This document has been formatted for printing from your browser from the Web site of the Illinois Association of School Boards.

COPYRIGHT NOTICE -- This document is © copyrighted by the Illinois Association of School Boards. IASB hereby grants to school districts and other Internet users the right to download, print and reproduce this document provided that (a) the Illinois Association of School Boards is noted as publisher and copyright holder of the document and (b) any reproductions of this document are disseminated without charge and not used for any commercial purpose.

Illinois School Board Journal
November/December 2005

Keeping finances on the up-and-up
by Linda Dawson

Linda Dawson is IASB director of editorial services and Journal editor.

Recent incidents of money misdeeds in Illinois school districts raise the question of whether school boards … as trustees of their community's tax dollars … are doing everything they can to ensure district finances are on the up-and-up.

Anyone with a true intent to steal can probably devise a way to bilk someone … or a school district … out of money. Setting aside that "where there's a will, there's a way" argument, school boards have a number of policy options and safeguards that they can put in place to lessen the likelihood that someone will abscond with district funds.

A bigger question, however, involves board policies that protect, not against a devious and determined effort to defraud, but against the unknowing and unintentional mismanagement of money.

School boards can get themselves into a difficult situation either by not having good financial policies and procedures in place, or failing to follow those policies once they're created, according to Michael Johnson, executive director of the Illinois Association of School Boards. Typical problem areas involve having a good set of checks and balances, following bidding procedures and putting good reimbursement procedures in place.

When it comes to checks and balances, school boards might look first at their policies and administrative procedures on money handling. Their first question: "If somebody was going to steal from us, how would they do it?"

The easiest thing to walk off with: cash.

One of the simplest procedures may be one of the most effective at deterring the theft of money, according to Tim Custis, a certified public accountant with Gorenz & Associates in Peoria as well as a school board member for Washington CHSD 308. His advice: the person collecting the money should not be the same person who deposits that money and records the transaction.

The bigger the district, the easier it is to separate collection, recording and deposit duties, Custis said, but even the smallest district should be able to identify at least two people who could act as a check and balance against each other when handling cash.

"Most people are very honest," Custis said of the school employees his firm deals with during annual school audits. "They act hurt when we point out that having only one person handling receipts and deposits could be a problem. But we tell them it's for their own protection."

Cash transactions themselves can be a problem, he said, because they don't leave the paper trail you have with a check or a credit card transaction. As an example of what not to do, he pointed to a district that had been paying athletic officials in cash from gate receipts. A better procedure, he said, is to write a check ahead of the event and then have the official sign off when it is received. That way, the district has two ways to show that the payment was made and received.

Gate receipts, concession stand money and pop machine money — all of which generate cash — as well as registration fees where large amounts of money are handled in a short space of time pose a temptation for someone with an eye to steal. Custis suggests that taking care to note beginning and ending ticket numbers for an event, having a second person check the numbers against the money, and then getting the money deposited that night — or at least the next morning — are all good procedures that will help deter theft and minimize errors.

Custis told of one horror story where a secretary had been driving around with tens of thousands of un-deposited district fees in the trunk of her car. That's extreme, but even leaving the money in a locked desk or a safe for long periods of time should be discouraged.

Activity accounts handled by a booster club or a student group also can be problematic, Custis said. Huge amounts of money can travel through these accounts with the district having little oversight — especially for accounts maintained on the building level.

According to the Illinois School Law Survey, school boards "1) must establish rules and regulations governing conditions under which school classes, clubs and associations may collect or acquire funds in the name of any school, and 2) provide for the safeguarding of such funds for the educational, recreational or cultural purposes they are designed to serve."

If an account is opened by the band parents to purchase new uniforms, and if the school district knows about the account, then the district may be responsible if someone absconds with the funds, he said. Additionally, the purchase of those uniforms needs to follow proper bid procedures if the cost is more than $20,000. That's something that's often overlooked when purchases are made by adjunct groups, but still under the auspices of the district.

To keep activity funds on the up-and-up, Custis recommends they be handled through the central office, with policies and procedures that might allow checks to be written every two weeks to expedite any payments that might need to be made.

What's often missing in the checks and balances equation is someone who questions that something doesn't look quite right, IASB's Johnson said. If an employee suspects that someone might be stealing cash, who should they tell? Would they be telling the person who might be taking the money? In that case, he said, it might be wise to tell the school board president.

Every district should have policies and procedures in place that ensure good checks and balances for handling money within the district, as well as someone checking to make certain that those policies and procedures are followed, Johnson said. "It doesn't have to be wrongdoing. It can be simple mistakes and wrong accounting." But having good policies and procedures should make discrepancies easier to spot.

Obviously the most well known check that finances are on the up-and-up is the annual audit. By law, each school district is required to have an audit done annually and the district superintendent should have a report from that audit by October 15. (105ILCS5/17-1)

Audits must be done using "Government Audit Standards," Custis said, "which means that we have to review internal controls and procedures to be sure that the district has done things properly." That's in addition to what most people think of with making certain all the funds and columns of numbers balance.

Once completed, an audit report is mailed to the district, along with a letter known as "Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards." It's a lengthy name, but this letter, Custis said, "will reveal any violations of laws or regulations found during that audit, as well as reveal any internal control deficiencies identified."

Bill Phillips, assistant professor for educational leadership at the University of Illinois-Springfield, said this letter is an important piece of information that not all board members get to see because it first goes to the superintendent.

"Board members should make sure that they see all of the information that comes out of the audit," Phillips said, "including that letter."

Even better, he said, is to ask the auditor to make a presentation to the entire board, rather than just hand the audit over to the superintendent.

Custis said more and more of the audit now occurs before any accountants ever step foot in the district to examine the official books. His office receives preliminary reports on income and expenses that are analyzed and compared with accounts from the previous year. "If there are any significant differences, we want to know why," he said.

Because it would be virtually impossible for an audit to look at every transaction that goes through the district in a year, Custis said auditors look at different accounts and try to "mix it up intentionally" so that the same funds are not scrutinized every time. However, that theory does not apply to grant revenue accounts.

Because the Illinois State Board of Education knows exactly what a district receives when it awards a grant, Custis said, those accounts are audited 100 percent every year.

Sometimes litigation may influence what accounts get more scrutiny, he said. Auditors paid closer attention to tort fund accounts following questions raised around the state about their use. "It's not that we didn't look at them before," he said, but they are much more detailed in the audit now as to how those funds were spent.

Audits also are looking much closer for fraud because of the "Statement of Auditing Standards 99" that went into effect for any audit of financial statements for periods beginning on or after December 15, 2002. In essence, Custis said, this means auditors must ask more questions about fraud and suspicious activity, such as: is someone all of a sudden living a life-style that is way above what his or her salary should be able to afford?

In asking questions, auditors also can find out if certain employees always insist they are the only ones who can handle certain procedures, refuse to have anyone trained as back-up and never take a vacation. Those circumstances should trigger a red flag that something might be amiss.

"The onus is put on auditors," he said. "Now the public expects us to be looking for fraud." However, he noted, more fraud has been identified in the last two years under the new standards than within the 10 previous years.

While board members are ultimately vested with the financial security of the district, their actual supervision should be done at a distance by setting policy and asking questions.

In districts where audits have "found something," Custis said, the question always arises: "Well, if board members were checking the bills, why didn't they question this?"

"It's not realistic to know what every bill is for," IASB's Johnson said, "but it is possible to ask for more information," especially if the bill is out of the ordinary, in amount or recipient.

If there is a question, it should be raised with the superintendent before the board meeting, not the night of the meeting, he said. But if a board member questions a bill before the meeting and it is explained, then the superintendent should let it be known at the meeting, in public, that a question was raised, what it was and the explanation.

The best place to begin with understanding district bills is during a new board member orientation. Johnson said the superintendent should help board members become acquainted with expected expenses: customary vendors, payroll and recurring expenses like utilities. That will help them distinguish amounts that are "normal" from something that is out of the ordinary.

Without questioning the who, what and why of specific payments, board members can keep tabs on district finances by simply looking at account balances. But different funds may need different questions.

Is the education fund more than 75 percent gone by December with half the school year remaining? That could mean there's a problem, Custis said. If 75 percent of the bond and interest fund is paid out by December, it may just mean that a large payment was due before January 1 and nothing will need to be paid again until April.

But while the board officially accepts the budget and should keep an eye on fund balances, it's not up to the board to say which account a bill should be paid from, Johnson said. "That's not in their purview."

Putting on his school board member hat, Custis said board members need to keep their responsibilities in perspective. "It's your responsibility to set the budget in the first place and then live within that budget," he said.

Board members may not totally understand the budget process, but they should be able to tell if the district is staying within its budget, he said. And, by policy, they should be able to recognize deficit spending.

"If it's a planned spend-down, that's one thing," Custis said. "But if they just allow it to happen, through inattention or mismanagement, that's something else."

Next issue: Bidding procedures