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Chapter 7
FINANCIAL MANAGEMENT

This chapter addresses the financial management functions of Dallas Independent School District (DISD) in the following sections:

A. Budget Development and Monitoring
B. Accounting Operations
Part 1
Part 2
Part 3
C. Internal/External Auditing
D. Tax Collections
E. Public Education Information Management System (PEIMS) Reporting

B. ACCOUNTING OPERATIONS (PART 1)

A school district's accounting operations include payroll, accounts payable, activity funds, grant accounting, cash management and general ledger accounting. These are critical functions because goods and services must be acquired, paid for and recorded if the district is to accomplish its core task of educating children. Vendors and employees expect to be paid on time and for the correct amount. Moreover, a variety of legal requirements must be met, such as compliance with the requirements of TEA's FASRG.

General Operations

FINDING

Although individual finance-related areas such as payroll, accounts payable, budgeting and activity funds have their own procedures manuals, DISD lacks a single policies and procedures manual for the district's business and financial processes. Policies communicate what should be done and why; procedures communicate how things should be done. Standard policies and procedures must be established and clearly communicated for a district of DISD's size to operate effectively.

Written policies and procedures serve various functions. They provide written notice to all employees of an organization's expectations and practices; provide direction in the correct way of processing transactions; serve as reference material; and provide a training tool for new employees. Additionally, written policies and procedures provide a source of continuity and a basis for uniformity. Without clear, written and current policies and procedures, DISD's internal control structure is weaker because practices, controls, guidelines and processes may not be applied consistently, correctly and uniformly throughout the district.

The Houston Independent School District codified its finance-related activities in a two-volume procedures manual published in 1995. At this writing, the manual is being updated and will become available on the district's Web site sometime during 2001. The manual includes organization charts of financial areas, a finance office telephone directory and a summary of who handles what. In 16 sections it covers, among other areas, accounts payable, activity funds, budgeting and planning, financial reporting, purchasing, payroll, benefits and risk management.

Recommendation 108:

Develop a districtwide financial management policies and procedures manual.

Both board and Financial Operations Division finance-related policies and procedures should be codified in an indexed, constantly updated policies and procedures manual. This tool should provide staff members with detailed procedures for performing critical accounting and reporting functions. Moreover, it should institutionalize the district's vision, philosophy, operating procedures and general practices. It should clearly communicate acceptable and unacceptable practices as well as the consequences of violating its provisions.

The manual should be detailed enough to be useful in daily operations yet flexible enough to be used by current as well as future employees. At minimum, the manual should include:

  • Budget policies and procedures
  • Payroll policies and procedures
  • Accounts payable policies and procedures
  • Activity fund policies and procedures
  • Treasury policies and procedures
  • District procedures governing approvals for checks and journal vouchers
  • Procedures for cash receipts and travel reimbursements
  • Procedures and controls for safeguarding district fixed assets
  • Descriptions of each process performed in the Financial Operations Division
  • Detailed desk level instructions for the most critical processes
  • District procedures governing distribution of financial reports

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent instructs the chief financial officer to develop comprehensive financial management policies and procedures for the district. September 2001
2. The chief financial officer organizes a policies and procedures task force consisting of representatives from Internal Audit, Payroll, Budget, Accounts Payable, Treasury and other financial departments in the district. September 2001
3. The chief financial officer instructs the task force to review existing policies and procedures and develop a single, comprehensive manual for the district. October 2001 through December 2001
4. The task force assigns a committee to conduct a search for best practices in this area and to identify the best model for the district. December 2001 through January 2002
5. The task force takes into consideration the unique functions of the district's financial system when developing the procedures manual. January 2002
6. The task force develops a policies and procedures manual and submits a first draft to the chief financial officer and superintendent for approval. January 2002 through September 2002
7. The superintendent instructs the chief financial officer to publish the manual and distribute it throughout the district. September 2002

FISCAL IMPACT

This recommendation can be implemented with existing resources.

FINDING

While some follow-up reviews have been performed by Internal Audit, DISD lacks a comprehensive plan for following-up on and implementing recommendations made during various finance-related audits and reviews. Without adequate follow-up, the district cannot fully benefit from such recommendations. Moreover, opportunities for strengthening controls and improving processes are lost when follow-up is neglected or performed haphazardly.

The Internal Audit Department recognizes this problem and includes follow-up reviews in its annual audit plan. For example, Internal Audit conducted follow-ups of the 1997, 1998, and 1999 management letters, and during fiscal 2000, external and internal auditors conducted a follow-up of control assessments performed by KPMG, the district's external auditors. The Internal Audit Department has not received the original control assessment reports and does not know if the external auditor ever provided them to the district. As a result, Internal Audit conducted its control assessments follow-ups using recommendation summaries that KPMG provided.

Exhibit 7-15 presents the implementation status of finance-related reviews conducted since TSPR's 1992 review.

Exhibit 7-15
Implementation Status of Finance-Related Reviews
1992 through 2000
Report Progress Report Date Recs. Implemented Recs. Partially Implemented Recs. Not Implemented
Texas Comptroller of Public Accounts performance review October 1993 298 0 6
1996-97 Management Letter December 1999 19 12 6
1997-98 Management Letter December 1999 5 13 3
Implementation Plan Follow-up to Fiscal 2000 Control Assessment May 2000 58 103 5
1998-99 Management Letter December 2000 4 4 11
1999-2000 Management Letter Letter completed in December 2000. No follow-up due.
DISD Procurement Process Reengineering Initiative No follow-up report prepared
Human Resources Management System Position Control and Payroll Controls Documentation No follow-up report prepared
Internal Audit Quality Review Follow-up performed as part of 1995 Internal Audit Initiative
TEA's Public Education Information Management System (PEIMS review) Follow-up performed as part of 1999 PEIMS review.
Review of Security Elements of Delta Financial System. Final report was never issued. Follow-up included in fiscal 2001 audit plan.
Controls Assessment Reports-September 1998 Follow-up included in fiscal 2001 audit plan.
Controls Assessment Reports November 1998 Follow-up included in fiscal 2001 audit plan.
Post-Implementation Review of Delta System After report was issued, district issued a request for proposals to replace the Delta system.
Public Education Information Management System (PEIMS) No follow-up report prepared in progress
Fraud Audit FBI issued subpoenas to follow up on fraud issues.
Source: Available progress reports and interviews with DISD Financial Operations Division and Internal Audit Department.

The basis for comprehensive follow-up on audit recommendations is contained, to a limited extent, in board policy. Board regulation CFC requires department heads to prepare implementation plans for external auditor management letter comments, federal and state audit reports and internal audit reports. However, there is no similar requirement for other types of reviews, such as the fraud audit conducted during fiscal 2000 or the payroll/personnel control assessments conducted in 1998. Board regulation CFC requires department heads to prepare and submit, by specified deadlines, written implementation plans to the CFO and internal auditor that contain the following elements:

  • Acknowledgement of findings and recommendations
  • Description of corrective actions(s)
  • Time line for implementation
  • Identification of specific staff member(s) responsible for implementing corrective action

Managers who fail to prepare and submit an audit implementation plan "must notify the CFO and the internal auditor and provide a detailed explanation prior to the effective date of implementation."

TSPR reviewed external auditor management letters for fiscal 1997 through 1999, noting that a management response accompanied each recommendation. However, the responses lacked timelines for implementation and did not identify specific staff members responsible for implementing corrective actions. TSPR also reviewed internal audit reports issued during fiscal 2000, noting that the provisions of board regulation CFC were applied inconsistently. Exhibit 7-16 summarizes TSPR's review and shows that department head responses complied with regulation CFC in only one report.

Exhibit 7-16
Review of Compliance with Board Regulation CFC
Internal Audit Reports Issued in 2000
  Compliance with Board Regulation CFC?
Description Report Date Acknowledged Report Described Corrective Actions Provided Time Lines Identified
Staff Responsible
Service Center Physical Inventory Observation November 2000 Yes Yes No No
Vendor Database Monitoring September 2000 No No No No
Surprise Time Card Review October 2000 Report noted that principals with exceptions at their campus responded with letter addressing corrective actions. TSPR did not review the letters.
Emergency Pickup Authorization Special Project September 2000 Yes Yes Yes Yes
Review of Human Resource Services Employees Hired Reports October 2000 No No No No
Review of Steinway Piano or Equal Bid #B3-12363 October 2000 No No No No
Booker T Washington High School Electrical Contract Bid November 2000 No No No No
Source: Completed Internal Audit Reports Issued in 2000.

Recommendation 109:

Develop a comprehensive plan to review and implement recommendations from both internal and external audits and reviews, and expand and enforce the provisions of board regulation CFC.

Board regulation CFC should be expanded to all audits and reviews. Strict monitoring and enforcement of this regulation would provide a basis for a districtwide follow-up plan, since the person responsible and the timeline for implementation would be an integral part of management's response.

Since the Internal Audit Department has conducted follow-up reviews of management letters in the past and routinely conducts follow-ups of internal reviews as part of its audit plan, the department should play a major role in developing a comprehensive implementation plan. Moreover, department heads must understand their crucial role in documenting management's responses as well as their roles in implementing audit recommendations.

Finally, the district must ensure that the Internal Audit Department receives audit reports of prior control assessments. Internal Audit should review and receive all report drafts in future reviews.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent directs the chief financial officer to draft an expanded version of board regulation CFC including all audits and reviews, not just external auditor management letter comments, federal and state audit reports, and internal audit reports. August 2001
2. The superintendent reviews and approves a draft of the expanded regulation. August 2001
3. The superintendent places the expanded regulation on the board agenda for approval. August 2001
4. The board approves the expanded version of regulation CFC. August 2001
5. The superintendent directs the Internal Audit director to develop a comprehensive audit/review implementation plan incorporating relevant reviews conducted over the past five years. September 2001
6. The superintendent directs the chief financial officer to send a memo to all department heads informing them of the expanded regulation and requiring strict compliance with its provisions. September 2001
7. Department heads acknowledge receipt of the chief financial officer's memo and communicate their understanding and intention to comply with board regulation CFC. October 2001
8. The Internal Audit director presents the audit/review implementation plan to the superintendent for approval and includes a plan to assemble a task force to spearhead the implementation plan. November 2001
9. The superintendent approves the Internal Audit director's plan and authorizes organization of an implementation task force. November 2001
10. The Internal Audit director includes the implementation plan in the current year's audit plan. December 2001
11. The task force begin following up on the implementation of past audit/review recommendations. January 2002
12. The Internal Audit staff and/or task force issues a report summarizing their results. April 2002
13. The Internal Audit staff and/or task force reviews the implementation of future audit and review recommendations and issues progress reports summarizing its results. May 2002 and Ongoing

FISCAL IMPACT

This recommendation can be implemented with existing resources.

Payroll

Payroll is the largest expenditure in any school district. About 77 percent of DISD's total expenditures consist of payroll and employee benefits. The district's fiscal 2000 payroll was $803 million, representing a 10.3 percent increase over fiscal 1999. Since fiscal 1998, payroll costs have risen by an average 7.5 percent per year. Exhibit 7-17 presents actual payroll costs for fiscal years 1998 through 2000.

Exhibit 7-17
DISD Actual Payroll Costs-Fiscal Years 1998-2000

 Actual Payroll Costs
Source: DISD Payroll Department.

The payroll supervisor and 17 payroll employees handle the day-to-day operations of the Payroll Department. Two positions are vacant at this writing. These individuals process monthly and biweekly payrolls each month for about 19,000 employees. Exhibit 7-18 presents the Payroll Department's organization.

Exhibit 7-18
Payroll Department Organization

 Payroll Department Organization
Source: DISD Financial Operations Division.

FINDING

DISD created a separate department to perform control functions for payroll and accounts payable in response to KPMG recommendations, made during an assessment of the district's internal controls. The creation of this department, however, was at best a small bandage applied to a serious wound; it does not address the real problem -- weak internal controls.

In 1997 an internal audit revealed weak internal controls related to overtime. The district was paying excessive overtime and discovered that some employees were falsifying their timesheets. Instead of holding supervisors strictly accountable for controlling and authorizing overtime -- and disciplining them when they do not -- the district created a separate department to check overtime hours.

KPMG made the recommendations in Exhibit 7-19 after conducting its payroll control assessment. In response to these recommendations, in fiscal 2000 the district created a department within the Financial Operations Division called the Quality Control Department (Quality Control), which, among other duties, checks overtime hours every pay period.

Exhibit 7-19
Summary of Recommendations Creating the Quality Control
Recommendation Action Taken (Management's Response)
Implement procedures to ensure that overtime reports are reviewed by principals and department heads (e.g. positive confirmation of such review). A quality control position has been established that is responsible for the review of overtime reports. A report has been developed that shows all overtime by school and department. Quality Control contacts all schools and departments to verify that overtime in excess of 20 hours per person is accurate.
Implement policies whereby personnel outside the Payroll Department are responsible for reconciling the payroll data to bank statements. A quality control position has been established in the Financial Operations Division to perform all bank reconciliations.
Implement policy to require *ACH payments be reconciled to Delta reports to ensure that all ACH payments are authorized. A Quality Control has been established in the Financial Operations Division to perform all bank reconciliations.
Implement procedures whereby an employee outside the Payroll Department reviews the payroll pay limit exception reports. A Quality Control has been established in the Financial Operations Division that reviews the payroll limit exception reports.
Source: KPMG's Implementation Plan Activity Follow-up- May 2000.
*ACH=Automated Clearing House: a funds transfer system governed by the ACH Rules of the National Automated Clearing House Association (NACHA), which provides for the interbank clearing of electronic entries for participating financial institutions.

Quality Control operates on a budget of $276,031, has five employees and is organized as shown in Exhibit 7-20.

Exhibit 7-20
Quality Control Department

 Quality Control Department

Quality Control administers the procurement card program, performs bank reconciliations, trains activity fund bookkeepers and monitors and reviews activity fund reports. The department also monitors payroll overtime hours and reviews accounts payable vouchers before checks are generated.

Each pay period, Quality Control receives a report of all employees who worked 20 hours of overtime or more in that pay period. To verify reported overtime hours, the Quality Control director calls the appropriate campus to ask the supervisor how many overtime hours were approved for each employee. Quality Control also verifies the payroll checks of everyone in the Payroll Department, since these workers can alter any payroll record, including their own. Quality Control has noted clerical errors but does not keep a record of them. Instead, Quality Control brings them to the Payroll director's attention for resolution.

Quality Control also performs verification procedures for the Accounts Payable Department. Twice each week, before Accounts Payable prints checks, the Quality Control director audits invoice batches, checking the vendor name, invoice number, invoice date, invoice amount and purchase order number.

Typically, checks and balances are built into specific processes to detect errors and irregularities -- for example, the verification of overtime hours using trend analysis and budget-to-actual reports. In addition, supervisors review and approve overtime for their employees. Accounts payable clerks with no invoice processing responsibilities typically review payment vouchers for accuracy. An employee in the Accounts Payable Department helps the Quality Control director review payment vouchers whenever Quality Control falls behind in its review. A separate department to perform these functions is simply an unnecessary layer of bureaucracy.

Recommendation 110:

Build checks and balances into the current Purchasing, Accounts Payable and General Accounting procedures and eliminate the department created as a solution to weak internal controls.

Quality Control should be eliminated and its duties divided among Purchasing, Accounts Payable and General Accounting (Exhibit 7-21). The director's position is the only one that should be eliminated, since the other positions perform critical functions that can be transferred to Purchasing, Accounts Payable or General Accounting.

Supervisors should verify overtime using variation analysis and budget reports. In addition, the Internal Audit Department should review overtime reports and conduct ongoing overtime audits. The Accounts Payable Department should assign someone with no invoice processing duties to verify payment vouchers. One accounts payable clerk already assists Quality Control with this function whenever backlogs occur. These duties could be divided between this employee and one or two other accounts payable clerks with no data input responsibilities.

Exhibit 7-21
Elimination of Quality Control
Position Duties and Responsibilities Disposition
Director-Quality Control Supervises activity of Section. Eliminate position. Divide duties among Purchasing, Accounts Payable and General Accounting, as appropriate.
Specialist III-Procurement Cards Administers the district's procurement card program. Transfer duties and responsibilities to the Purchasing Department.
Specialist II-Bank Reconciliations Reconciles all district bank accounts. Transfer duties and responsibilities to General Accounting.
Specialist II-Activity Funds Coordinates activity fund training for school office managers. Transfer duties and responsibilities to a section in General Accounting responsible for coordinating student activity fund accounting and administration.
Specialist II-Activity Funds Monitors and verifies monthly activity fund reports. Transfer duties and responsibilities to a section in General Accounting responsible for coordinating student activity fund accounting and administration.
Source: Interviews with DISD staff and DISD Job Descriptions.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent instructs the chief financial officer to eliminate the Quality Control and reassign its responsibilities to the appropriate areas. September 2001
2. The chief financial officer eliminates the Quality Control director's position and assigns the department's review responsibilities to the Purchasing, Accounts Payable and General Accounting Departments. September 2001
3. The chief financial officer or a designee develops procedures to analyze payroll and informs supervisors that they will be held strictly accountable for their overtime budgets. September 2001
4. The chief financial officer or a designee monitors overtime districtwide on a monthly basis. September 2001

FISCAL IMPACT

The fiscal impact of this recommendation is equal to the director's salary of $68,500 plus benefits of $2,272 and auto allowance of $1,404, for a total savings of $72,176 annually.

Recommendation 2001-02 2002-03 2003-04 2004-05 2005-06
Build checks and balances into the current Purchasing, Accounts Payable and General Accounting procedures and eliminate the department created as a solution to weak internal controls. $72,176 $72,176 $72,176 $72,176 $72,176

FINDING

Supplemental pay forms create a major burden for school office managers and the Payroll and Budget departments. Supplemental pay is additional pay certain employees receive for additional work. For example, teachers receive extended-day pay for working an extra 45 minutes per day.

DISD provides 67types of supplemental pay and processes more than 2,000 supplemental forms each month. During fiscal 2000, the district paid nearly $53 million in supplemental pay (Exhibit 7-22).

Exhibit 7-22

Supplemental Pay-Fiscal 2000
Description Amount
Extra Duty $23,968,726
Substitute Teacher Salaries $10,855,249
Overtime $6,101,622
Support Substitute Salaries $4,593,211
Salaries Professional $4,166,842
Professional Part-time/Temporary $2,091,766
Support Part-time/Temporary $323,119
Salaries Support Personnel $301,768
Other Employee Benefits $291,411
Other $60,377
Car Allowance $27,689
Career Ladder $12,173
Total $52,793,953
Percent of Total Payroll 7%

Source: DISD Payroll Department Special Report Request.

Office managers complete supplemental pay forms for the approval of the appropriate principals. These forms represent additional paperwork for office managers, since the regular payroll transmittal is completed on a separate form. The Payroll Department batches and enters these forms into the district's payroll system and the Budget Department reviews the forms to ensure that the budget codes are correct and money is available in the line code.

Budget specialists spend too much of their time (10-25 percent) processing supplemental pay forms and not enough time servicing the budget needs of the schools and departments. Payroll clerks say that entering the forms is a time-consuming task, and the department is considering using scanning technology to eliminate the need for manual entry. While scanning technology may ease the Payroll Department's burden, it will do nothing to help school office clerks and budget specialists. The problem is that the district simply has too many types of and requests for supplemental pay. Exhibit 7-23 presents a summary of codes existing as of March 12, 2001.

Exhibit 7-23

List of Supplemental Pay Codes as of March 12, 2001
Code Description Code Description
ABE Adult Basic Education PTB Part-Time Biweekly
ACD Academic Decathlon PTM Part-Time Monthly
ASBE Asbestos Pay RELF Relief Supervisor
ASCH Before/After School RETR Retro Pay
ATHL Athletics RSA Retirement Service Award
ATND Attendance Award SAT Saturday School
BISL Bilingual/ESL SBLC Signing Bonus-Learning Center
BOYS Boys Town SBPK Signing Bonus Pre K
BUSM Bus Monitor SDEV Staff Development
CILT Campus Instructional Leader SECU Security
CLAS Class Coverage STDC Stipend Department Chair
CODA Coaching Days STEC Stipend Extra Class
CONT Contract Reimbursement STIP Stipend
CURR Curriculum SUBC Substitute Custodian
DRIV Driver's Education SUBF Substitute Food Service
ELEC Elections SUBM Substitute Monthly
ESPY Evening Shift Pay SUMS Summer School
EVEN Evening School SUPL Supplemental Pay
EXTD Extended Day TAAS TAAS Testing
FLOW Flow Through TEMP Temporary
FOOD Food Service TEXT Textbook
FSIP Food Service Incentive Pay TLED Temporary Lead Person
GOAL Goals-Learning Centers TMPB Temporary Biweekly
GRAD Graduation Duty TMPM Temporary Monthly
HIC Helper-in-Charge TTL1 Title I
HIP Hippy Program TUTR Tutor
INPY Incentive Pay for High Performing Schools UIL University Interschool League
INTR Intersession USI Urban Systemic Initiative
LERN Learning Center VAC Vacation Pay
LSSA Life Sport WCOS Workers Compensation Offset
LSTR Life Sport Travel WELL Wellness Program
NEWS Newspaper WKSH Workshop
OVT Hourly Time and 1/2 YEAR Yearbook
PSA Payback Salary    

Source: DISD Payroll Department.

DISD's Internal Audit Department conducted a preliminary survey of the supplemental pay process prior to performing an audit of this area. The department's report, issued in January 2001, noted the following significant weaknesses:

  • There is no control over the number of pay codes that can be established.
  • There are no guidelines for who can use supplemental pay codes and when.
  • There is no budgetary control over supplemental pay; it is coded to regular payroll accounts.
  • Supplemental pay rates are not verified.

Internal Audit recommended that the district assemble a task force to "establish internal control procedures and specifications for an automated supplemental pay process."

Recommendation 111:

Consolidate supplemental pay codes and implement Internal Audit Department recommendations.

The district should eliminate as many supplemental pay codes as possible and restrict the number that can be used. In addition, the district should implement Internal Audit's recommendation to "establish internal control procedures and specifications for an automated supplemental pay process." Certain types of supplemental pay should be included in the regular salary of eligible employees. Other types could be eliminated altogether through a change in district compensation policy and accounted for as part of an employee's regular job duties.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent instructs the chief financial officer to devise a method of consolidating and reducing the number of supplemental pay codes. September 2001
2. The superintendent instructs the chief financial officer to confer with the Internal Audit Department and the task force established to implement supplemental pay controls throughout the district. September 2001
3. The chief financial officer in cooperation with the supplemental pay task force devise a plan to reduce the number of supplemental pay codes and to develop controls over supplemental pay. September 2001 through March 2002
4. The chief financial officer presents the plan to the superintendent for review and approval. April 2002
5. The superintendent places the plan on the board agenda for review and approval. April 2002
6. The board reviews and approves the plan. May 2002
7. The plan is implemented throughout the district. September 2002

FISCAL IMPACT

This recommendation can be implemented with existing resources.