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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 3)

Since fiscal 1998, schools in seven of the nine district areas have experienced average annual growth rates in student activity audit exceptions. Schools in areas six and nine experienced the largest growth rates of audit exceptions, averaging 24 and 41 percent, respectively. Schools in areas three and four experienced declining rates of 13 percent and 25 percent, respectively. Exhibit 7-34 compares audit exceptions by area for fiscal years 1998 through 2000.

Exhibit 7-34
Average Annual Growth Rates
Activity Fund Audit Exceptions
Fiscal 1998 through 2000

 Average Annual Growth Rates
Source: DISD Internal Audit Department.

Some school districts centralize activity fund administration and accounting to better manage and control these funds. Exhibit 7-35 summarizes DISD and peer activity fund information, including activity fund administration models.

Exhibit 7-35
Summary of DISD and Peer Student Activity Fund Information
District Number
of
Schools
Fiscal 2000
Activity Fund
Expenditures
Activity Fund
Model
Used
Central Office
Activity
Fund Staff
Dallas 239 $15,527,436 Decentralized 1 Director 2 Staff
San Antonio 108 $1,750,000 Centralized 1 Accountant 4 Staff
Houston 297 $17,727,611 *Hybrid 1 Manager 5 Staff
El Paso 84 $1,861,351 Decentralized 1 Professional 2 Clerks
Source: Texas Education Agency, AEIS, 1999-2000 and Interviews with peer district personnel.
*Houston ISD uses a centralized model for middle and high schools and a decentralized model for elementary schools.
Note: Austin and Fort Worth data not provided.

The San Antonio Independent School District (SAISD) accounts for school activity funds centrally. SAISD deposits activity funds into a single checking account and performs bank reconciliations at the central office. To use the funds, schools must submit requisitions to the central office, which processes them through the district's accounts payable system. SAISD's central office also issues the checks, reconciles the bank account and invests activity fund monies. Campuses receive credit for interest earned on their portion of funds in the account. SAISD's Internal Audit unit audits student activity accounts and completes an audit of all school activity funds every two years.

The Houston Independent School District (HISD) uses a hybrid model. Middle and high school activity funds are administered and accounted for centrally, while elementary schools manage their own funds. All HISD schools collect and deposit funds. Middle and high schools must submit purchase requisitions to central office to use their funds; elementary schools can make their own purchases and maintain their own accounting records. The central office reconciles bank accounts for all schools and invests activity fund monies. Campuses whose activity funds are controlled centrally receive credit for interest earned on their portion of the funds. Every summer, HISD's Internal Audit Department audits each activity fund.

HISD's rationale for this hybrid model is based on its risk assessment. Middle and high schools are more risky because they manage more money than do elementary schools. Furthermore, the district has twice as many elementary schools as middle and high schools, and the administrative burden of central administration of elementary school activity funds is considered to outweigh the risk.

DISD's Internal Audit Department has developed a centralized activity fund management model based upon the district's area concept, but has not yet presented it for approval or adoption by the board. Under this model, administrative responsibilities would be divided among schools, the Quality Control Department, Internal Audit and the nine area district offices (Exhibit 7-36). Presently, responsibilities are divided among the schools, the Quality Control Section and the Internal Audit Department.

Exhibit 7-36
Internal Audit's Proposed Structure of Activity Fund Administration

 Activity Fund Administration
Source: DISD Internal Audit Department

Recommendation 116:

Centralize middle and high school activity fund administration under five area business managers.

The district should administer high and middle school activity funds at the area level, while keeping elementary school activity fund administration at the campus level. This structure would provide much-needed oversight of activity funds while preserving some of the advantages of site-based management.

Although activity funds would not be administered centrally under the proposed model, the central office would continue to play a role. Two specialist IIs currently in the Quality Control Section with student activity fund responsibilities should be transferred to General Accounting and given primary responsibility for overseeing elementary school activity fund operations. In addition, they should be responsible for supporting the activities of business managers in the area offices who would oversee middle and high school activity fund operations.

Responsibility for middle and high schools in the nine district areas should be divided among five area business managers. These individuals also would provide assistance and support to elementary school office managers and serve as a front line resource for review, support and problem-solving. A suggested work distribution based on the volume of middle/high school fiscal 2000 expenditures is shown in Exhibit 7-37.

Exhibit 7-37
Work Distribution Plan
Based on Fiscal 2000 Middle and High School Disbursements
Area
Business Manager
Area
Combinations
Middle/High School
Disbursements
Percentage Of Total
Disbursements
Total Middle/High
Schools
1 Areas 1+3 2,007,019 21% 11
2 Areas 2+6 1,997,025 21% 11
3 Areas 4+7 1,903,778 20% 10
4 Areas 5+8 1,965,654 20% 12
5 Area 9 1,764,422 18% 20
  Total 9,637,898 100% *64
Source: DISD General Accounting Student Activity Fund Information.
*Includes only those middle and high schools whose activity funds were audited during fiscal 2000.

Exhibit 7-38 presents the proposed organizational structure.

Exhibit 7-38
Proposed Activity Fund Administration Model

 Activity Fund Administration  Activity Fund Administration
Source: Developed by TSPR.

Reorganizing the administration of the district's middle and high school activity funds under the direction of five area business managers will improve control and reporting of activity fund activities, increase supervision of day-to-day operations of office managers related to activity funds, provide efficient services to schools and reduce the occurrence of fraud, theft and unallowable disbursements.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The chief financial officer forms a task force consisting of the Internal Audit director, the student activity fund specialists in the Quality Control department, and a middle and high school representative. August 2001
2. The chief financial officer instructs the task force to evaluate the feasibility of reorganizing student activity fund administration based on the area management concept. August 2001
3. The CFO instructs the task force to develop a plan to reorganize student activity fund administration based on the area concept. September 2001
4. The CFO reviews and approves the plan and posts positions for five area business managers. October 2001
5. The CFO interviews candidates for the area business manager positions. October through December 2001
6. The Human Resources Department fills the area business manager positions. January 2002
7. The successful candidates begin their duties. January 2002

FISCAL IMPACT

The recommendation provides for one specialist III to fill each of the area business manager positions. Based on DISD's averagesalary schedule used in the preparation of its 2000-01 budget, a specialist III receives $43,079 salary plus $2,272 benefits plus a $962 car allowance, for total annual compensation of $46,313. Since the positions would not be filled until January 2002, the fiscal impact during fiscal 2002 would be a cost of $154,377 ($46,313 x 8/12 x 5) and $231,565 in 2003 and thereafter ($46,313 x 5).

Recommendation 2001-02 2002-03 2003-04 2004-05 2005-06
Centralize middle and high school activity fund administration under five area business managers. ($154,377) ($231,565) ($231,565) ($231,565) ($231,565)

FINDING

Board policy drives the auditing of school activity funds, rather than any in-depth risk assessment. Board Policy CFD (LOCAL) requires the Internal Audit Department to audit every activity fund every year. In addition, activity funds must be included in the annual independent audit conducted by the district's external auditors.

Audits are most cost-effective when they are focused in high-risk areas. The Internal Audit Department wants to place more emphasis on high-risk areas such as schools with weak activity fund controls and inaccurate enrollment and attendance records. However, the department is unable to do so because of staff size and the board policy requiring annual audits of all activity funds. Activity funds at schools with weak controls represent high-risk areas because they often involve large sums of money. Enrollment and attendance represents a high-risk area because they affect funding for individual schools and the district as a whole.

Internal Audit does not use its audit finding tracking system to differentiate between those schools requiring more audit effort and those requiring less. The present tracking system indicates whether a given exception was repeated from the prior year, but does not rate a school's level of compliance with activity fund policies and procedures. Audit exceptions are summarized by area and total audit exceptions are compared to the previous year, but are not used to focus audit effort by area or school.

Exhibit 7-39 provides a summary of audit exceptions noted since fiscal 1998. This information could provide a basis for a more focused approach to selecting schools for audit. At present, it is not being used for this purpose. Over the past three fiscal years, the same five audit exceptions have reoccurred in about a third of the schools. These exceptions are highlighted in the exhibit and should be targeted to encourage compliance with the Activity Fund Manual.

Exhibit 7-39
Frequency of Audit Exceptions
Audit Exception Fiscal 1998 Frequency Fiscal 1999 Frequency Fiscal 2000 Frequency Three-year Average
Issues with fund raising permission forms and reports *0% 66% 28% 31%
Forms not submitted for payments for contractual services *0% 46% 48% 31%
Sales tax and/or quarterly reports not submitted to Comptroller's office 31% 38% 28% 32%
Lost textbook funds not submitted at end of year 0% 31% **0% 10%
Unallowable/questionable expenditures 46% 27% 19% 31%
Improper petty cash procedures 6% 14% 3% 8%
Multiple quotes not obtained for purchases over $1,000 60% 13% 36% 36%
Centralized funds not maintained separately and/or returned by May 31 17% 13% 6% 12%
Deposits not made timely 15% 11% 33% 20%
Accounts with negative balances 17% 6% 18% 14%
Checks issued payable to cash 3% 6% 5% 5%
Payments made to district employees 5% 5% 7% 6%
Checks not signed by principal or designee 0% 2% 1% 1%
Source: DISD Internal Audit Department Activity Fund Audit Exception Reports.
*Audit procedure was first performed during fiscal 1998.
**Audit procedure was not performed during fiscal 2000.

Schools with capable office managers that have had few audit exceptions receive the same audit effort as schools with inexperienced office managers and recurring audit exceptions. Audit exception rating systems and audit rotation cycles allow internal auditors to focus more on high-risk areas.

Recommendation 117:

Target activity fund audits based on in-depth risk assessments and establish a staggered audit schedule.

The Internal Audit Department should devise a method of rating school compliance with activity fund procedures. The rating system should be used to decide which schools need more audit emphasis. Instead of simply reporting and tracking findings from year to year, the district should weigh the findings to determine an overall level of compliance. Then, the Internal Audit Department should grade each school and track their grades from year to year to determine if progress has been made. More audit emphasis should be focused on schools deemed high risk. Exhibit 7-40 presents an example of a multi-year report card designed to grade compliance with activity fund procedures.

Exhibit 7-40
Sample School Fund Audit Report Card
School Grade Fiscal 2001 Grade Fiscal 2000 Grade Fiscal 1999
One A B C
Two C B A
Three A D F
Four A A A
Grading Scale
Key to Grading Scale
A School fully complies with Activity Fund Manual; no reportable conditions noted.
B School substantially complies with manual; reportable conditions were noted, but they do not significantly weaken internal controls.
C School achieved adequate compliance with manual; reportable conditions were noted that must be addressed to strengthen or improve internal controls.
D School is out of compliance with manual; reportable conditions pose a significant threat to the system of internal controls.
F School is out of compliance with manual; reportable conditions indicate that internal controls are weak or nonexistent.
Source: Texas School Performance Review.

Corrective measures should be applied to schools consistently rated "out of compliance." Suggested corrective measures are shown by degree of severity in Exhibit 7-41.

Exhibit 7-41
Suggested Corrective Measures
for Schools Consistently Rated "Out of Compliance"
Degree of Severity Corrective Measure
First Degree Submit a corrective action plan to the superintendent and subject school to audit again the following year.
Second Degree Submit a corrective action plan, require principal and bookkeeper to attend quarterly training sessions followed by "mini-audits" conducted at the end of the quarter in which the training takes place, and subject school to audit again the following year.
Third Degree Reassign responsibility for custodianship of activity funds from the office manager to another qualified individual, and make compliance with activity fund policies and procedures a key component of the principal's performance evaluation.
Source: Texas School Performance Review.

Internal Audit also should develop a staggered audit schedule to ensure that all activity funds are audited at least once every two years. The schedule should be kept confidential and schools should be notified that they could be audited at anytime.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The superintendent places an item on the board agenda to revise Board Policy CFD (LOCAL) to allow the Internal Audit Department to audit activity funds based on a staggered schedule. August 2001
2. The board reviews and approves the agenda item. September 2001
3. The chief financial officer instructs the Internal Audit Department to devise a grading system for compliance with the Activity Fund Manual. September 2001
4. The chief financial officer instructs the activity funds coordinator to draft corrective measures for schools that are consistently out of compliance with the Activity Fund Manual. September 2001
5. The chief financial officer reviews the grading system and approves a final draft of corrective measures. November 2001
6. The activity funds coordinator informs campus principals and office managers of the grading system and corrective measures and obtains confirmation that they are understood. November 2001
7. The activity funds coordinator sets the effective date on which the measures will go into effect. November 2001
8. The Internal Audit Department incorporates staggered activity fund audits into its fiscal 2003 audit plan. December 2001

FISCAL IMPACT

This recommendation can be implemented with existing resources.

FINDING

The district is not using the full capabilities of its activity fund software. It uses the software as standalone systems although it has networkable capabilities. Checks can be printed using the software; however, many office managers type checks on a typewriter then enter them into the system. There is a district consolidation module that would allow the district to print 1099 forms each year for contractors paid more than $600, but the district does not use this capability. Finally, the system has an auditing module that facilitates audits by allowing "what-if" and other analysis on transaction data, but the district has not made use of this capability either.

Limited use of the software's capabilities makes it more difficult for district staff to monitor activity funds and assist school office managers. It also results in more paper being generated as schools send reports to the central office each month for review and for input into the district's general ledger.

DISD campuses may use the district's activity fund software or a manual accounting system of their own invention; the Quality Control Section has not made use of the software mandatory. Exhibit 7-42 highlights schools that do not have activity fund software and use manual systems.

Exhibit 7-42
Schools Using Manual Activity Fund Accounting Systems
Type Schools Using Manual Systems Fiscal 2000 Expenditures Average per School
Elementary Schools 35 $1,191,966 $34,056
Middle Schools 1 $68,463 $68,463
High Schools 4 $112,436 $28,109
Special Schools 12 $214,304 $17,859
Total/Percent of Total 52/22% $1,587,169  
Source: DISD Quality Control and General Accounting Department.

Using the network capabilities, with appropriate controls, would allow the activity fund specialist to view office managers' systems and would make it easier to oversee their activities and troubleshoot their problems. Schools would not be required to send their reports to central office every month. The activity fund specialist would simply print out a report of monthly activity and request whatever supporting documentation is needed.

In addition, networking would allow the Internal Audit Department to monitor transactions of selected schools during the year without requesting paper reports. If the activity fund network were integrated with the district's financial accounting system, there would be no need to create manual entries into the automated accounting system.The transactions could be downloaded automatically. Finally, using the check printing and district consolidation capabilities of the system would eliminate unnecessary data input, while the audit module would facilitate Internal Audit's annual audits of activity funds.

Recommendation 118:

Use the full capabilities of the activity fund software and require all schools to use the system.

The district should use the full capabilities of its activity fund software. The process of monitoring and accounting for activity funds would be streamlined if the district used the full capabilities of the software. Moreover, full use of the system by all schools results in more effective accounting than can be attained using a manual system.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The chief financial officer instructs the student activity coordinator to determine which capabilities of the activity fund software are not being used. August 2001
2. The chief financial officer confers with the district's Information Technology Department to determine what needs to be done to network all school activity fund databases with the central office. August 2001
3. The chief financial officer and Information Technology Department work to network school activity funds to the central office. August 2001 and Ongoing
4. The activity fund coordinator conducts a survey of office managers to determine which capabilities are not being used. August and September 2001
5. The chief financial officer instructs the activity fund coordinator to cooperate with the Information Technology Department to provide training in the network version of the activity fund software. September 2001
6. The activity fund coordinator develops a training program to train office managers on system capabilities that are not being used. September and October 2001
7. The chief financial officer issues a memo instructing all office managers to use the full capabilities of the networked activity fund software. September 2001

FISCAL IMPACT

Based upon quotes received from the software vendor, the activity fund software costs $149 per school plus $8 shipping. Since 52 schools use manual systems, the fiscal impact of acquiring the software would be $8,164 (52 x $157). This price includes toll-free technical support in the first year and current version downloads from the company's Web site at any time as long as the school maintains a valid support contract, which costs about $60 per school after the first year. Therefore, the annual cost of this recommendation would be $8,164 in fiscal 2002 and $3,120 (52 x $60) in fiscal years 2003 through 2006.

Recommendation 2001-02 2002-03 2003-04 2004-05 2005-06
Use the full capabilities of the activity fund software and require all schools to use the system. ($8,164) ($3,120) ($3,120) ($3,120) ($3,120)

FINDING

Activity fund checks require only one signature, regardless of the amount. Section 2.2 of the Activity Fund Manual requires each bank account to have two authorized signers, one of whom must be the principal, registered with the bank. However, only one of the two signatures is needed to approve checks. Many school districts require two signatures on checks to limit the possibility of irregularities. Strong internal controls call for two signatures. Typically, the principal and his or her designee are authorized signers plus one other individual at the school other than the bookkeeper.

Recommendation 119:

Require at least two signatures on activity fund checks.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The chief financial officer instructs the activity fund coordinator to draft a memo requiring dual signatures on activity fund checks. August 2001
2. The activity fund coordinator drafts the memo and submits it to the chief financial officer for review and approval. August 2001
3. The chief financial officer reviews and approves the memo and disseminates it throughout the district. September 2001
4. The chief financial officer informs the Internal Audit Department about the new requirement and suggests that each school's compliance be tested during activity fund audits. September 2001

FISCAL IMPACT

This recommendation can be implemented with existing resources.

FINDING

Unexplained differences between school activity fund ledgers and the district's general ledger require large adjusting entries at the end of the year. Each year, after Internal Audit completes its review of activity funds, General Accounting makes adjustments to activity fund account balances to adjust them to final audit balances. These adjustments are not necessarily audit adjustments; Internal Audit typically does not make activity fund audit adjustments. Instead, the adjustments arise out of differences between activity fund reports schools submit to General Accounting each month and the final year-end activity fund reports. One would expect the sum of the monthly reports to equal the total of the annual report, but the reconciliation report shows that they do not agree for most schools. Therefore, an adjustment to the general ledger is required. Exhibit 7-43 summarizes adjustments made at the end of fiscal 2000 for differences greater than $15,000.

Exhibit 7-43
Activity Fund Adjustments Greater than $15,000
Campus School Ledger District Ledger Adjustment
Arts Magnet $111,564 $73,211 $38,353
Bryan Adams ($58,509) ($39,215) ($19,294)
Burleson $3,492 $35,234 ($31,742)
Casa View $33,894 $10,964 $22,930
Pinkston $63,035 $33,016 $30,019
Science Magnet $31,003 $4,879 $26,124
Wilson $86,877 $69,088 $17,789
Source: DISD General Accounting Summary of Activity Fund Adjustments.

Section 14.1 of the Activity Fund Manual establishes procedures for submitting monthly reports to the central office. Office managers are required to submit form A-45, School Activity Statement, and form CA-766, Monthly Finance Report. The School Activity Statement shows beginning balance, monthly receipts, disbursements, transfers and the ending balance. Principals are required to certify the accuracy of this report but are not held accountable if the School Activity and the monthly finance report do not match. The Monthly Finance Report is the document General Accounting uses to record each school's financial activity for the month. The office manager uses the totals on this report to prepare the School Activity Statement.

The nature of the discrepancies between the monthly and year-end reports is unknown and no one in the district has attempted to determine their cause.

Recommendation 120:

Reconcile differences between campus student activity ledgers and the district's general ledger and hold principals accountable for the accuracy of the reports.

Instead of simply recording such differences as adjustments, the district should determine why these differences are occurring and implement corrective actions. While this investigation may be time-consuming, it would not be difficult. A simple comparison should be made between the monthly School Activity Statements and the monthly Finance Reports for each school where differences are noted. Any differences should be explained and reconciled. Principals should be held accountable for monitoring these required reports prior to submission.

IMPLEMENTATION STRATEGIES AND TIMELINE
1. The chief financial officer instructs the general accounting coordinator to assign an accountant to investigate differences between campus activity fund ledgers and the district's general ledger. August 2001
2. The general accounting coordinator assigns an accountant to research the reason for the differences. August 2001
3. The assigned accountant selects several schools with differences and compares their monthly reports to entries on the district's general ledger. September 2001
4. The assigned accountant determines the reason for the differences and reports the reasons to the general accounting coordinator, who in turn reports the reasons to the chief financial officer. September 2001
5. The chief financial officer instructs the general accounting coordinator to take the steps needed to prevent such differences in the future. September 2001

FISCAL IMPACT

This recommendation can be implemented with existing resources.