Auditor to Sag Harbor Schools: Tighten Controls, Segregate Duties

The main entrance to Pierson Middle-High School.

An auditing firm charged with reviewing the Sag Harbor School District’s operations has recommended a series of improvements including balancing the school lunch fund to eliminate a current deficit, tightening controls on access to accounting software and reinstating an internal auditor.

Those suggestions appear in a “management letter” from the firm Cullen and Danowski that sums up its audit, which found the district’s finances sound. The Sag Harbor School District has declined to release the letter based on its “draft” status but a copy was anonymously sent to The Sag Harbor Express this week.

Superintendent Katy Graves, who was out of the district for health reasons when the audit was reviewed by the Board of Education last month, had recommended the school board not accept the management letter in its current form. She said there were inaccuracies in the letter and the district had already addressed some of the items the auditors described as “opportunities for strengthening internal controls and operating efficiency.”

She declined on Wednesday to identify which parts of the draft letter she considered inaccurate, saying the letter would be discussed on Monday, December 17, after the school board’s Audit Committee had another chance to meet.

According to the draft letter, the school lunch fund lost $23,422 in the current school year and lost $14,206 the previous year. Its balance at the end of June 2018 remained at a deficit of $10,766. Ms. Graves explained on Wednesday the loss occurred because the district has switched to local vendors, less reliance on frozen foods, more nutritious options and foods to accommodate students with allergies.

“We’ve been very transparent that we’ve been running at a deficit,” she said. “That’s going to be a little more expensive, but it’s not a huge loss.”

The letter also noted the district had missed out on hundreds of thousands of dollars in funding after not filing forms with New York State for reimbursement for certain summer programs for disabled students dating back to 2015. According to the letter, Sag Harbor missed out on $262,756 in 2015 and $91,802 in 2016, and did not receive any funding for the summer of 2017. The letter did not indicate how much the district missed out on in 2017.

Ms. Graves said during a recent school board meeting she had received word the district could retroactively file forms and reclaim those funds, which she said the district had begun doing.

According to the draft letter, the auditors recommended the district tighten controls on its financial accounting software. They “noted instances in which employees have permissions that are incompatible with or not necessary for their job duties.” For instance, they said, account clerks can increase purchase orders, void checks and edit time sheets; the technology director can edit time and attendance entries; and some former employees can still access the software.

Cullen and Danowksi also suggested in the letter adding protocols for periodic reviews of journal entries into the district’s financial accounting software, as there are currently “no procedures in place … to ensure that there are no unauthorized journal entries posted to the system.”

The firm recommended “segregation of duties,” a term referring to the division of responsibilities among a greater number of employees, in the areas of health insurance, personnel and payroll functions. Through separating jobs, the auditor noted, errors and fraud are more easily detectable.

“The management letter says we have to segregate our duties more, but we don’t have much staff,” Ms. Graves said. “Our management is outstanding. For being so short-staffed, I think our people work very hard and we set very high standards.”

The external auditor suggested Sag Harbor reinstate an internal auditor. State law says districts with fewer than 1,500 students such as Sag Harbor are not required to have internal auditors, but Cullen and Danowski recommended, “Due to the size of the district and the limited segregation of duties, the internal audit function … can be a valuable tool in identifying high risk areas.”

Ms. Graves said she would be in favor of reinstating an internal auditor every few years.

The draft letter highlighted some instances where employees were being paid stipends for extra responsibilities before the school board formally had approved them. That has been raised during recent school board meetings as an issue the board is trying to address.

Ms. Graves said the perception of a problem with the draft management letter stemmed from the district using an auditor that it had not used in several years. While the audit was beneficial, she said, their exit interview was not thorough enough.

“The majority of [the letter] is accurate, but you don’t want something being in a letter when it’s not correct,” she said. “The auditors concurred with me. They said, ‘We didn’t get to do enough of an exit interview with you.’”

The letter also noted the district had addressed a previous auditor’s comments regarding email passwords that needed to be changed and sales tax that needed to be paid on a couple of occasions. Ms. Graves also said during a recent board meeting the district has also addressed auditor comments that the Sag Harbor Afterschool Elementary Program needs more oversight.

School board vice president Diana Kolhoff said Wednesday the board has not yet seen a final version of the management letter. Auditors met with the administration this week to make some “minor corrections,” she said. The board expects to see it Monday and could potentially vote to accept it.

“Once the letter is accepted, the board will work closely with the audit committee to determine next steps,” Ms. Kolhoff said.