The headlines can be brutal: School superintendent arrested. Officials say embezzlement scheme netted $8 million. And suddenly a Google search turns up criticism of the district's practice not just from standard media articles, but CPA newsletters, trade publications and professional blogs.
Officials in Roslyn Public Schools in New York know the story by heart as they start the next chapter after becoming the poster child for criminal charges.
Yet far more districts wind up behind the eight-ball from sheer financial mismanagement than fraud, assures Jack Dougherty, the assistant director of audit services at New York's Office of the State Comptroller. "Over the years I've heard many administrators comment, 'We got a clean bill of health because the CPAs didn't find any fraud.' You can have something less than fraud and still need to improve your internal controls," he says. "Our experience is that the Roslyns are few and far between."
Today's district budgets are riddled with uncontrollable costs, of course: fuel, energy, salaries, health insurance premiums. And that makes the dollars that schools can control still more precious, contends Michael J. Osnato, director of the Institute for Educational Leadership, Research and Renewal at Seton Hall University in South Orange, N.J. Before joining the training ranks, Osnato spent 25 years as a school superintendent, most recently at the helm of Montclair Board of Education in New Jersey in 2004.
No one can produce hard facts on the number of districts nationwide that are bleeding unnecessarily. Joe Spinelli's educated guess as co-founder of Daylight Forensic and Advisory fraud risk management firm in Manhattan stands at 70 percent of districts that have at least one problem.
"Superintendents see themselves as instructional leaders, but they are really in charge of a large corporation with significant financial issues," Osnato points out. "You don't want to hire a CPA as a superintendent, but an important part of the job is to instill confidence by managing the public's money effectively." In the long term, he advocates state-required fiscal oversight for school leaders-in the meantime, he is reaching out to first-year superintendents with a four-hour course to introduce them to red flags.
The lessons involve poring over a monthly treasurer's report to understand expenditures by codes, and to look at enrollment projections. He gives them an overview on how to look for transfers, where people are moving money in and out of accounts frequently, and cautions them to watch grant money. "Too many times, busy superintendents just sign state reports. They need to look at it and ask questions," says Osnato.
It sounds elementary, but districts trip over these basics every day. Take, for example, the Manhasset Union Free School District in New York that oversees just four schools, 2,600 students and 407 employees. When New York State Comptroller Alan G. Hevesi released details on its audit in October 2005, he found reimbursements totaling $5,313.85 for conference expenses, which exceeded federal reimbursement rates by more than $1,200. They district had also honored receipts totaling $2,382 for five days in California when that conference lasted just two days. That form included a $165 dinner.
Auditors also discovered $321,000 worth of checks that did not have a required second signature; another 12 checks totaling $29,590 cleared the bank before the internal claims auditor had signed off on them. Checks were written out of sequence, and vendor names didn't match. Nor could auditors find purchase orders for 29 expense claims (another $132,000 unaccounted for), and the accounting software package was open to a slew of people who could delete files anonymously.
"The best defense against fraud, waste and mismanagement is strong internal controls," Hevesi said in his statement. "In too many areas, our auditors identified instances where the Manhasset school district failed to do what needed to be done." He has since expressed approval of the district's actions to correct the gaps.
The Big F: Fraud
Spinelli has found his calendar booked since the Roslyn scandal with districts seeking to avoid the same fate. "They want to take a proactive approach to insure they have a clean house, or to have proof they were on top of it should something crop up," he explains. Most ask him to send his report to the district attorney should he uncover monkey business "because they have zero tolerance for this nonsense," says Spinelli. To date, this former inspector general of New York has revealed ghost employees bilking a couple million from one district, and employees tanking their personal vehicles on credit cards designated for bus fuel.
"I don't want to pick on Roslyn because I have a laundry list of various institutions that got hit," he adds. "I'm sure there is some ineptitude involved in what transpired, but, quite frankly, it's been our experience that if it's a large number, it will definitely rise to criminality." Nor does size matter -he's witnessed smaller districts that have lost hundreds of thousands to embezzlement.
"I believe in my heart the vast majority of people who work in school districts are hard-working, honest, decent people," he adds. "However, there are always bad apples and someone trying to game the system. Antifraud controls at least give you an opportunity to prevent it."
But his outline to get a handle on the situation isn't complicated:
1. Line up your ducks. Step one, Spinelli style, is to draft a code of conduct and require school board members, administrative staff, principals, teachers to sign in annually. This way, no one can plead ignorance to the rules on junkets, free dinners, etc. "School boards are getting religion," he reports.
Dougherty recommends school boards establish a strong oversight on financial records, reviewing claims or appointing an independent internal auditor. "We don't want to see this person also filling in as someone's secretary," he says.
2. Nix nepotism. Relatives hiring relatives is a recipe for trouble, experts insist. The consultant role is a particularly slippery slope.
3. Verify vendors. Spinelli can't overstate this category: Investigate vendors thoroughly before hiring them. Administrators need to insure the company isn't owned by a board member's relative (or located at his house), that it truly exists outside a post office box, it doesn't have multiple addresses for payment, and that payees match the vendors. "When I ask officials what types of controls they have in place in this area, I often don't get any answers," he says.
4. Poke at purchasing. Make sure you can locate all equipment the district purchases-Daylight Forensics crews have uncovered districts that purchased vehicles without board approval-cars that wound up in a supervisor's driveway and never seen in a business capacity again. A three-way system requiring the invoice and receiving orders to match the purchase order exactly before authorizing payment goes a long way in circumventing these games, Spinelli says.
5. Watch travel expenses. Put the brakes on prepaying board members to attend a conference. Sadly, some districts still fork over a lump sum and simply require the person to return with receipts. "We've had incidences where people stayed at the finest hotels, then had the audacity to submit credit card expenses for hookers," says Spinelli. It's far more prudent to lay out the type of documentation you require for travel reimbursement, then verify each expense is legitimate.
The Overlooked Grants
Deb Ward has found herself in heated discussions with administrators who believe how they spend grant money is nobody's business. "As long as we're still educating students and have their best interests at heart, it shouldn't be a problem," she relays the argument. "Unfortunately, that's not how the funders are looking at it."
As a proposal writing consultant and program director at Saint Mary's University of Minnesota in Winona, Ward knows first-hand such monies aren't a true gift. Districts must use the dollars following the basic guidelines they submitted in their application. But a few years ago after a workshop, a trembling official approached her with a confession: The superintendent had siphoned grant money targeted for special education students when they ran short on some budget line items. Could he lose his job?
Ward's response: Contact a lawyer. Districts caught in this predicament at the least stand to lose future funds, and at worst can be asked to replace the missing money. "And it puts a big red flag against your name, especially at the federal level, [affecting] your eligibility for completely different grant programs down the road," she warns. Private foundations have less firepower to audit districts, but the consequences are just as stiff if they catch a whiff of mismanagement.
Staying on track in this area is simple: Funders provide guidelines for tracking their money. To be safe, Ward recommends superintendents install a checks-and-balance system to insure the business office is correctly filing its reporting in a timely manner. "Somebody just needs to be reading the paperwork," she notes.
Not So Petty Cash
Osnato has a huge concern with how many districts handle cash. Not the bills and coins that cross hands in the cafeteria line, but the bucks various teachers and staff collect for club dues, dances, after-prom gigs, fund-raisers, parking fees and the like. They should be deposited regularly in a bank account, with receipts to back up the amount. In real life, the money is stuffed in draws, or lays around in a not-so-private safe.
"It sounds minor but I can't tell you how many times in my superintendent career I had issues reconciling how much money was collected and how much was deposited. Schools are often lax in good, sound accounting practices," Osnato says. Cash handling, he adds, is an area where school districts are consistently faulted for lousy management.
From the 10,000-foot overview, facilities spending amounts to no more than 10 percent or 12 percent of a district's overall budget, says Paul Huddleston, founding principle of Magellan K-12, a specialty consulting firm based in Charlottesville, Virg. That makes it a poor candidate to squeeze big savings, this financial analyst contends.
Fiscal irresponsibility here stems from ignorance on how to handle a lack of dollars. "I see a lack of foresight, planning and proper budgeting more than simple waste," Huddleston says. For example, when districts defer maintenance to the point of an emergency, typically their only resource is to turn to bond money to fix the problem. "They're using the long-term money for short-term maintenance like paint," he says. Sound familiar? It's the same basic blueprint that sunk the federal government trillions of dollars into debt.
Other districts attack maintenance problems piecemeal, paying for what they can afford this year and hoping for a better tomorrow. But if you don't appropriately group projects-for example, fixing ceiling tiles but not the leaky roof-the end result is the same as tossing money down the drain.
When it comes to new construction, occasionally a school board spends more than is necessary because it builds too big. "They pick the same prototype as before, but there was never enough storage, never enough common space, never enough whatever," Huddleston explains. "They let the administration tell them what they need and it keeps growing. I can't tell any community they shouldn't have the finest schools in the nation, but the board needs to be aware of the standards and how their plans compare to their peers."
Other times a district loses a bond issue and needs space it can't produce, forcing it to look at public-private partnerships. That solution, in Huddleston's assessment, is usually more expensive than a traditional ownership. "They didn't want to be wasteful of taxpayer's dollars but they were caught in the switches," he notes.
Speaking of trapped, Osnato feels for districts that see their special education populations jump. "They often spiral well beyond what is projected," he says. In fact, his data shows the sharpest increase in any district over the last 10 years is in special ed costs.
Cindy Nellums, superintendent principal of Richmond Elementary School District in Susanville, Calif., welcomes his sympathy. With only 220 students in the entire district, her total budget comes to a mere $1 million. When a child victim of a car accident landed on her doorstep, she suddenly found herself responsible for the student's education to the tune of $200,000 a year, or 20 percent of that budget. California's excess cost pool for such situations isn't big enough to cover more than 10 such cases throughout the entire state, and Nellums was left out in the cold.
Prorating eventually helped ease the financial burden, "but the rise of autism, alcohol fetal syndrome, so many special diagnoses are taking a terrible drain on districts," she notes. Her advice: A low incidence population, as this segment is known, can move into the district at any time, so it helps to put away even a small sum to ward against that possibility.
Next, learn all you can about the student's condition and how you could meet his needs in a home environment. "Work as cooperatively and urgently as soon as possible with parents, advocates in hopes you can come to a solution that is perhaps more beneficial to the student and the district," urges Nellums. Too many times, she adds, the situation drifts into a "district against the parent" bout that hinders cooperation. In Richmond's case, she tapped agency services ranging from occupation therapy to counseling, offering them housing in the school in exchange for their assistance with this student.
"We try to get it into superintendents' heads that it's not enough to be a great instructional leader," Osnato repeats. "They have to understand that in a era where the public is skeptical of the public sectors' ability to manage money period, they need to be extra conscious, have high ethics and take the time to monitor the fiscal side of the operation."
Julie Sturgeon is a contributing editor.