conditions that subject the district to increased risk for fraud. The district has experienced a great deal of instability in its leadership at the superintendent level and other administrative levels for the past decade. Revisions to both the former superintendent’s and deputy superintendent’s contracts were virtually identical and were proposed simultaneously, suggesting that the two administrators worked together to modify their contracts in ways that were mutually beneficial. The number of amendments made to each of the former administrators’ employment contracts during their short employment history further supports this. When atten- tion was drawn to the details behind the proposed contract language amendments, the former administrators redirected the focus to the strained relationship between the district and the county office and the perception that the county office was biased in its scrutiny of these contracts. In the table below are the total amounts that each former employee was paid over and above what they were entitled to. In addition to the amounts stated below, warrants and/or reimburse- ments made to the former employees as stated above in the report should be reviewed further. If a determination is made that they should not have received such payment the amounts should be considered owed to the district. This table does not consider the questionable payments of separation pay that contradict the terms of the former superintendent’s employment contract. Former Superintendent Term life insurance payout $107,000.00 Minus the district monthly premiums -$213.20 Vacation overpayment $55,826.72 Potential Amount Overpaid $162,613.52 Former Deputy Superintendent Salary overpayment $14,131.19 Term life insurance payout $100,000.00 Minus the district monthly premiums -$159.90 Vacation overpayment $47,380.64 Potential Amount Overpaid $161,351.95 San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 32 CONCLUSION Conclusion Potential for Fraud Based on the findings in this report, there is sufficient evidence to demonstrate that fraud, misappropriation of funds, or other illegal fiscal activities may have occurred in the specific areas reviewed. Deficiencies and exceptions noted during FCMAT’s review of the financial records and the district’s internal control environment increase the probability of fraud, mismanagement and/ or misappropriation. These findings should be of great concern to the San Ysidro School District and the San Diego County Office of Education and require immediate intervention to limit the risk of fraud, mismanagement and/or misappropriation of assets, or other illegal fiscal activities in the future. Judgments Regarding Guilt or Innocence The existence of fraud is solely the purview of the courts and juries, and FCMAT will not make statements that could be construed as a conclusion that fraud has occurred. Fraud is a broad legal concept, and auditors do not make legal determinations of whether fraud has occurred. The primary factor that distinguishes fraud from error is whether the underlying action is intentional or unintentional. Education Code Section 42638(b) states that action by the county superinten- dent shall include the following: If the county superintendent determines that there is sufficient evidence that fraud or misappropriation of funds may have occurred, the county superintendent shall notify the governing board of the school district, the state controller, the superintendent of public instruction, and the local district attorney. Per Education Code Section 1241.5(b), the county superintendent shall report the findings and recommendations to the board of the district at a regularly scheduled board meeting within 45 days of completing the audit. The board of the district shall notify the county superintendent within 15 days after receipt of the report of its proposed actions regarding the county superinten- dent’s recommendations. Recommendation The county superintendent should: 1. Notify the governing board of the San Ysidro School District, the state controller, the superintendent of public instruction and the local district attorney that sufficient evidence exists to indicate that fraud or misappropri- ation of district funds and/or assets or other illegal fiscal activities may have occurred. Fiscal crisis & ManageMent assistance teaM 3333 APPENDDIRXAFT Appendix Appendix A - Study Agreement San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 3344 DRAAFPTPENDIX Fiscal crisis & ManageMent assistance teaM 3355 APPENDDIRXAFT San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 3366 DRAAFPTPENDIX Fiscal crisis & ManageMent assistance teaM 3377 APPENDDIRXAFT San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt 3388 DRAAFPTPENDIX Fiscal crisis & ManageMent assistance teaM 3399 APPENDDIRXAFT San Diego County offiCe of eDuCation re: San ySiDro SChool DiStriCt