Finance and audit

2. • Partner –Wiss & Company, LLP
• 36 Years Experience working solely in Public Sector
• Reviewer for International ASBO Certificate of Excellence in Financial Reporting
• Member of the NJCPA Government A&A Committee
• Member of the Trustees of the RMA Association

3. • Internal Controls and Fraud Prevention
• Fraud Examples
• IT Controls
• CARES Act Issues
• GASBs Impacting Schools Districts
• General Topics

5. • Understanding internal controls
• Basic internal controls that should be in place in every school district
• Fraud risk areas
• Real life examples of fraud in school districts
• Internal controls to prevent and detect fraud
• Auditor’s responsibility in detecting fraud

6. Internal Controls are an integral part of any organization’s policies and procedures,
that can be effected by its Board, management, and other personnel, that is
designed to provide reasonable (not absolute!) assurance regarding the
achievement of the following objectives:
• Protecting its resources against waste, abuse, fraud or inefficiency
• Reliability and accuracy of financial reporting
• Effectiveness and efficiency of operations
• Compliance with laws and regulations

7. • Helps protect us from bad things happening!
• As accountants we are very risk adverse individuals
• Internal Controls help mitigate risk
• Won’t eliminate risk

8. Types of Risk a District May Face:
• Strategic – the risk that would prevent a District from fulfilling its mission
• Financial – the risk that could result in a negative financial impact to the District
• Regulatory – the risk that could expose the District to penalties from a regulatory
agency due to non-compliance with laws or grant requirements

9. Types of Risk a District May Face (continued):
Reputational – the risk that could expose the District to negative publicity
• Affects ability to pass annual budgets
• Affects ability to pass referendums

10. Types of Risk a District May Face (continued):
Operational – the risk that could prevent the District from operating in the most
effective and efficient manner
• Especially important given the limited resources currently available
• Impact the pandemic has had on control environment

11. What Could Go Wrong???:
• Program decisions being made with incorrect financial information
• Deficits in operations
• Amounts due back to the federal government
• Lose support of the residents of the District
• Basic functions of the District are not working
• Modified opinion to financial statements
• Appointment of State Monitor

12. Internal Controls Are Simple
• What do you worry about going wrong?
• What keeps you up at night?
• What steps have been taken to assure it doesn’t go wrong?
• Where are those internal controls?
• How do you know everything is under control?
• Have you looked to see if anything is working properly?

13. Segregation of Duties
• Responsibilities should be assigned to employees to ensure one employee does
not have total control over all aspects of an entire transaction
• The District should reduce the opportunity for an employee to commit or conceal
an error, whether it be intentional or unintentional, or to commit fraud

14. Segregation of Duties
• Board responsibilities – effective oversight over management
• Purchasing and Accounts Payable
• Human Resources and Payroll
• Cash receipts and cash disbursements
• Rights to modules with financial accounting system
• Bank reconciliation segregated from cash activities (May be difficult if the
Treasurer of School Monies position was eliminated based on size of district)

15. • Instances of fraud or suspected fraud related to third party vendors
• Need to assess the risk of fraud in each of your Districts
• Need to put in place better monitoring procedures over third party vendors that
are charged with managing a function
• The “Trust Factor”

16. Schemes – typically three categories:
• Asset Misappropriation
• Corruption
• Financial Statement Fraud

17. 3 Conditions generally present when fraud occurs:
• Management or other employees have an Incentive or are under pressure, which
provides a reason to commit fraud
• The absence of controls, ineffective controls, or the ability of management to
override controls provides an opportunity for a fraud to be perpetrated
• Those involved are able to rationalize committing a fraudulent act. Some
individuals possess an attitude, character, or set of ethical values that allow them
to knowingly commit a dishonest act.

18. • Examples of cases that have been in newspapers
• Do not think any of us want to be mentioned in the press for fraud

19. • Woman accused of stealing from North Jersey school district charged with tax
fraud
• Ex-Poplar School District worker pleads guilty to wire fraud
• Insurance agent in New Jersey admits to defrauding school district | Insurance
• Worker who stole from school district will go to prison, lose pension

20. • New Jersey Teacher Charged With Health Care Fraud Conspiracy Targeting New
Jersey School Employees Health Benefits Program
• District alleges fraud in charter school application
• Treasurer headed to prison after hosing fire department out of $40K
• Engineer, Contractors, School Business Administrator Charged in Kickback
Scheme
• School board employee arrested in connection with stolen laptops

21. • Ex-official admits stealing $90K for pocketing lunch money
• Educator arrested in Billing Fraud Case

22. • Purchasing/Contract Mgt. and Quotes
• Third Party Vendors
• Cash Receipts/Revenue
• Health Insurance
• IT issues/access/hacking

23. Purchasing/Contract management
• Vendor Existence/Setup
• Kickbacks from Vendors
• Cash Payments
• Gifts from vendors in exchange for business
• In-kind
• Work done on private residences
Contract Splitting/manipulation of quotes or bids
• Fictitious vendors

24. Background
• Audit initially identified unusual fluctuations in expenses in certain accounts
• Follow up with Bus Adm and directed to pursue further
• Director of department out on medical leave
• Fraud interview conducted and clerk opened up and shared all sorts of
information

25. What was identified
• 2 new vendors established without supervisor approval
• Access to add vendors to system without supervisor approval
• Purchases of supplies well in excess of needs all associated with the 2 new
vendors
• Possible collusion with vendor and kickbacks

26. How to Prevent
• Make sure vendor set up is properly controlled
• Question purchase requisitions/orders that seem extreme or unusual
• Question unusual fluctuations in expenses

27. Background
• Certain cash receipts not recorded
• Replacement of cash with checks
• Miscellaneous unanticipated revenue
• Control over entire process by supervisor
• Involved cafeteria cash and checks related to rent and other miscellaneous
unanticipated revenue

28. What was identified
• Procedures to divert cash
• Lack of approval and tracking of rental of facilities
• Collections of rental checks that no one tracked
• Replaced cafeteria cash with rental checks to support cafeteria deposit and
pocketed cash
• Impact - $90,000

29. How to Prevent
• Too much control for one person-lack of segregation of duties
• No controls or approvals of facility use charges
• Stronger controls in place over the collection of cash

30. • Outside hacking of financial accounting system and banking activities
• Replicated the process and was able to watch what was happening
• Attempts to transfer significant funds to foreign bank accounts
• Had passwords and access
• Missing was the electronic secure ID number
• How the fraud was discovered-emails notifying the district of attempted
transfers at off times/
• Impact – close but no cigar-did not get away with it

31. • Proper Segregation of Duties
• Effective IT General Controls-passwords, change controls, system rights, timely
removal upon termination from district
• Effective Monitoring and Oversight
• Fraud Hotline / Anonymous Tip Center
• Know your District – identify unusual fluctuations or spending
• Need to assess risk in District

32. • Annually should assess risk in District
• Control assessment should be considered
• Need to consider cost vs. benefit of implementing an internal control

33. Segregation of Duties (Examples)
• New employee setup (HR) segregated from Payroll processing (Payroll), when
possible
• Entering of cash receipts (clerk) segregated from performance of bank
reconciliation (Treasurer)
• New vendor setup (BA) segregated from processing payments to vendors
(Purchasing)

34. IT General Controls
• New User Setup
• Timely removal of access rights for terminated employees
• Program change controls
• Limitation of “super user” access
• Controlling of access to modules based on job description
• Limitation of rights to post journal entries
• Passwords

35. Effective Monitoring and Oversight
• Business Administrator
• Board members
• Superintendent
• Principals
• HR Manager
• 3rd Party Management Companies

36. Reporting Fraud
• Create internal confidential reporting process
• Protection from retaliation for whistleblowers
• Timely investigation of fraud allegations
• Report to external parties deemed appropriate in the circumstances

37. Know your District – Fraudulent activity can be prevented or detected
• Investigate significant transfer requests on monthly Board Secretary Reports – mis-postings may be
done intentionally to conceal fraud
• Look for unusual fluctuations
• Keep your eyes open and listen
• Annually make sure the District communicates its policy on fraud, illegal acts and conflicts of interest
policies
• Randomly question department heads on their monthly spending – let them know you are watching
• Randomly contact vendors to confirm purchase orders/activity
• Challenge the quote process and unusual requests

38. Ways to Prevent Fraud
• Surprise audits on specific district functions or operations
• Payroll distribution audits-now required by Accountability Regulations
• Require job rotation, when possible
• Require mandatory vacations
• Communicate the District’s views and policies regarding fraud
• Annual Independent Financial Statement Audit

39. • Important contracts are “missing”
• Subsidiary ledger is not satisfactorily reconciled to its control account
• The results of an analytical procedure performed during the audit may not be
consistent with expectations
• These conditions, however, may be the result of circumstances other than fraud.
Even reports of alleged fraud may not always be reliable because an employee
or outsider may be mistaken or may be motivated for unknown reasons to make
a false allegation.

40. • Maintain a sense of skepticism
• Work together with your auditors to identify areas that you consider to be high
risk
• Eliminate excessive authority residing with one individual
• Effectively monitor the activities of your District and question any deviations
• Maintain an effective line of communication throughout all levels of employees
and encourage open dialogue

41. • Fraud is prevalent in all types of entities
• Important for the Board and administration to set the tone
• Ensure controls are in place and evaluated periodically to prevent errors and
fraud
• Internal controls are implemented for the protection of the administration and
the District as a whole
• Make sure the District is appropriately insured

42. Limitations on Internal Control
• Only as good as the people using it
• Management override of any control can cause a deficiency to occur
• Collusion by two or more people can render a control ineffective

43. COVID-19 impact continues including both accounting and auditing challenges
• Massive infusions of federal funding for many entities
• Increased fraud risks
• Client internal control considerations
• Noncompliance with laws/regulations
• Revenue uncertainties/going concern
• Accounting estimates
• Remote auditing considerations continue
• Clock ticking again on previously postponed accounting and AICPA auditing standards

44. Historic federal funding in response to pandemic
• Many new programs
• Impact on existing programs receiving additional funding
• New recipients/increase in first-time single audits = HIGHER RISK!
• Late (or continued lack of) federal guidance resulting in delayed audits from 2020 and
workload compression
• Year 2 audit considerations for CARES Act major programs from 2020
• Federal focus on accountability and transparency
• Quality continues to be a focus; significant federal oversight expected over COVD-19
funding

45. New Jersey DOE is currently performing audits of CARES Act expenditures-Monitoring
• Coronovirus Relief Fund (CRF)
• Digital Divide
Similar Findings being identified
• No multiple quotes for items over $10K
• Federal vs. State purchasing guidelines
• Use of state contract with no multiple quotes

47. Increasing number of Ransom attacks in school districts
Disabling of district systems until ransom is paid
Controls
• Change of passwords often
• Outside access controls
• IT training for employees who use the system
• Online training and testing

48. Other Items
• Control over access
• Insurance in place
• Program change controls
• Controls after termination or departure from district
• Disaster recovery plan
• Continue to improve controls to prevent outside intervention

50. Other Items
• Reporting for Pensions and Postemployment Benefits Other Than Pensions
• WHAT THE HECK IS TAKING SO LONG????
• Have delayed issuance of audits for the last few years
• Everyone hoping the reports are available more timely in future
• Not good news thus far - Info for municipalities is delayed

51. Focus in determination
The activity is a fiduciary activity if all of the following criteria are met:
• a. The assets associated with the activity are controlled by the government
• b. The assets associated with the activity are not derived either:
• (1) Solely from the government’s own-source revenues (as described in
paragraph 13) or
• (2) From government-mandated nonexchange transactions or voluntary
nonexchange transactions with the exception of pass-through grants for which
the government does not have administrative involvement or direct financial
involvement

52. The assets associated with the activity have one or more of the following
characteristics:
• (1) The assets are (a) administered through a trust in which the government itself
is not a beneficiary, (b) dedicated to providing benefits to recipients in
accordance with the benefit terms, and (c) legally protected from the creditors
of the government.
• (2) The assets are for the benefit of individuals and the government does not
have administrative involvement with the assets or direct financial involvement
with the assets.
In addition, the assets are not derived from the government’s provision of goods or
services to those individuals.

53. • Implementation for all engagements with a year end of December 31, 2020 and later
• Recently delayed one year due to COVID-19 pandemic- will be effective for June 30, 2021
audits
• Basically eliminated what we currently know as the trust and agency fund
• Renamed as Custodial Funds, if applicable
• Funds and related financial information will now be moved and accounted for in other
funds
• SAF
• Unemployment
• Payroll and Payroll Agency
• Scholarships

54. • Student activity funds will now be presented in the special revenue fund (asset and
liability)
• My expectation that the schedule of SAFs currently presented in the H section of the audit
will be added to the E section
• No impact on Fund Balance
• Provide what was provided in past and will result in financial statement presentation

55. • Payroll and payroll agency accounts will be accounted for in the general fund. Cash with
offsetting liability and no impact on operations
• My expectation that the schedule of SAFs currently presented in the H section of the audit
will be added to the C section
• No impact on Fund Balance
• Provide what was provided in past and will result in financial statement presentation
• No impact on Fund Balance
• Provide what was provided in past and will result in financial statement presentation
• My expectation that the schedule of SAFs currently presented in the H section of the audit
will be added to the C section

56. • Scholarship fund with or without a trust agreement unless there is absolutely zero
administrative control (but we all know usually the district selects the student for
the scholarship) – special revenue fund
• My expectation that the schedule of SAFs currently presented in the H section of
the audit will be added to the E section
• No impact on Fund Balance
• Provide what was provided in past and will result in financial statement
presentation

57. • Unemployment trust fund transactions will be accounted for in the general –
employee contributions are just like agency liabilities and the employer share is
still coming from its own revenue so none of it can be in the custodial fund
• Move the unemployment net position at 7/1/20 to restricted fund balance in the
general fund-pull out on excess fund balance calculation
• Going forward, account for the employee contributions as an other
liability. When that is fully spent, some mechanism will need to be put in place to
withdraw money from the unemployment trust to pay any outstanding claims
through the budget (picture maintenance reserve withdrawal into the budget
but for unemployment claims)

58. May take on this
• Make this a year end issue and not monthly
• Do not worry about budgeting funds as was previously noted by NJDOE in budget
guidelines
• Financial reporting issue to conform to the GASB and not a NJDOE issue
• Make it as easy as possible
• No monthly Bd Secretary report impact

59. • Effective for School District financial statements June 30, 2022
• No longer classifies leases as operating or capital
• All leases will be considered capital and liabilities in the financial statements
unless it is considered a short term lease
• Short term leases are leases that expire in less than one year

60. In preparation:
• Identify all items that you are using under a lease
• Financial statements will require recording all operating leases as a lease liability
like currently done for capital leases
• Intangible right-of-use lease asset is the offset which will be amortized

61. • Timing to finalize - 2023
• Looking to improve the effectiveness of the current financial reporting model
(GASB 34 model)
• Concerns that GASB has:
• Governments use differing time frames for recognition in governmental
statements, thereby reducing comparability

62. Concerns that GASB has (continued):
• Current presentation lacks a conceptual foundation making it difficult for the
GASB to establish standards for government funds for certain complex
transactions, such as derivatives and service concession arrangements

64. • Confirming orders
• Mis-classification at year end between accounts payable and reserve for
encumbrances
• Obtaining verbal quotes instead of written quotes
• Quotes received from 2 vendors with different business names but the same
owner per signature on W-9. One of the entities always wins quote
• Lack of Business Office oversight over quotation process
• Purchases for subsequent fiscal year charged to the current year budget

65. • Funds transferred to capital projects fund for a project that was not part of a
referendum, ESIP lease or SDA grant
• Unexpended capital reserve funds used in capital outlay fund should be returned
to capital reserve at end of year or end of project if in capital projects fund
• Withdrawing funds without voter approval (statement of purpose) for a capital
project that was not deemed an “Other Capital Project” which would otherwise
be eligible for state support and not approved by the Office of School Facilities as
eligible for State support

66. • Use of multi-vendor purchase orders
• Use of cooperative purchasing agreements without ensuring rates charged
agree to approved agreements
• Expired contracts not renewed or not re-bid
• Contracts in excess of $2 million (but less than $10 million) and contracts in
excess of $10 million not sent to the State Comptroller’s Office

67. • Human Resource/Payroll documents not maintained in employee files – I-9’s, W-
4, Pension forms, etc.
• Inadequate analysis of payroll deduction payable balances
• Accruing vs. Encumbering retro accruals related to unsettled CBA agreements
• Time and effort reporting for grant funded employees
Example - www.state.nj.us/education/title1/tech/schoolwide/TimeandActivity.doc

68. • Material adjustments to the board secretary reports
• Prior year audit adjustments not posted
• Subsidiary ledgers and bank reconciliations do not agree to the general ledger
• Interfund balances do not net to zero
• Posting revenue or expense transactions directly to fund balance account

69. • Adjusting journal entries not properly supported with no evidence of review and
approval
• Significant number of “expense adjustments”
• Some accounting funds not recorded in the general ledger – trust & agency and
certain enterprise funds
• FSCP not well documented

70. • Surety bond coverage not sufficient
• Standard Operating Procedure manuals too generic and not detailed and
specific enough to enable transition to a new employee
• Budget transfers in excess of 10% that require County approval not submitted to
the County

71. Items identified as control deficiencies or in violation of State guidelines-SAF
• No formal policy in place directing the schools as to how the funds can be
utilized
• Items purchased from SAF that should be processed through the normal district
purchasing process
• No oversight at all by business office. Although not required, it is a good idea to
request information and review

72. Items identified as control deficiencies or in violation of State guidelines-SAF
• Sunshine funds maintained for special school parties and commingled with SAF
• Funds not used for the originally intended purpose or disbursed for non-student
related purposes
• No policy in place to address what happens when there are funds remaining
after the event or purchase
• Class funds that remain after that class has graduated
• Refunds

73. Items identified as control deficiencies or in violation of State guidelines-SAF
• No supporting documentation for receipts or disbursements
• One signature on checks
• Cash collected and held for significant period of time and not deposited
• Purchasing Home Depot/Lowes gift cards and using them as purchasing cards
for supplies when needed
• Gift cards provided to students with insufficient documentation of who received
the cards

74. Items identified as control deficiencies or in violation of State guidelines-SAF
• Employees paid from the SAF to chaperone, etc. and not included as income on
employees W-2
• 1099s not issued for vendors that exceed the IRS threshold
• Circumvention of the procurement process/bids/quotes
• Bank accounts established without Board approval
• Outside organizations and sunshine accounts using the District’s bank accounts
and ID numbers

75. • Bill S-2691 – authorized districts to maintain a surplus of 4% for the 20-21 and 21-22
Fys (May maintain)
• Due to financial impacts of COVID-19
• Use or transfer of these funds between line items and program categories do not
require Commissioner of Education approval

76. • Allows more undesignated funds to be available without having to budget for
excess FB or transfer to reserves
• Designed to meet needs due to COVID
• What happens in 2022-23 fiscal year when back to 2%?
• Plan for additional excess FB
• Plan for putting any unneeded funds into a capital, maintenance or other
reserve
• Use funds to budget capital or other 1-time items

77. Transfers are permitted to fund losses
• Transfer line 27080 account 11-900-330-930 to cover community and adult ed
operations in an enterprise fund
• Transfer line 17080 account 11-401-100-930 for athletics
• Transfer line 17580 account 11-402-100-930 for co-curricular activities
• Transfer line 25080 account 11-4XX-100-930 for other instructional programs