San Bernardino County Superintendent of Schools Office – Hesperia Unified School District Report

San Bernardino County Superintendent of Schools Office Extraordinary Audit of the Hesperia Unified School District March 25, 2013 Joel D. Montero Chief Executive Officer Fiscal crisis & ManageMent assistance teaM March 25, 2013 Gary Thomas, Ed.D., Superintendent of Schools San Bernardino County Superintendent of Schools Office 601 North E Street San Bernardino, CA 92415-0020 Dear Superintendent Thomas: In September 2012, the San Bernardino County Superintendent of Schools Office and the Fiscal Crisis and Management Assistance Team (FCMAT) entered into an agreement to provide an Assembly Bill 139 extraordinary audit of the Hesperia Unified School District. Specifically, the agree- ment stated that FCMAT would perform the following: 1. The San Bernardino County Superintendent of Schools Office has requested FCMAT to provide for the assignment of professionals to conduct an AB 139 Extraordinary Audit. Pursuant to Education Code Section 1241.5 (b), the Superintendent of the County Office has reason to believe that fraud, misap- propriation of funds or other illegal practices may have occurred and shall conduct an audit. The COE is requesting FCMAT to review the Associated Student Body funds on behalf of the Hesperia Unified School District. In addition to the authority granted under 1241.5 (c) and 47604.3, the county superintendent may conduct an investigation of the district and or charter schools based upon written complaints by parents or other information that justifies the review. 2. The primary focus of this review is to provide the COE and the Hesperia Unified School District with reasonable assurances based on the testing performed that adequate management controls are in place regarding the district’s reporting and monitoring of financial transactions and that fraud, misappropriation of funds or other illegal activities have not occurred. Management controls include the processes for planning, organizing, directing, and controlling program operations, including systems for measuring, reporting, and monitoring performance. The receipt of revenues and expenditure of ASB funds is generally a high risk audit area in which potential fraud issues such as fictitious employees or vendors, or misap- propriation of assets including cash may be detected. Specific audit objectives will include evaluating the policies, procedures, internal controls and transactions performed by the district related to the following: FCMAT Joel D. Montero, Chief Executive Officer . . 1300 17th Street - CITY CENTRE, Bakersfield, CA 93 . 301-4533 Telephone 661-6 . 36-4611 Fax 661-63 . 6-4647 422 Petaluma Blvd North, Suite. C, Petaluma, CA 94952 Telephone: 707-775-2850 Fax: 707-775-2854 www.fcmat.org Administrative Agent: Christine L. Frazier - Office of Kern County Superintendent of Schools FCMAT will review the revenues and expenditures related to the receipt of funds, transfer and\or disbursement of funds made by the district’s Associated Student Body account for the current and two prior fiscal years and determine if fraud, misappropriation of funds or other illegal activities have occurred at the Hesperia Unified School District. The initial assessment is not only to determine if fraud occurred but to differentiate between inadvertent violations versus those that may have been carried out with deliberate criminal intent. FCMAT will sample test data from the current and two prior fiscal years and include a review of the revenues and expenditures in the Associated Student Body accounts to determine if fraud, misappropriation of funds or other illegal activities have occurred. Testing associated with this review will be based upon sample selection and will not include the testing of the complete list of all transactions and records for this period. Sample testing and review results are intended to provide reasonable, but not absolute assurance as to the accuracy of the district’s transactions and financial activity. 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 Bernardino County Superintendent of Schools Office and the Hesperia Unified School District and extends thanks to all the staff for their assistance during fieldwork. Sincerely, Joel D. Montero Chief Executive Officer i TABLE OF CONTENTS Table of contents About FCMAT .........................................................................................iii Introduction ............................................................................................1 Study Team.......................................................................................................2 Executive Summary ........................................................................3 Findings and Recommendations .....................................................5 Occupational Fraud .......................................................................................5 Financial Management.................................................................................9 Conclusion ......................................................................................................31 Appendices ............................................................................................33 San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt ii TABLE OF CONTENTS 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 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 management assistance services are used not just to help avert fiscal crisis, but to promote sound financial practices and efficient operations. FCMAT’s data management services are used to help local educational agencies (LEAs) meet state reporting responsibilities, improve data quality, and share information. 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 local education agency 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. Studies by Fiscal Year 90 80 70 60 50 40 30 20 10 0 92/93 93/94 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 San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt seidutS fo rebmuN FCMAT also develops and provides numerous publications, software tools, workshops and professional development opportunities to help local educational agencies operate more effec- tively and fulfill their fiscal oversight and data management responsibilities. The California School Information Services (CSIS) arm of FCMAT assists the California Department of Education with the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS) and also maintains DataGate, the FCMAT/CSIS software LEAs use for CSIS services. FCMAT was created by Assembly Bill 1200 in 1992 to assist LEAs to meet and sustain their financial obligations. Assembly Bill 107 in 1997 charged FCMAT with responsi- bility for CSIS and its statewide data management work. Assembly Bill 1115 in 1999 codified CSIS’ mission. AB 1200 is also a statewide plan for county office of education and school districts to work together locally to improve fiscal procedures and accountability standards. Assembly Bill 2756 (2004) provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. In January 2006, SB 430 (charter schools) and AB 1366 (community colleges) became law and expanded FCMAT’s services to those types of LEAs. iv ABOUT FCMAT Since 1992, FCMAT has been engaged to perform nearly 850 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 Joel D. Montero, 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 In September 2012 the Fiscal Crisis and Management Assistance Team (FCMAT) received a request from the San Bernardino County Superintendent of Schools Office for an Assembly Bill (AB) 139 extraordinary audit of the Hesperia Unified School District, Oak Hills High School Associated Student Body (ASB). The district notified the county office that several instances of ongoing irregularities existed with the ASB funds at Oak Hills. During the initial inquiry, the county office learned that ASB club accounts had insufficient cash to make vendor payments; the cash portion of deposits lagged several days; and the new bookkeeper could not locate original records or supporting documentation. Other discrepancies included payments for purchases prior to student council approval, multiple club accounts with negative account balances, and unauthorized purchases and sales of non-nutritional drinks. Concerned that allegations of inappropriate and excessive spending by the ASB advisor may have violated various education code sections and California Code of Regulations (CCR) related to fraud and/or misappropriation of assets, the county office requested the AB 139 Extraordinary Audit to determine whether sufficient evidence of fraudulent activity exists to report the matter to the local district attorney’s office for further investigation. AB 139 Extraordinary Audit Education Code Section 1241.5(b) permits a county superintendent of schools to review or audit the expenditures and internal controls of any school district 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. On completion of the investigation, if evidence exists that fraud or misappro- priation of funds may have occurred Education Code Section 42638 (b) states that 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 basis of this review is to determine if sufficient documentation exists to further investigate the findings, or if there is evidence of criminal activity that should be reported to the local district attorney’s office for further investigation by law enforcement. Audit Fieldwork Investigating allegations of fraud requires a number of steps that include interviews with potential witnesses and gathering evidence from internal and external sources. FCMAT team members visited the district on separate occasions in September and December 2012 to interview staff and obtain and review documents. Additional documentation for missing bank and credit card records was obtained as late as January 2013. FCMAT reviewed, analyzed and tested business records including cash receipts, cash disbursements, bank reconciliations, general ledger activity, bank statements, credit card statements, financial reports, board policy and administrative regulations, ASB meeting minutes, and internal documents secured from various departments and from independent sources. The team also interviewed district office and school site staff to obtain information related to general business practices and events that transpired during the current and preceding four fiscal years to obtain information concerning any alleged mismanagement, fraud or abuse. This report is the result of FCMAT’s investigation. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 2 INTRODUCTION Study Team The study team was composed of the following members: Deborah Deal, CFE Julie Auvil, CPA, CGMA FCMAT Fiscal Intervention Specialist FCMAT Fiscal Intervention Specialist Los Angeles, California Bakersfield, California Laura Haywood FCMAT Technical Writer Bakersfield, California Fiscal crisis & ManageMent assistance teaM 3 EXECUTIVE SUMMARY Executive Summary Scope and Procedures The San Bernardino County Superintendent of Schools Office requested this study under the provisions of Education Code Section 1241.5 to determine whether fraud, misappropriation of funds or other illegal practices may have occurred. Specific audit objectives included evaluation of all ASB club general ledger account transactions, bank deposits, disbursements, and credit card activity. Information was gathered regarding specific allegations and audit test procedures were performed to determine whether fraud may have occurred, evaluate any associated loss, and determine who may have been involved. Chronology of Events Hesperia Unified School District opened Oak Hills High School in fall 2009. For several months prior to opening the new school, faculty and support staff were tasked with setting up offices, computer labs, library services, cafeteria, maintenance and the bookkeeping system for ASB. The ASB advisor and bookkeeper hired at Oak Hills had many years of experience, having held these same positions in another district high school. In fall 2008, a bank account was established and the new ASB bookkeeping system (Blue Bear) was initialized with a chart of accounts for school clubs with startup money from another district school. The district’s business office had procedures in place for ASB reporting as a function of its over- sight responsibilities and internal control procedures. These procedures required each school to submit various records to the district office for review, including bank reconciliations and general ledger activity. Based on the findings of these reviews, additional supporting documentation could be requested. Business office staff made repeated attempts to obtain timely and complete records from the bookkeeper at Oak Hills. Communication to the school principal and ASB advisor failed to produce results. In fall 2010 the district commissioned the first of three independent reviews conducted by certificated public accountants. Several notable irregularities and discrepancies were identified in the independent auditor reports that caused the district to place the bookkeeper on administrative leave and subsequently reassign the ASB advisor. These included untimely deposits, depositing the cash portion of a deposit several weeks after the initial deposit, large write-offs to balance a deposit, and many other find- ings of this nature. Approximately one year after returning from administrative leave, the bookkeeper resigned. A new bookkeeper was hired and noticed several club accounts with negative balances and overall insufficient cash balances to pay vendor bills. The district then contacted the county office requesting an extraordinary audit by FCMAT. FCMAT interviewed staff members regarding policies and procedures including internal controls; roles and responsibilities; fundraising activities and cash handling practices; purchasing practices and expenditure authorization; the receipt and deposit of cash; and other possible irregularities. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 4 EXECUTIVE SUMMARY FCMAT performed the following audit procedures to test ASB transactions at Oaks Hills for the 2008-09 through 2011-12 fiscal years and activity through February 2013 of the current fiscal year: • Review of the detailed general ledger activity. • Review of bank statements and reconciliations. • Review of credit card statements. • Review of all revenue, expenditure transactions, journal entries and available supporting documentation recorded in the ASB checking account from October 2008 through October 2012. Transaction review focused on verification that appropriate supporting documentation and authorization were present. • Trace of transactions recorded in the ASB accounts from October 2008 through October 2012 to bank records and credit card statements including beginning and ending balances for fiscal years 2008-09, 2009-10, 2010-11 and 2011-12. • Second interview with ASB advisor regarding transactions where documentation could not be located by district staff. • Reviewed 2011-12 ASB adopted budget revenue and expenditure forms and compared to results from general ledger. • Tested a sample of 24 transactions for the 2009-10, 2010-11 and 2011-12 fiscal years. • Reviewed bank statements from October 2008 to October 2012 for unusual activity. • Reviewed credit card statements for cards issued directly to the former ASB advisor and traced activity to the ASB accounts and bank statements. • Reviewed the March 21, 2011 independent auditor’s report regarding Oak Hills High School ASB cash receipts, credit card and gift card testing. Fiscal crisis & ManageMent assistance teaM 5 OCCUPATIONAL FRAUD Findings and Recommendations Occupational Fraud Occupational fraud may have occurred at the district. This type of fraud can be described in an organization as when owners, executives, managers or employees use their position to deliber- ately misuse or misapply the employer’s resources or assets for personal benefit. There are three primary classifications of occupational fraud: • Asset misappropriation • Corruption • Fraudulent financial statements Asset misappropriation includes cash skimming, falsifying expense reports and/or forging company checks. Corruption involves an employee(s) influencing business transactions to obtain a personal benefit that violates that employee’s duty to the employer and/or the organization. Financial statement fraud is the intentional misstatement or omission of material information in financial reports. Occupational fraud is one of the most difficult types of fraud and abuse to detect; however, the most common method of detection comes from tips. Tips accounted for three times the number of any other fraud prevention method for this type of fraud scheme. Proper monitoring and effective oversight are also highly effective at preventing fraud. Internal Controls Internal controls are the principal mechanism for preventing and/or deterring fraud or illegal acts. Illegal acts, misappropriation of assets or other fraudulent activities can include an assort- ment of irregularities characterized by intentional deception and misrepresentation of material facts. Effective internal controls provide reasonable assurance that a district’s operations are effec- tive and efficient, that the financial information produced is reliable, and that the organization complies with all applicable laws and regulations. Weaknesses or the lack of many internal control elements have led to an environment where there is potential for fraud, misappropriation of assets and misuse of district assets in the Oak Hills ASB. FCMAT found significant material weaknesses in the district’s enforcement of governing board internal controls, operational policies and procedures related to the management and oversight of ASB activities. A system of internal controls consists of policies and procedures designed to provide the governing board and management with reasonable assurance that the organization achieves 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 controls include soft controls such as management tone, performance evaluations, training programs, and established policies, procedures and standards of conduct. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 6 OCCUPATIONAL FRAUD Internal controls provide the framework for an effective fraud prevention program. The five interrelated components of an effective internal control structure include (1) the control environ- ment, (2) fraud risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Control Environment Monitoring Fraud Risk Assessment Control Activities Information and Communication The internal control environment establishes the moral tone of the organization. This is commonly referred to as “the tone at the top.” It is an intangible element that consists of employees’ perceptions of the ethical conduct displayed by the governing board and executive management. A strong system of internal controls that consists of all five elements can provide reasonable but not absolute assurance that the organization will succeed in achieving its goals and objectives. While all five elements are interrelated, this report will focus on the pertinent control environ- ment and control activities. The control environment is the foundation necessary for all other components of internal control to be effective in preventing and/or deterring fraud or illegal acts. It provides discipline and control and includes factors such as integrity, ethical values and employee competence. Control activities are the direct result of the development of policies and procedures designed to prevent and identify misuse of the district’s assets, including the prevention of any employee from overriding system controls. Control activities include: 1. Performance reviews – the action of comparing actual data with expectations. In a district’s business office, this most often occurs by comparing budgeted amounts with actual expenditures, identifying variances and following up with budget transfers to prevent overspending. 2. Information processing – the approvals, authorizations, verifications and reconciliations necessary to ensure that transactions are valid, complete and accurate. 3. Physical controls – processes and procedures designed to ensure the safe- guarding and security of assets and records. Fiscal crisis & ManageMent assistance teaM 7 OCCUPATIONAL FRAUD 4. Segregation of duties – processes and procedures that ensure that no employee or group is in a position to commit and conceal errors or fraud in the normal course of duties. In general, this entails separating the custody of assets, authorizing or approving related transactions affecting those assets, recording or reporting related transactions, and executing the transaction activity. Adequate segregation 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. The deficiencies and exceptions noted during FCMAT’s review of the ASB financial records clearly demonstrate poor financial management and provide sufficient evidence to demonstrate that fraud, mismanagement and misappropriation may have occurred. The Business Cycle and Purchasing Control Criteria Fundamental control criteria are applicable for various district business cycles. These basic principles apply to payroll, accounts receivable, accounts payable, purchasing, warehousing and inventory. A control matrix for each area should include authorization, safeguarding, verification and recording. These objectives must integrate input, process and output controls to be highly effective in both fraud prevention and detection. Following is an example of a control matrix for accounts payable and purchasing: Control Matrix Objectives Authorization • Was the item properly authorized and approved? • Were the procedures followed? • Is the item what was approved? Recording • Did the recording of the transaction happen timely? • Does adequate support documentation include receipts, bills of lading and authorized approvals by designated managers or supervisors? Verification • Was the purchase from an approved vendor? • Are related party transactions prohibited? • Were all the policies and procedures followed with respect to purchasing guidelines and bid limits? • If a partial shipment was received, are the differences reviewed and reconciled? • Are proper management review processes in place? Safeguarding Assets • Are duties properly segregated? • Are controls in place to prevent unauthorized access? • Are levels of confidentiality defined and adhered to? San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 8 OCCUPATIONAL FRAUD Examples of improper internal controls include, but are not limited to: • Failure to adequately segregate the duties and responsibilities of authorization. • Failure to record transactions, resulting in lack of accountability and the possibility of theft. • Unauthorized transactions, resulting in skimming, embezzlement or larceny. • Lack of monitoring, implementing, or enforcing internal controls by the governing board and management. • Collusion among employees where little or no supervision exists. An inadequate system of control activities left the district vulnerable to the possibility of fraud/ theft. FCMAT found that although the district had board policies and administrative regulations in place and the business office was diligent in monitoring and conducted its oversight respon- sibilities timely, ultimately, the business office did not have authority to enforce district policy at the school site level. As a result, requests for information were ignored and substantial gaps in support documentation existed. This impeded the district in ensuring its assets were properly managed and safeguarded. Eventually, senior management requested an external review by certificated public accountants that found many examples of irregularities and serious concerns regarding the internal control environment at Oak Hills. Continued efforts by the district’s business office to hold school site staff accountable failed. Two additional reports eventually led to the disciplinary action for the bookkeeper and subsequently the ASB advisor. Several irregularities surfaced when a new bookkeeper was hired, indicating prior fiscal misman- agement and possible misappropriation of funds may have occurred. The combination of oversight without enforcement left the district severely handicapped in ensuring the assets of the district were properly managed and safeguarded. Fiscal crisis & ManageMent assistance teaM 9 FINANCIAL MANAGEMENT Financial Management Organized Associated Student Body The district conducts extracurricular student activities with an organized associated student body (ASB) at each high school that includes a designated certificated advisor, bookkeeper, student council, individual clubs and club advisors. Student council members learn to make decisions under the general guidance of the principal and/or certificated advisor. An organized ASB is formally established with a constitution and operates under existing laws and regulations identified in the education, penal and government codes. Organized ASBs have a student council and student club leaders that conduct formal meetings and vote on the budget, fundraising activities and payments. Students decide how ASB funds should be raised and spent within district established guidelines, and the school administration, bookkeeper and club advisor(s) assist and advise. As with all other district expenditures, advance approval must be obtained for any ASB expendi- ture through a proper purchasing structure that includes the signature of a student in the club, the club advisor, and the certificated ASB advisor. Regardless of the operational structure, the school site principal/site administrator is directly responsible for ASB financial activities and must ensure they conform to established district policies and procedures. The Oaks Hills ASB has an established student council. Each year students campaign for officer positions on the council and serve on the school leadership team. All grade levels are represented on the council. General Ledger The district’s high schools use a computerized system common to ASB accounting called Blue Bear. This accounting system is specially designed to accommodate individual transactions for multiple club and trust accounts at the school sites. Oak Hills completed construction and opened in the fall of 2009. For several months prior to opening the new school, faculty and support staff were tasked with setting up offices, computer labs, library services, cafeteria, mainte- nance and the bookkeeping system for ASB. The advisor and bookkeeper hired at Oak Hills transferred from another district high school with many years of experience in these same positions. A bank account was established in fall 2008, and the new Blue Bear bookkeeping system was initialized with a chart of accounts for school clubs and startup money of $4,020 from another district school, Sultana High School. Blue Bear software utilizes three types of account structures – trust, income/revenue and expense accounts. The software is very flexible and allows each user to construct their chart of accounts in whatever logical manner they prefer. The Oak Hills ASB accounts are organized as follows: • 1000 – 1999 Cash accounts • 2000 – 2999 Club accounts • 3000 – 3999 Liability • 4000 - 5999 Event accounts • 8000 – 8999 Web store • 9998 Temporary clearing account San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 10 FINANCIAL MANAGEMENT The 1000-3000 and 8000-9998 accounts were all established as trust accounts. Trust account balances carry over from one year to the next whereas expense and revenue accounts in the 4000 -5999 group close with each year’s activity and start a new year with a zero balance. FCMAT obtained detailed Blue Bear account analysis reports from October 2008 through October 2012 and found that the ASB club accounting structure was complex, challenging to follow, and inconsistent in the use and structure of the chart of accounts. For example, several original postings would be subsequently transferred to multiple accounts through a series of journal entries without explanation. Most event accounts in the 4000 and 5000 series were established as either revenue or expendi- ture accounts. At the end of each fiscal year, most of these accounts were closed and reconciled against each other and the balance was transferred into account 3000, Due to Student Body. However, FCMAT found that some event accounts were treated as trust accounts where balances were carried from year to year: • Athletic donations (4012) • Athletic-soda commissions (4015) • Dances-prom (4029) • Debts owed to ASB from clubs (5066) The first digit indicates the type of account, and all accounts in the series typically are handled similarly. For example, all 4000 accounts would be revenue or expenditure accounts and closed at the end of each year. The Oak Hills ASB accounts were not handled in this manner. Once the event accounts were closed individually from the prior year and collapsed into the Due to Student Body Account (3000) at the beginning of the next year (as represented by the high- lighting in the chart on the next page). The account balances were then closed and transferred into the ASB general account (4005). The total amounts closed from the Student Body Account (3000) into the ASB general account (4005) for the years ending June 30, 2009, June 30, 2010 and June 30, 2011 were ($98), ($33,146.19) and ($35,918.86), respectively. The small negative balance as of June 30, 2009 reflects that the school had not yet opened and the ASB had just been established. The large negative balances indicate that several thousand dollars were missing from fundraising deposits, haphazardly overspent or a combination of both. One of the basic principles of ASB accounting is that current students raise money for current events. Negative account balances should be avoided except for rare exceptions. Negative balances reflect that a particular club did not raise sufficient funds to cover expenditures posted against the account, or that money raised for activities was never deposited into the bank account. Offsetting account balances and moving negative balances from account to account indicates there may have been intent to make it difficult to trace, especially crossing fiscal years. The table below demonstrates starting and ending account balances for each year. Of particular concern are the large negative balances and the inconsistent accounting treatment for event accounts. Fiscal crisis & ManageMent assistance teaM 11 FINANCIAL MANAGEMENT Oak Hills High School ASB Opening and Closing Account Balances for 2009-10 and 2010-11 Fiscal Years HESPERIA UNIFIED SCHOOL DISTRICT OAK HILLS HIGH SCHOOL ASB Fund Balance Analysis 2009/10 2010/11 2011/12 Account Account Beginning Ending Beginning Ending Beginning Ending Number Name Balance Balance Balance Balance Balance Balance 3000 Due to Student Body $ (98.00) $ (98.00) $ (33,146.19) $ - $ (35,918.86) $ - 4000 ASB CARDS $ 4 50.00 $ 23,766.60 $ - $ 31,299.00 $ - $ 33,906.00 4003 Credit Card Processing-Web $ - $ - $ - $ - 4004 Credit Card Processing $ - $ (115.37) $ - $ 4,638.92 $ - $ (842.56) 4005 ASB GENERAL $ 9,218.68 $ ( 72,564.71) $ - $ (99,259.73) $ - $ 19,381.76 4008 ASB - DONATIONS $ 7,500.00 $ 10,259.96 $ - $ 3,802.95 $ - $ 4,532.00 4010 Athletics - General $ - $ (7,000.16) $ - $ (11,271.94) $ - $ ( 13,166.76) 4011 Athletics - CIF $ - $ (950.00) $ - $ (1,858.16) $ - $ - 4012 Athletics - Donations $ - $ 5,928.00 $ 5,928.00 $ 12,552.60 $ 12,552.60 $ 5,500.00 4013 Athletics-Records Banquet $ - $ (626.18) $ - $ - $ - $ - 4015 Athletics-Soda Commissions $ 404.42 $ 404.42 $ 1,112.04 $ 1,112.04 $ 2,119.31 4016 Athletics-Tournament/GBkbll $ - $ 501.41 $ - $ 285.75 $ - $ 501.89 4017 Athletics - Tournament/G Sccr $ - $ 844.41 $ - $ 2,733.56 $ - $ 445.89 4018 Athletics - Tournament/Vbll $ - $ 846.00 $ - $ 191.21 4019 Athletics - Tournament/Wrstlg $ - $ 464.75 $ - $ 600.00 $ - $ (658.27) 4020 Athletics - Tournament/B Soccer $ - $ (673.44) $ - $ 1,429.21 4022 Community Cards $ - $ 1,706.85 $ - $ (1,350.00) $ - $ - 4023 Community Cards-Fantastic Fund $ - $ (3,000.00) 4026 DANCES/End of Year $ - $ 218.57 $ - $ 103.89 $ - 4029 DANCES/Prom $ - $ (3,000.00) $ (3,000.00) $ (6,439.45) $ (6,439.45) $ (7,356.97) 4030 DANCES/Homecoming $ - $ (3,592.93) $ - $ 1,084.56 $ - $ 4,840.73 4031 DANCES-Winter Formal $ - $ 2,747.40 $ - $ 3,857.20 $ - $ 3,783.32 4032 EVENTS/Activities-Seniors $ - $ - $ - $ - 4034 EVENTS/Every 15 Minutes $ - $ (11,367.30) $ - $ 9,999.99 4036 EVENT/Grad Nite $ - $ 933.07 $ - $ 4,261.00 4038 EVENTS/Mr. Bulldog $ - $ (279.54) $ - $ 115.59 4040 EVENTS/Talent Show $ - $ 612.12 $ - $ 1,213.44 $ - $ (355.08) 4042 EVENTS/Talent Show All Dist. $ - $ 1,809.97 $ - $ (298.59) $ - $ - 4050 I.D. CARD $ - $ 460.00 $ - $ 465.00 $ - $ 455.00 4053 Interest from Checking $ - $ 341.73 $ - $ 351.34 $ - $ 174.87 4058 Parking Fees $ - $ 6.00 $ - $ - $ - $ - 4060 P.E. Clothes $ - $ 1,823.99 $ - $ 4,318.31 $ - $ 1,802.80 4200 Renaissance $ - $ (7,942.98) $ - $ (13,204.03) $ - $ ( 10,463.61) 4290 Soda Commissions $ - $ 1,866.90 $ - $ 3,216.87 $ - $ 695.22 4300 Spirit Winners $ - $ (200.00) $ - $ 20.00 $ - $ (198.04) 5001 ASB GENERAL $ - $ (143,049.03) 5002 A-BASEBALL $ - $ (3,242.00) $ - $ (3,491.55) $ - $ (1,857.42) 5003 A-BASKETBALL - BOYS $ - $ (2,136.60) $ - $ 71.81 $ - $ 615.92 5004 A-BASKETBALL - GIRLS $ - $ (1,023.66) $ - $ (173.12) $ - $ (587.67) 5005 A-CROSS COUNTRY $ - $ (561.51) $ - $ (1,049.83) $ - $ (1,377.21) 5006 A-FOOTBALL $ - $ 16,915.56 $ - $ 33,870.77 $ - $ 37,243.21 5007 A-GOLF $ - $ (1,428.23) $ - $ (1,365.00) $ - $ (685.00) 5008 A-SOCCER - BOYS $ - $ (4,571.06) $ - $ (2,295.06) $ - $ (5,805.10) 5009 A-SOCCER - GIRLS $ - $ (2,459.06) $ - $ (4,085.71) $ - $ (2,959.94) 5010 A-SOFTBALL $ - $ (3,206.52) $ - $ (2,257.23) $ - $ (1,948.00) 5011 A-TENNIS - BOYS $ - $ (176.55) $ - $ (218.85) $ - $ (310.21) 5012 A-TENNIS - GIRLS $ - $ (554.47) $ - $ (202.20) $ - $ (689.27) 5013 A-TRACK - BOYS & GIRLS $ - $ (1,936.75) $ - $ (1,759.45) $ - $ (780.53) 5014 A-VOLLEYBALL $ - $ (115.81) $ - $ 1,519.83 $ - $ 1,161.33 5015 A-WRESTLING $ - $ (4,164.32) $ - $ (3,267.87) $ - $ (486.58) 5016 A-WRESTLING CIF TOURN $ - $ (94.00) $ - $ - $ - $ (519.33) 5020 Athletics - General $ - $ ( 15,236.59) 5030 Band Tournament Fees $ - $ (1,805.00) $ - $ (2,395.00) $ - $ (2,090.00) 5036 Bulldog Café $ - $ (46.30) $ - $ - $ - $ - 5040 Clinics - Athletic $ - $ (815.36) $ - $ (432.75) $ - $ (260.00) 5042 Club Fair $ - $ (4,000.00) $ - $ (5,000.00) $ - $ (2,500.00) 5045 Conferences $ - $ (1,440.00) $ - $ (2,431.62) $ - $ (2,025.00) 5058 Competition - Cheerleading $ - $ (720.00) $ - $ (2,400.00) $ - $ - 5060 Competition - Drama $ - $ - $ - $ (1,292.00) $ - $ (744.00) 5066 Debts Owed to ASB from Clubs $ - $ (260.00) $ (260.00) $ (12,475.60) $ (12,475.60) $ ( 10,030.18) 5072 Graduation Expenses $ - $ 2,786.76 $ - $ ( 11,756.86) 5080 Parking Fees $ - $ 284.00 $ - $ 308.19 $ - $ 215.00 5085 Intramurals $ - $ 5.00 $ - $ - $ - $ - 5088 Junior Breakfast $ - $ (895.97) $ - $ - $ - $ - 5120 Powder Puff Football $ (1,001.44) $ - $ 535.74 $ - $ 565.00 5152 Senior Activities $ - $ (1,511.37) $ - $ 4,561.00 5162 STUDENT STORE $ 7 95.00 $ 31,703.53 $ - $ 40,409.52 $ - $ 14,929.97 8000 Web Store Clearing Bank $ - $ - $ - $ - 8010 Web Store Clear for Remittance $ - $ - $ - $ 1,921.35 8020 WebStore Fees $ - $ - $ - $ 12.03 9998 Temporary Clearing Account $ - $ - $ - $ - $ - $ - TOTAL $ 107,969.92 $ 111,093.12 $ 111,093.12 $ 129,612.08 $ 129,612.08 $ 28,570.00 San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 12 FINANCIAL MANAGEMENT Basic business practice is that each account title has only one account. FCMAT’s review showed that two ASB general accounts were established, accounts 4005 and 5001, beginning with the 2011-12 fiscal year. Only account 4005 was reported in the prior fiscal year. An analysis of these two accounts revealed that large transfers occurred as follows: 1. The first transfer between these two accounts, for $66,951.97, occurred on 12/20/11. This brought the 4005 account balance to zero and posted the overexpenditure into account 5001. 2. A second transfer of $69,257.27 occurred on 1/12/12, giving account 4001 a positive fund balance while incurring an additional overexpendi- ture in account 5001. Account 5001 thus had a total negative balance of $136,105.42 on 1/12/12. Despite FCMAT’s repeated requests for documentation of these transfers, no support documen- tation could be located. Interviews with ASB staff revealed that funds were raised by Oak Hills staff members, placed in a staff club account (2780) and used for staff events. ASBs are established to raise and spend money on behalf of students. Funds raised by adults should never be placed in an ASB account. ASB account 2106, established in 2009-10, was used to collect advanced placement (AP) testing fees and purchase test materials. AP testing is not a student fundraising activity. It is a function and responsibility of the curriculum department. The collection of revenues and the expenditures for this function should not be commingled with the ASB accounts. The ASB bookkeeper did not follow generally accepted accounting principles even though the bookkeeper holds a degree in accounting and had several years of experience with ASB accounting. Sample transactions showed many instances where expenditures such as bank and credit card fees and other adjusting entries were offsets to bank deposits. These fees and adjusting entries should be posted through journal entries not as an offset to the bank deposit. ASBs are required to adopt a budget each fiscal year. This budget serves as a guideline for antici- pated fundraising events to meet expenditure goals. FCMAT compared the adopted budget for 2011-12 with the actual activity. Instead of increasing the ASB fund balance by $15,845, the actual fund balance decreased by $86,702 for a total difference between the projected budget and the actual activity of $102,547. A review of 75 club accounts showed that approximately half ended the year with negative balances. Oak Hills High School ASB Budget vs. Actual Activity for the Year Ended June 30, 2012 Adopted Budget Actual Activity Revenues $868,300 $799,439 Expenditures $852,455 $886,141 Fund Balance (Increase/ Decrease) $15,845 ($86,702) Fiscal crisis & ManageMent assistance teaM 13 FINANCIAL MANAGEMENT Cash Deposits and Bank Reconciliations Cash is an essential component of ASB operations. However, the cash involved in ASB opera- tions creates many opportunities for fraud to occur. The most common finding in a district’s annual audit is the failure of the ASB to follow internal control procedures, especially in cash management and procurement. Bank statement reconciliations can be easily altered simply by showing an outstanding deposit and subsequently posting a journal entry to write off the missing funds, thereby clearing the outstanding deposit. Timely review of bank reconciliations by management and confirming deposits with cash count sheets can identify and deter this type of fraud. Sound internal control procedures should be established for the students holding the fundraiser and for the ASB bookkeeper processing the funds received. Regardless of the internal control procedures used, they are designed to protect the ASB’s assets (primarily cash) and to protect the students and staff who handle cash from allegations and unintentional errors. On three different occasions beginning on November 1, 2010, district administration commis- sioned focused reviews of the Oak Hills ASB by independent auditors after repeated efforts to receive timely ASB general ledger reports, bank reconciliations and support documentation from the ASB bookkeeper and ASB advisor were unsuccessful. The first report, dated November 1, 2010, was prepared by an independent audit firm. The stated objectives were to review the accounting practices and internal control structure to ensure that the Oak Hills ASB was operating effectively, and to make recommendations. A summary of the findings indicated that: • Bank reconciliations were not completed timely. Specifically, the October and November 2009 reconciliations were not completed until January 2010. On average, bank reconciliations were not completed for more than two months after the closing of the month. • Numerous exceptions were noted in cash disbursements, including the lack of proper authorization, inadequate support documentation and questionable expenditures. Examples included: • Five disbursements missing at least one signature and no indication of prior approval by the ASB student council • Forty-five disbursements made without supporting receipts of goods and/or services • Twenty-three disbursements made prior to student council approval • Twelve disbursements exceeding the “not to exceed” purchase order A second report dated March 21, 2011 by an independent audit firm, revealed several instances of bank deposit adjustments, negative club account balances, improper safeguarding of district assets, issuance of a large number of gift cards, lack of itemized receipts to support credit card purchases by the ASB advisor and unusual and suspicious expenditure activity. Lastly, an ASB management comments worksheet prepared by an independent audit firm on February 16, 2012, revealed numerous cash management irregularities based on a sample test of transactions, with weaknesses in internal controls and reportable conditions. Specific findings included: San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 14 FINANCIAL MANAGEMENT • Untimely bank deposits: one out of five tested. • Bank deposit slips cannot be reconciled to cash receipts: three out of five tested. • Proper approvals not obtained for cash disbursements. • Expenditure approvals not documented in the student council minutes: seven out of 25 tested. • Evidence of receipt of goods lacking: six out of 25 tested. • Expenditures lack appropriate supporting documentation: 11 out of 25 tested. • Expenses occurred prior to approval: two out of 25 tested. • Various club accounts with negative balances. • Insufficient segregation of duties: seven out of 25 tested. • Inadequate cash receipt documentation: two out of five tested transactions. • Deficiencies with Student Council meeting minutes. • Clubs or trust accounts not appropriate for ASB. The district’s assistant superintendent for business issued a letter dated August 9, 2012 stating that the ASB bookkeeper resigned in January 2012 and the ASB advisor was transferred to another high school based on the numerous deficiencies which could be the result of “a misap- propriation of ASB funds.” On closing the ASB books, the new bookkeeper discovered that approximately $130,000 was unaccounted for at year end This was the first time that the district officially recognized the possibility that a misappropriation of funds may have occurred. During FCMAT’s fieldwork, attempts were made to interview the former ASB bookkeeper regarding bookkeeping procedures and specific transactions where documentation was missing. Those requests went unanswered. The following deficiencies were noted during FCMAT’s review and test of transactions: • Unconventional chart of accounts to record ASB transactions and reconcile with bank records • Large reductions or write-downs of the cash portion of bank deposits • Disregard for district policies, procedures and protocols • Direct bank debits without supporting documentation • Questionable use of funds and reimbursements to the ASB advisor • Inconsistent use of a purchase order system for expenditures • Lack of student approval • Lack of supporting documentation for payment • Excess use of the ASB advisor’s personal credit cards • Gifts, including cash to staff and students • Expenditures exceeding revenue generated • Lack of consistent dual signatures on checks • Overstated budget projections of anticipated revenues and expenditures as well as overspending of expenditure accounts. Fiscal crisis & ManageMent assistance teaM 15 FINANCIAL MANAGEMENT Lack of controls over expenditure activities, most significantly cash controls and segregation of duties, presents an opportunity for theft. The lack of detailed accounting and proper supporting documentation associated with cash collected from fundraising activities made it impossible to ensure that all collections were ultimately deposited into the ASB bank account. Deficiencies in cash controls create an environment conducive to skimming. This type of fraud involves the removal of cash before it can be recorded in the accounting records, leaving no direct audit trail to the theft. FCMAT noted that internal control weaknesses related to cash controls were identified in all three reports commissioned by district management to study irregularities at Oak Hills ASB. Strong internal controls for cash collection are necessary to prevent mishandling of district funds and are designed to safeguard and protect employees from inappropriate charges of mishandling funds by defining their responsibilities in the cash handling process. “Cash” is defined as coin, currency, checks, money orders, and credit card transactions. Required procedures for cash collection points include the following: • Accounting for cash as is it received. • Adequate separation of duties and checks and balances, which includes cash collecting, depositing, reconciling and reporting. • Proper pre-numbered receipts given for all cash received. • Approval of any voided cash receipts by area supervisor. • Deposit of cash promptly at the county treasurer’s office or into the district’s authorized account. • Reconciliation of validated deposit forms to supporting documentation and to the account statement. • Approval by the business office of any changes in cash handling procedures. • Proper safeguarding of cash. Specific findings include instances where large cash shortages were deducted from bank deposits and deposits did not include the cash or currency portion for several days or weeks. Well- established internal controls without appropriate levels of enforcement leave the district vulner- able to misappropriation of assets, illegal activities and fraud. Funds received must be reconciled to the cash report or to the total of the temporary receipts at the end of the day or at the end of each shift. Cash must be reconciled separately from checks, credit cards, and money orders by comparing actual cash received to the cash total from the cash report or to the sum of the cash sales from the manual receipts. Bank Reconciliations The bank reconciliation process explains the difference between the bank balance shown in the district’s bank statement and the corresponding amount shown in the districts accounting records at a particular point in time. Differences may occur, for example, because a check or a list of checks issued by the district has not been presented to the bank, a banking transaction such as a credit received, or a charge made by the bank, has not yet been recorded in the financial records, or either the bank or the district has made an error. FCMAT reviewed the bank reconciliations for the month ended June 30 for fiscal years 2009, 2010 and 2011. This revealed that the general ledger balance was forced to agree with the bank San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 16 FINANCIAL MANAGEMENT statements for these months, when in fact the bank’s balance was greater than that of the general ledger. Inspection of those bank reconciliations revealed the following: • A fictitious “outstanding” deposit recorded on the June 2009 bank reconciliation of $632. FCMAT found no evidence that this deposit was recorded in the general ledger in either July or August bank statements. This was, however, the exact amount necessary to balance the ASB general ledger to the bank statement. • The inclusion of an outstanding check for a negative $750 in the June 2011 bank reconciliation. Tracing this check into the general ledger revealed that it was deducted when it was written on 5/26/11, added back on 6/1/11 and then deducted again on 10/31/11. The proper amount on the bank statement should have been a positive $750. Using a negative amount to record outstanding checks artificially decreased the total outstanding checks and again forced the bank reconciliation to balance. • Eight items totaling $3,247.18 and classified as “checks that didn’t go” were used as “outstanding adjustments” on the June 2011 bank reconciliation. These amounts were used similarly to outstanding deposits. Tracing these items into the general ledger showed that each of the eight items were credited and debited on the same date. This had a net zero effect on the general ledger balance but the items were entered on the bank reconciliation as outstanding, artificially increasing the general ledger balance per the bank reconciliation. FCMAT’s ASB bank reconciliation form is provided in Appendix A. The district should encourage ASB bookkeepers to utilize this form, and management should review the components monthly. Cash Deposits and Fundraising Activities Whenever students hold fundraising events or collect cash they should follow established internal control procedures. The ASB bookkeeper should also follow defined internal controls for distrib- uting cash boxes, tickets and receipt books before a fundraiser begins and after it is over to ensure that the monies collected agree with the tickets sold and all cash and checks are promptly depos- ited to the bank. Internal controls are designed to protect the ASB’s assets, primarily cash, and to protect the students, employees and staff who handle cash from accusations or unintentional errors. Hesperia Unified School District Board Policy 3452 states that the school principal is responsible for “the conduct of the student body financial activities, safeguarding of the student body funds, supervision of their expenditures in accordance with Board adopted policy and procedure.” In addition, the principal “shall assume responsibility for appointing a qualified certificated staff member to serve as an advisor for each secondary organization or club” and ensure that the ASB advisor and students understand they are not authorized to hold a fundraising event unless estab- lished cash control procedures are followed. The ASB advisor and club advisors “shall instruct students in procedures that have been adopted by the Board of Education” and ensure that the procedures are followed throughout the event. There are different cash control procedures for different types of events, but all include these basic principles: • Proper cash handling and physical chain of custody for all cash receipts. • No commingling of receipts from separate events. Fiscal crisis & ManageMent assistance teaM 17 FINANCIAL MANAGEMENT • Cash is counted in the presence of two people (dual cash counts). • Proceeds from event immediately delivered to the ASB bookkeeper or designated employee. • Multipart receipts used for event proceeds. • Immediate deposit of funds into the bank account (no longer than two to three days after receipt), and all deposits made prior to weekends or holidays. • Copies of the deposit slip and all supporting documentation of the fundraiser are retained. Fundraising proceeds deposited into the ASB bank account and recorded in the ASB general ledger totaled $75,218.81 over the 36 months reviewed. The following deficiencies were noted during FCMAT’s review of supporting documentation: • No revenue projections or budgets prepared for fundraising efforts. • No use of pre-numbered and pre-printed standard receipts documenting cash collections. • Infrequent dual cash count procedures documented on cash count sheets supporting deposits. • Poor segregation of duties and chain of custody related to cash handling. • Expenditures deducted from cash proceeds prior to deposit. • Funds for deposit to the district were deposited and pasted through the ASB bank account. District employees interviewed identified further inconsistencies in policies and procedure in addition to the deficiencies noted above. For example, substitute bookkeepers were trained in proper cash procedures, such as balancing to the penny and performing cash counts in the pres- ence of a second person, while the bookkeeper ignored proper procedures herself. Files on the district-issued computer were not provided to those who would occasionally assist or perform ASB bookkeeping duties in the former bookkeeper’s absence. District administrators reported job duties had not been performed properly, with deposits delayed for weeks or months, insufficient documentation for monthly financial reviews and a lack of cooperation by the former ASB book- keeper regarding district requests to resolve these issues. Other indicators of potential misappropriation of funds or other fraudulent activities include oddities in accounting records such as cash shortages and overages and missing support docu- mentation. Between July 1, 2008 and October 31, 2012, there were 42 instances of overages or shortages in deposits totaling $7,427.39 as shown in the table below. The table also denotes that two of these shortage amounts were subsequently deposited. This excludes six instances where counterfeit bills were tendered to the Oak Hills ASB and reversed by the bank. Of the 42 instances, 34 occurred during the tenure of the former ASB bookkeeper (who resigned January 23, 2012) and eight were not posted into the ASB’s general ledger. No instance of a deposit shortage has been reported by the bank since April 27, 2012. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 18 FINANCIAL MANAGEMENT Oak Hills High School Cash Vault Analysis July 1, 2008 through October 31, 2012 Date Reason Amount 2008/09 None 2009/10 9/3/2009 Deposit Short $(100.00) 9/24/2009 Deposit Short $(80.00) 9/29/2009 Deposit Short $(24.00) 10/27/2009 Deposit Short $(20.00) 12/18/2009 Counterfeit $(20.00) 2/11/2010 Deposit Short - Slip in Error $(1,000.00) 3/9/2010 Deposit Short - Slip in Error $(100.00) 4/8/2010 Deposit Short - Slip in Error $(200.00) 4/27/2010 Deposit Short - Slip in Error $(100.00) 5/6/2010 Deposit Over $101.00 5/27/2010 Deposit Over $90.00 5/27/2010 Deposit Short $(85.00) Subtotal $(1,538.00) 2010/11 8/12/2010 Deposit Short $(2,124.00) 8/17/2010 Counterfeit $(50.00) 8/26/2010 Deposit Over $15.00 9/14/2010 Counterfeit $(20.00) 9/28/2010 Deposit Short (deposited 9/30/10) $(1,525.00) 10/12/2010 Deposit Short $(72.00) 10/14/2010 Deposit Over $170.00 10/19/2010 Deposit Over $10.00 11/2/2010 Counterfeit $(100.00) 11/16/2010 Deposit Short $(8.00) 12/7/2010 Counterfeit $(10.00) 12/9/2010 Deposit Over $402.00 1/11/2011 Deposit Short (deposited 2/10/11) $(1,230.00) 2/4/2011 Deposit Short $(10.00) 2/8/2011 Deposit Over $20.00 3/3/2011 Deposit Over $23.00 3/10/2011 Deposit Over $20.00 4/12/2011 Deposit Over $611.00 4/12/2011 Deposit Over $60.00 5/3/2011 Deposit Over $389.00 Subtotal $(3,429.00) Fiscal crisis & ManageMent assistance teaM 19 FINANCIAL MANAGEMENT 2011-12 8/23/2011 Deposit Short $(183.19) 9/8/2011 Deposit Short $(60.70) 9/8/2011 Deposit Short $(200.00) 10/4/2011 Deposit Short $(20.00) 10/5/2011 Deposit Short $(20.00) 10/5/2011 Deposit Short $(100.00) 10/6/2011 Deposit Short $(10.00) 2/17/2012 Deposit Over $10.00 2/17/2012 Deposit Short $(100.00) Deposit Adjustment - Check Deposited 2/21/2012 Twice $(980.00) Deposit Adjustment - Check Deposited 2/23/2012 Twice $(162.50) 3/6/2012 Deposit Over $6.00 3/9/2012 Counterfeit $(100.00) Deposit Adjustment - Check Deposited 3/15/2012 Twice $(45.00) Deposit Adjustment - Check Deposited 3/29/2012 Twice $(68.00) 4/27/2012 Deposit Short $(427.00) Subtotal $(2,460.39) 2012-13 None through 10/31/12 TOTAL ALL YEARS $(7,427.39) Of the 34 deposit shortages, four of the largest ones occurred during the tenure of the prior ASB bookkeeper and were also the subject of the March 21, 2011 report by an independent auditor: • Two shortages, $1,000 on 2/11/10 and $2,124 on 8/12/10, were attributed to incorrect addition on the deposit slip. The deposit slip should be the controlling document used to record the amount into the general ledger. However, the amount posted into the general ledger by the prior ASB bookkeeper was not the amount reflecting the incorrect addition but the amount counted by the bank that included the shortage. • Two shortages, $1,525 on 9/28/10 and $1,230 on 1/11/11, involved deposits where the shortage was deposited on a subsequent date. The 9/28/10 shortage was deposited two days after the original deposit, but the 1/11/11 shortage was deposited 30 days after the original deposit. In both cases, the deposit slip amount was used to record the deposit and then the general ledger was corrected to report both the shortage and the subsequent deposit. The independent auditors expressed concern over the time lag on the 1/11/11 deposit and were unsure if the shortage was “misplaced or temporarily borrowed.” It is common with ASB events and purchases for students or adults to be responsible for payment to attend the event, or to purchase items that will be retained by the student. This is particularly common when funds have not been raised to support the event. When parents or other commu- nity members attend these events, ASB funds should not support adult participation. This is also true if students purchase an item that will be retained by the student, such as personalized San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 20 FINANCIAL MANAGEMENT clothing. Interviews with the former ASB advisor revealed events or purchases where students or others were paying for the event or purchase, yet the general ledger did not support those state- ments. Examples of this anomaly include: • The ASB held a 4.0 Dinner for those who had achieved a high grade point average on September 1, 2009. This event was held at a local Mexican food restaurant with the student meals to have been paid by a local business and guests paying $5 per person, according to the ASB advisor. The cost of the dinner was $1,050, yet the general ledger posted only $405 in revenues. This event cost the ASB $645 and should have paid for itself. • A breakfast was held for the 2009-10 junior students on April 21, 2010 to provide them with information about what to expect in their senior year. This event was held at a local buffet restaurant during STAR testing and each student was charged $7. According to the former ASB advisor, the event drew 400 participants, and credit card records reflect an expenditure of $3,247.97 for the event; therefore, the anticipated revenue should be $2,800. Review of the ASB general ledger listed seven deposits totaling $2,352 made from student collections, leaving the ASB $896 short of the total cost of the event. • On September 8, 2010, the ASB leadership students purchased black sweatpants as part of a “uniform” for them to use and wear. Each student was to pay or fund-raise for their own uniform. General ledger records show no payments received against the $706 charged to ASB funds. Because of the absence of supporting documentation, it is unclear whether this indicates poor business management or whether funds paid were diverted prior to deposit. Credit Cards FCMAT’s review of the ASB bank statements for the checking account held at Desert Community Bank revealed that credit card payments were primarily made as pre-authorized debits to a Capital One credit card account and, beginning March 14, 2010, to a Desert Community Bank (DCB) credit card. Both were the personal credit cards of the ASB advisor. District business office staff reported they were unaware of any credit cards beyond the one issued through the district’s CalCard program. However, monthly review of the Oak Hills ASB’s bank statements would have revealed the existence of these credit cards including the automatic debit payments posted on the bank statements. The report dated March 21, 2011 specifically discusses these credit cards and their concerns that the cards were issued in the name of the former ASB advisor and that limited information could be found on the activities paid through these credit cards. The last paragraph of the credit card section of the report states: “[i]n many instances the only documentation that was retained to substantiate credit card payments was a printout payment summary that only included an amount and did not reconcile to an itemized listing of corresponding expenses and receipts.” At the time of FCMAT’s fieldwork, the Oak Hills ASB office could not locate any records of either the transactions made using these accounts or the account statements on which payment had been made. Copies of the statements for both the Capital One and DCB credit card accounts were subsequently provided to FCMAT by the former ASB advisor after he requested them from the financial institutions. The Capital One account had a credit limit of $2,000, and purchases made were from June 7, 2009 through February 17, 2011. The DCB account had a $15,000 credit limit, and purchasing Fiscal crisis & ManageMent assistance teaM activity began on March 14, 2010 and ended on August 9, 2011. Purchases totaled $75,773.37 for all three fiscal years. Payments on the account were made primarily through pre-authorized debits to the ASB checking account; however, paper checks were used in a limited number of transactions. Total credit card transactions for each month are represented in the table below. TOTALS $ 19,192.10 $ 5,973.08 $ 25,165.18 $ 485.15 $ 48,099.16 $ 48,584.31 $ - $ 2,023.88 $ 2,023.88 June $ - $ 5,718.06 $ 5,718.06 $ - $ 2,399.15 $ 2,399.15 $ - $ - $ - May $ 66.04 ^ $ 255.02 $ 321.06 $ - $ 2,159.69 $ 2,159.69 $ - $ - $ - April $ - $ - $ - $ - $ 2,167.78 $ 2,167.78 $ - $ - $ - March $ 1,421.76 ^ $ - $ 1,421.76 $ 81.01 $ - $ 81.01 $ - $ - $ - February $ 1,919.16 ^ $ - $ 1,919.16 $ 235.52 $ 5,911.07 ^ $ 6,146.59 $ - $ - $ - January $ 559.82 ^ $ - $ 559.82 $ - $ 4,142.06 ^ $ 4,142.06 $ - $ - $ - December $ 1,699.72 ^ $ - $ 1,699.72 $ - $ 12,777.66 ^ $ 12,777.66 $ - $ - $ - November $ 1,068.06 ^ $ - $ 1,068.06 $ - $ - $ - $ - $ - $ - October $ 3,928.81 ^ $ - $ 3,928.81 $ - $ 11,568.62 ^ $ 11,568.62 $ - $ - $ - September $ 3,586.07 ^ $ - $ 3,586.07 $ - $ 6,973.13 ^ $ 6,973.13 $ - $ - $ - August $ 4,733.32 ^ $ - $ 4,733.32 $ - $ - $ - $ - $ 2,023.88 ^ $ 2,023.88 July $ 209.34 $ - $ 209.34 $ 168.62 ^ $ - $ 168.62 $ - $ - $ - Month Capital One DCB Total Capital One DCB Total Capital One DCB Total 2009/10 2010/11 2011/12 Credit Card Analysis OAK HILLS HIGH SCHOOL ASB HESPERIA UNIFIED SCHOOL DISTRICT 21 FINANCIAL MANAGEMENT San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 22 FINANCIAL MANAGEMENT The credit card activity was posted into the Blue Bear software in account numbers 2002 ASB-Capital One, and 2004 ASB-DCB Credit. For items that were recorded in the general ledger, purchases were posted in the “expense and transfers” columns and payments in the “reve- nues and expense” columns. When the purchase/expenditure was entered into either account 2002 or 2004, an entry was simultaneously made to the club or event account associated with the purchase. All payments made to the credit card companies were traced to the ASB general ledger accounts and bank statements. Only $43,908.66 in credit card purchases were posted to club and trust accounts. The remaining $31,864.71 is unaccounted for. FCMAT traced each charge reported on the credit card statements to the ASB general ledger, and determined that $31,864.71 (approximately 42%) of the $75,773.37 total credit card purchases were not posted in the general ledger, and consequently not charged to a club or event account. If the charge should have been posted to a club or event account, the accounting treatment artificially inflated the club account balances while the ASB general account showed large nega- tive account balances where the balance of the payments for the $31,864.71 were charged. If the charges were unauthorized purchases or personal charges made by the ASB advisor, this would be a misappropriation of funds. The following chart lists credit card charges from the ASB advisor’s personal credit cards repre- senting $31,864.71 in purchases that were never recorded although payments from ASB funds were made. At the end of each fiscal year, the 2002 and 2004 account balances flowed to the next fiscal year. The former ASB bookkeeper made the payments for these credit cards without supporting documentation for purchases that were never posted into the ASB general ledger and offset to club accounts totaling $31, 864.71. The current ASB bookkeeper was unable to locate any support documentation for these charges, but the former ASB advisor offered some written responses as listed in the chart below. Several of these charges are not valid ASB expenditures. Others indicate excessive spending on a limited group of students without sufficient funds to support the expense. Board Policy 3452 strictly prohibits spending beyond available funds without written express permission from the Student Council and a repayment plan. The ASB advisor had a fiduciary duty to ensure that funds were authorized by the Student Council and available for spending, which did not occur. Oak Hills High School ASB Payments Made to ASB Advisor’s Personal Credit Card for Unrecorded Purchases, August 6, 2009 – August 9, 2011 Date Credit Card Name Vendor Amount Paid Description from ASB Funds 8/6/2009 Capital One Staples (398.63) Payment over/short 8/6/2009 Capital One Staples $400.47 No explanation 8/10/2009 Capital One Winchell’s Donut House 14.98 No explanation 8/22/2009 Capital One Borders (39.96) Payment over/short 8/22/2009 Capital One Capital One 39.00 Over limit fee 8/22/2009 Capital One Borders 43.46 No explanation 8/24/2009 Capital One Oriental Trading Company 588.70 Advisor: Leadership camp fee at Big Bear Fiscal crisis & ManageMent assistance teaM 23 FINANCIAL MANAGEMENT 9/22/2009 Capital One Capital One (39.00) Over limit fee revered 11/18/2009 Capital One Capital One 39.00 Past due fee 12/3/2009 Capital One Motivational Media 55.00 Advisor: For classroom presentations and assemblies 12/11/2009 Capital One Alberto’s Mexican Food 21.58 No explanation 12/14/2009 Capital One Red Baron Pizza 87.00 No explanation 12/28/2009 Capital One Del Taco 57.56 No explanation 12/29/2009 Capital One Jack in the Box 70.43 No explanation 1/22/2010 Capital One Oriental Trading Company 37.96 No explanation 2/2/2010 Capital One Almost Golf 16.25 Credit was on statement but not posted to GL 2/17/2010 Capital One Select Postal Service 20.19 No explanation 2/18/2010 Capital One Oriental Trading Company 301.87 No explanation 2/18/2010 Capital One High Desert Party Rentals 369.00 Advisor: Rental of chocolate fountain and chocolate supplies for homecoming 3/19/2010 Capital One MN BM Services 19.69 No explanation 4/3/2010 Desert Community Bank Target 20.00 No explanation 4/3/2010 Desert Community Bank Target 30.00 No explanation 4/4/2010 Desert Community Bank Baker’s Burger 10.00 No explanation 4/4/2010 Desert Community Bank Subway 20.00 No explanation 4/7/2010 Desert Community Bank Target 59.81 No explanation 4/15/2010 Desert Community Bank Target 32.10 No explanation 4/15/2010 Desert Community Bank Smart N Final 102.84 No explanation 4/16/2010 Desert Community Bank Slater Brothers 114.72 No explanation 4/19/2010 Capital One Capital One 15.00 Past due fee 4/20/2010 Desert Community Bank Online Promo 647.00 Advisor: Photo holders dance souvenirs 4/28/2010 Desert Community Bank Online Promo 44.19 No explanation 5/6/2010 Desert Community Bank Desert Community Bank 39.00 Late fee 5/8/2010 Desert Community Bank Del Taco 40.82 No explanation 6/3/2010 Capital One Del Taco 19.55 No explanation 6/3/2010 Capital One Del Taco 48.88 No explanation 6/7/2010 Desert Community Bank Desert Community Bank 39.00 Late fee 6/19/2010 Capital One Capital One 29.00 Past due fee 6/22/2010 Capital One Capital One 2.05 Interest charges 7/2/2010 Desert Community Bank School Apparel, Inc. 2,200.00 Advisor: Letterman sweaters – partial payment 7/13/2010 Desert Community Bank Ellison Education 1,200.00 Advisor: Die cuts and cutting pads 7/14/2010 Desert Community Bank Glass Doctor Inland 325.00 Advisor: Install service windows in the Empire student store 7/19/2010 Capital One Capital One 29.00 Past due fee 7/22/2010 Capital One Capital One 2.74 Interest charges 7/26/2010 Desert Community Bank Home Depot 941.22 Advisor: Plywood, paint, rollers, screws, etc. interior signage and parking signage 7/28/2010 Desert Community Bank Home Depot 184.47 No explanation 7/28/2010 Desert Community Bank Smart N Final 324.45 No explanation 8/2/2010 Desert Community Bank Baker’s Burger 1.00 No explanation 8/2/2010 Desert Community Bank Leo’s Donuts 56.46 No explanation 8/3/2010 Desert Community Bank Leo’s Donuts 21.17 No explanation 8/3/2010 Desert Community Bank Leo’s Donuts 21.18 No explanation San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 24 FINANCIAL MANAGEMENT 8/6/2010 Desert Community Bank Desert Community 39.00 Late Fee Bank 8/9/2010 Desert Community Bank School Apparel, Inc. 2,042.84 Advisor: Letterman sweaters – partial payment student store 8/17/2010 Desert Community Bank Crestline Co, Inc. 204.78 No explanation 9/3/2010 Desert Community Bank Microsoft Student 29.99 No explanation 9/8/2010 Desert Community Bank Sunway, Inc. 588.32 Advisor: Shorts, whistles and lanyards for Leadership students 9/10/2010 Desert Community Bank Radio Shack, Big Bear Lake 67.39 No explanation 9/11/2010 Desert Community Bank Kmart, Big Bear Lake 27.81 No explanation 9/11/2010 Desert Community Bank Kmart, Big Bear Lake 119.54 No explanation 9/11/2010 Desert Community Bank Slater Brothers, Big Bear 310.16 No explanation Lake 9/13/2010 Desert Community Bank Barnes & Noble 103.23 Advisor: Books used for research and assist with comic book design 9/16/2010 Desert Community Bank PayPal – Finalstep 7.41 No explanation 9/16/2010 Desert Community Bank PayPal – Finalstep 370.80 Advisor – Stoles used as sashes for students 9/16/2010 Desert Community Bank Lowe’s 1,006.52 Advisor: Wood, paint, rollers, screws, etc. homecoming floats 9/17/2010 Desert Community Bank Roll Over Beethoven 86.98 Advisor: For sound equipment 9/19/2010 Desert Community Bank Lowe’s 504.57 Advisor: Wood, paint, rollers, screws, etc. homecoming floats 9/26/2010 Desert Community Bank Halloween City 172.09 No explanation 9/27/2010 Desert Community Bank Slater Brothers 77.70 No explanation 9/27/2010 Desert Community Bank Target 83.61 No explanation 9/28/2010 Desert Community Bank Michael’s 182.20 No explanation 9/28/2010 Desert Community Bank Wal-Mart 205.77 No explanation 9/28/2010 Desert Community Bank Oriental Trading Company 365.39 No explanation 9/29/2010 Desert Community Bank Lowe’s 92.89 No explanation 10/6/2010 Desert Community Bank Desert Community Bank 39.00 Late fee 10/8/2010 Desert Community Bank Desert Community Bank 73.02 Interest charges 10/13/2010 Desert Community Bank Tan’s Club 288.32 No explanation 10/19/2010 Desert Community Bank Amazon Marketplace 207.00 No explanation 10/26/2010 Desert Community Bank AP Exam Specials 200.00 No explanation 11/3/2010 Desert Community Bank Del Taco 254.48 No explanation 11/8/2010 Desert Community Bank Target 416.44 No explanation 11/8/2010 Desert Community Bank Tie Dye USA 797.26 Advisor: 45 pullover hoodies 11/10/2010 Desert Community Bank Smart N Final 192.46 No explanation 11/11/2010 Desert Community Bank Target 19.54 No explanation 11/11/2010 Desert Community Bank Costco Online 195.73 No explanation 11/12/2010 Desert Community Bank Home Depot 181.68 No explanation 11/19/2010 Desert Community Bank PayPal – Southern Cal 35.00 No explanation 11/19/2010 Desert Community Bank Apple Online Store 127.70 No explanation 11/20/2010 Desert Community Bank Village Equipment Rentals 88.00 No explanation 12/3/2010 Desert Community Bank Costume Discounters 614.63 Advisor: 12 Santa costumes 12/4/2010 Desert Community Bank Dollar Store 198.59 No explanation 12/6/2010 Desert Community Bank Desert Community Bank 39.00 Late fee 12/7/2010 Desert Community Bank Oriental Trading Company 83.89 No explanation 12/9/2010 Desert Community Bank Desert Community Bank 226.77 Interest charge Fiscal crisis & ManageMent assistance teaM 25 FINANCIAL MANAGEMENT 12/9/2010 Desert Community Bank Oriental Trading Company 246.07 No explanation 12/9/2010 Desert Community Bank Oriental Trading Company 1,515.89 Advisor: Decorations and Mardi Gras beads for Spirit Week 12/10/2010 Desert Community Bank Baker’s Burger 84.17 No explanation 12/10/2010 Desert Community Bank Target 114.38 No explanation 12/13/2010 Desert Community Bank Red Baron Pizza 113.20 No explanation 12/14/2010 Desert Community Bank Casa Delicias 146.81 No explanation 12/14/2010 Desert Community Bank Target 194.06 No explanation 12/18/2010 Desert Community Bank Target 13.04 No explanation 12/26/2010 Desert Community Bank Target 60.73 No explanation 1/3/2011 Desert Community Bank Pier 1 187.84 No explanation 1/9/2011 Desert Community Bank Target 13.05 No explanation 1/12/2011 Desert Community Bank Red Baron Pizza 65.50 No explanation 1/15/2011 Desert Community Bank Google WC Novelties 180.93 No explanation 1/16/2011 Desert Community Bank Target 17.58 No explanation 1/16/2011 Desert Community Bank Confetti’s Party 260.37 No explanation 1/17/2011 Desert Community Bank Oriental Trading Company 59.94 No explanation 1/18/2011 Desert Community Bank Wal-Mart 35.05 No explanation 1/18/2011 Desert Community Bank Oriental Trading Company 255.87 No explanation 1/19/2011 Desert Community Bank Wal-Mart 71.48 No explanation 1/19/2011 Desert Community Bank Home Depot 119.47 No explanation 1/19/2011 Capital One Target 235.52 No explanation 1/19/2011 Desert Community Bank Lowe’s 268.24 No explanation 1/20/2011 Desert Community Bank Lowe’s 727.19 Advisor: Construction supplies for winter formal 1/21/2011 Desert Community Bank CADA-CASL 275.00 No explanation 1/26/2011 Desert Community Bank Title Boxing 819.45 Advisor: Costumes for Mr. Bulldog event 1/28/2011 Desert Community Bank Olive Garden 649.28 Advisor: Leadership Team Building Night 1/29/2011 Desert Community Bank Best Buy 54.36 No explanation 1/30/2011 Desert Community Bank Target 425.49 No explanation 1/31/2011 Desert Community Bank Insider Bat 117.50 No explanation 2/7/2011 Desert Community Bank Buy.com 190.23 Advisor: Repair of DVD duplicator 2/8/2011 Desert Community Bank Ringside.com (281.89) Payment over/short 2/8/2011 Desert Community Bank Target 9.52 No explanation 2/8/2011 Desert Community Bank Ringside.com 231.91 No explanation 2/18/2011 Desert Community Bank Oriental Trading Company (133.82) Payment over/short 2/18/2011 Desert Community Bank Oriental Trading Company 167.81 No explanation 3/2/2011 Desert Community Bank Dollar Tree 46.59 No explanation 3/3/2011 Desert Community Bank Town & Country (450.00) Payment over/short 3/3/2011 Desert Community Bank Town & Country 155.00 No explanation 3/5/2011 Desert Community Bank Town & Country 368.14 No explanation 3/11/2011 Desert Community Bank Leo’s Donuts 28.23 No explanation 3/14/2011 Desert Community Bank Goldmark Pro (342.90) Payment over/short 3/14/2011 Desert Community Bank Goldmark Pro 450.00 No explanation 3/20/2011 Desert Community Bank Excessive Force Paint 86.89 No explanation 3/21/2011 Desert Community Bank Goldmark Pro 135.31 No explanation 3/22/2011 Desert Community Bank Staples 75.00 No explanation San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 26 FINANCIAL MANAGEMENT 4/6/2011 Desert Community Bank Desert Community Bank 39.00 Late fee 4/8/2011 Desert Community Bank Desert Community Bank 75.30 Interest charges 4/28/2011 Desert Community Bank Exxon Mobile 17.89 No explanation 4/29/2011 Desert Community Bank Red Baron Pizza 117.08 No explanation 5/5/2011 Desert Community Bank Slater Brothers 11.94 No explanation 5/10/2011 Desert Community Bank Desert Community Bank 63.75 Interest charges 5/11/2011 Desert Community Bank Blue Soda 763.13 Advisor: For Spirit items, “2011” sun- glasses 5/12/2011 Desert Community Bank FedEx 46.59 No explanation 5/12/2011 Desert Community Bank HD Design Center 283.91 No explanation 5/16/2011 Desert Community Bank Small Appliance 32.98 No explanation 5/20/2011 Desert Community Bank Andes in Huntington Beach 130.50 No explanation 5/20/2011 Desert Community Bank BJ’s Restaurant 619.88 Advisor: Leadership end of year banquet 5/21/2011 Desert Community Bank Michael’s 107.53 No explanation 5/21/2011 Desert Community Bank Michael’s 380.08 No explanation 5/23/2011 Desert Community Bank Home Depot 208.34 No explanation 5/25/2011 Desert Community Bank Amazon.com 96.90 No explanation 5/25/2011 Desert Community Bank Casa Delicias 326.25 No explanation 5/25/2011 Desert Community Bank The Summit Inn 566.88 Advisor: 36 Leadership students and 8 adults for breakfast 5/26/2011 Desert Community Bank Target 104.05 No explanation 5/27/2011 Desert Community Bank Amazon Marketplace 100.66 No explanation Payments 7/6/2011 Desert Community Bank Desert Community Bank 39.00 Late fee 7/11/2011 Desert Community Bank Desert Community Bank 39.40 Interest charges 7/11/2011 Desert Community Bank Pat’s Cleaners 253.75 No explanation 8/9/2011 Desert Community Bank Desert Community Bank 39.00 Late fee 8/9/2011 Desert Community Bank Desert Community Bank 44.74 Interest charges Total $31,864.71 When the Capital One credit card was no longer used, the remaining account balance was transferred to ASB general account 4005. This also occurred with $21,033.90 of the ASB-DCB account balance on March 12, 2011 and when the ASB-DCB account was closed on August 19, 2011. No authorization or records exist to support these payments and transfers made by the ASB bookkeeper. FCMAT was unable to review the receipts for any of the credit card purchases to determine if correct approval procedures were followed in the purchasing process because these records did not exist, but did interview the former ASB advisor regarding what was purchased. That informa- tion and the descriptions noted in the ASB general ledger were used in FCMAT’s analysis of the credit card transactions for the period June 7, 2009 to August 9, 2011. The independent auditor reported dated March 21, 2011 report also commented on “unusual/ suspicious expenditure activity” related to purchases from the Oriental Trading Company that were delivered to the former ASB bookkeeper’s residence. Credit card purchases of $3,489.57 from this same vendor were among those not recorded into the ASB’s general ledger. In inter- views with the former ASB advisor, FCMAT learned that purchases from Oriental Trading Company were handled by the former ASB bookkeeper. Fiscal crisis & ManageMent assistance teaM 27 FINANCIAL MANAGEMENT Accounts Payable Transactions Education Code Section 48933(d) requires student money to be spent using a system established by the student organization subject to the approval of three people: an employee or official of the school district designated by the governing board (usually a site administrator), the certificated employee who is the designated advisor of the particular student body organization and a repre- sentative of the student body organization. These approvals are to be obtained each time before any funds can be expended in accordance with the district’s board policy (3452) and administra- tive regulations. The ASB is part of the district’s annual audit; therefore, ASB funds should follow the district’s purchasing and processing protocols. The purchasing cycle should include: • Approval by the student body council • Preparation of a purchase requisition • Budget review to ensure availability of funds • Issuance of the purchase order • Transmittal of the purchase order to the vendor The payment cycle has several steps to ensure proper approval and receipt of the item. Payments should always be made from original invoices that are authorized by designated personnel. The payment voucher payment should include the original invoice, receiving documentation (a cash register receipt or a bill of lading), signature of the approver, and student body council minutes. Once the invoice has been paid and check issued, the invoice is marked “paid.” All checks should be signed by two authorized personnel. The purpose of the Student Council meeting minutes is to support the basic premise of ASB funds – moneys raised by students and used by students of that class. To process ASB payments and generate checks to vendors, the Oak Hills High School’s ASB bookkeeper used the Blue Bear software. FCMAT tested a sample of 24 ASB expenditure transactions during the 2009-10, 2010-11 and 2011-12 fiscal years and found an extraordinary number of inconsistencies in the purchasing and vendor payment process. The process did not utilize many industry standard criteria and directly conflicted with board policy. The findings are summarized as follows: • No Student Council meeting minutes demonstrating approval for 19 (79.2%) of the transactions tested. While the ASB bookkeeper maintained a binder of the meeting minutes that may have held the minutes in question, inclusion of the meeting minutes in the payment voucher packet ensures a complete audit trail, including the evidence that the students were aware of and had authorized the purchase. • Proper signatures were missing in many of the payment voucher packets. Thirteen items tested did not comply with Education Code Section 48933: • In nine (37.5%) of the transactions tested, the ASB advisor signed as both the advisor and the administrator. • Three packets did not have the site administrator’s signature. • One did not contain the signature of the student representative. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 28 FINANCIAL MANAGEMENT • In three of the tested transactions, the ASB advisor signed as an approver of his own reimbursement expenditures. While he was the advisor of the group tendering payment, a third party should have been sought to provide an independent review and authorization. • Four (16.7%) of the transactions did not have requisitions to initiate the transaction nor did the payment packets contain a purchase order. • Supporting documentation such as detailed restaurant receipts or invoices were missing in four (16.7%) of the transactions. • Two (8.3%) payment documents were dated prior to the requisition. Education Code Section 44032 states that payment for travel should be for expenditures that are actual and necessary. The ASB advisor attended a California Association of Directors of Activities conference in Reno. During scheduled sessions of the conference, the ASB advisor purchased two ski lift tickets that were subsequently turned in for reimbursement and one was paid with ASB funds. Submitting claims for reimbursement for non-business related expenses is classified as reimbursement fraud. FCMAT analyzed several transactions where purchase orders were used for items other than those described on the purchase order. Examples include: • A purchase order was approved for ropes and harnesses for use at an event but was also used to purchase doughnuts. • A purchase order dated August 19, 2009, for “start-up supplies” was used on December 16 and 17, 2009 for “Adopt-A-Family food” and an ASB breakfast. Standard practice is to compare invoices/receipts being submitted for payment against the purchase order. If they deviate from the purchase approved by the purchase order, they should not be processed for payment or should be subject to further review to identify the discrepancy. Best business practice dictates that an invoice is matched with receiving documents to ensure receipt of the goods. In the absence of receiving documentation, the ASB bookkeeper should obtain authorization to pay the invoice from the person who generated the purchase and sign a “Lost Receipt” form. Eleven of the 24 transactions/voucher packets tested did not contain some form of receiving confirmation to process the payment. Cancelling vendor invoices by using a “Paid” stamp or other identifiable means is essential to ensure that invoices are not paid a second time if they become separated from their payment package. Of the 24 sample transactions tested, all lacked a “Paid” stamp or any other identifiable cancellation mark. In addition to issues related to the policies and procedures used in processing ASB transactions, the sample transactions revealed several questionable purchases. Two of these purchases were for embroidery on backpacks given to ASB leadership students that contained gifts placed in them by the ASB advisor. Unless the item is to recognize student achievement or excellence, it is considered a gift of public funds. FCMAT was provided documentation for expenses related to a cheerleading competition in Florida. ASB student funds paid for one student and her mother to attend the competition. The payment included airfare of $822.74, hotel and rental car totaling $271.85, tickets to Walt Disney World in Orlando, Florida of $305.66 and the competition fee. ASB funds are to be used Fiscal crisis & ManageMent assistance teaM 29 FINANCIAL MANAGEMENT for the benefit of a group of students, and use for an individual student and her parent is strictly prohibited. Review of the Oak Hills ASB bank statements showed that four debit purchases were made during the period from November 30, 2011 through May 29, 2012 totaling $1,279.79. Debit purchases are directly deducted from the bank account, which bypasses the approval and payment processes completely. The expenditures were traced into the ASB general ledger and into accounts for the “Class of 2013 and Athletics – General.” The ASB advisor was also the Athletics Account advisor. Although the ASB advisor may also be a club advisor, the district should ensure that proper segregation of duties exists to prevent both the authorization for the purchase and the ultimate payment of the goods and services. Student and Staff Appreciation Article 16, Section 5 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. In general, the constitutional prohibition against 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 expenditure. 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. Education Code Section 44015 provides guidance to educational agencies for gifts and awards to staff and/or students. Under this code section, the governing board must adopt rules and regulations prior to issuing any award. The board may appoint a committee represented by district officers, district employees, or private citizens to consider recommendations to recognize employee proposals, special acts, special services, or superior accomplishments. Any award cannot exceed $200 unless the governing board expressly approves a larger amount. The character of the expenditure is a significant factor when assessing whether something is a gift. An item that has only an intrinsic value as recognition of service, such as a plaque, would not be considered a gift because the recognition benefits the public by encouraging meritorious work. On the other hand, a gift such as a set of golf clubs has an extrinsic value and would violate the constitutional prohibition. FCMAT identified purchases that confirmed that gifts are provided to staff and students. Specifically, ASB funds were used to pay for these gifts and awards during the period of examina- tion: • Gift card purchases for rewards or prizes totaling $435. • Flower and plant arrangements sent as bereavement gifts totaling $139.76. • Staff appreciation gifts - $333.10. • Prizes and giveaways to students and classrooms as rewards for good grades, good behavior, or efforts in food drives - $1,023.53. • Bandanas purchased as an entry gifts to a football game - $288.32. • Embroidered backpacks given to ASB leadership students and the gifts placed in those backpacks - $771. • Payment of individual expenses for a cheerleader and her mother to attend a competition in Florida totaling $1,400.25 that included airfare, hotel, car rental and Disney World tickets. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 30 FINANCIAL MANAGEMENT • Barbecues and food purchases from local restaurants for the student leadership team during the lunch period - $847.42. • Chips, cookies, doughnuts and lollipops given to select students - $565.45. Fiscal crisis & ManageMent assistance teaM 31 CONCLUSION Conclusion The internal control environment includes ethical values and integrity displayed by the governing board and management as well as the underlying tone set by the organization’s site administra- tors. The tone of the organization set by management through its words and actions demonstrate to others that dishonest or unethical behavior will not be tolerated. An atmosphere in which employees feel safe to communicate concerns is a fundamental component of a strong and effec- tive internal control environment. The district should install a fraud hotline where employees can communicate anonymously should they suspect fraudulent activity. The control environment is an essential element and provides the foundation for other internal controls to be effective in achieving the goals and objectives to prevent and/or deter fraud or illegal acts. Regular external audits are a strong deterrent to mismanagement and fraud but cannot serve as the only method of ensuring accountability. It is imperative for the county office, the superintendent, principal, and governing board to implement the appropriate internal controls and hold staff accountable for their actions. Internal controls are clearly among the most important aspects of any fraud prevention program, however, to be effective the district should evaluate how board policies and administrative regulations should be enforced in a timely manner. Administrators and managers are in positions of authority and therefore have a higher standard of care to establish the ethical tone and serve as examples to other employees. They are entrusted to ensure that organizational activities comply with all applicable board policies, laws, regulations, and standards of conduct. Their management responsibilities include safeguarding the district’s assets and ensuring that internal controls function as intended. While the governing board and all district employees have some responsibility for internal controls, the ASB advisor and school principal had a fiduciary duty and responsibility to ensure that the governing board’s fiscal policies and procedures were followed and that the duties and responsibilities performed by the bookkeeper were reviewed. The findings of this audit indicate possible fraud, mismanagement and misappropriation of resources and assets of the district’s Associated Student Body account. A significant material weakness exists in the district’s internal controls, increasing the probability of fraud and/or abuse. These findings should be of great concern to the district’s governing board and the San Bernardino County Superintendent of Schools Office and require immediate intervention to limit the risk of fraud and/or misappropriation of assets in the future. Education Code Section 42638(b) states that action by the county superintendent shall include the following: If the county superintendent determines that there is evidence that fraud or misap- propriation of funds or other illegal activities may have occurred, the county superin- tendent shall notify the governing board of the school district, the State Controller, the Superintendent of Public Instruction and the local district attorney. San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 32 CONCLUSION Recommendation The county superintendent should: 1. Notify the governing board of the Hesperia Unified School District, the State Controller, the Superintendent of Public Instruction, and the local district attorney that fraud or misappropriation of district funds and/or assets may have occurred. Fiscal crisis & ManageMent assistance teaM 33 APPENDICES Appendices Appendix A - ASB Bank Reconciliation Worksheet Appendix B - Study Agreement San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 34 APPENDICES Fiscal crisis & ManageMent assistance teaM 35 APPENDICES Appendix A Bank Reconciliation Worksheet Name of School: _________________________________________________________________ ASB Bank Reconciliation Worksheet Name of Bank: Account Number: For the Month of: A. Ending Balance per Bank Statement G. Balance per Accounting Records: B. Plus Deposits in Transit: H. Plus Interest: I. Plus Adjustments: C. Total Deposits in Transit: J. Total Adjustments: D. Less Outstanding Checks: K. Bank Charges: Date Check # Amount Chapter 7 – Accounting and Financial Management 81 San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 36 APPENDICES L. Total Bank Charges E. Total Outstanding Checks F. Ending Balance (A + C – E) M. Ending Balance (G + H + J + L) Reconciliation prepared by: (Name, Title, Date) Reconciliation Reviewed by: (Name, Title, Date) Review by ASB: (Name, Title, Date) Review by District Business Office: (Name, Title, Date) 82 Associated Student Body Accounting Manual, Fraud Prevention Guide and Desk Reference Fiscal crisis & ManageMent assistance teaM 37 APPENDICES Appendix B San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 38 APPENDICES Fiscal crisis & ManageMent assistance teaM 39 APPENDICES San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt 40 APPENDICES Fiscal crisis & ManageMent assistance teaM 41 APPENDICES San Bernardino County offiCe of eduCation - HeSperia unified SCHool diStriCt