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Nantucket AUP report13 NANTUCKET PUBLIC SCHOOLS STUDENT ACTIVITY ACCOUNTS TOWN OF NANTUCKET, MASSACHUSETTS REPORT ON APPLYING AGREED-UPON PROCEDURES OVER COMPLIANCE IN RELATION TO THE STUDENT ACTIVITY ACCOUNTS GUIDELINES FOR MASSACHUSETTS SCHOOL DISTRICTS JUNE 30, 2013 NANTUCKET PUBLIC SCHOOLS STUDENT ACTIVITY ACCOUNTS TOWN OF NANTUCKET, MASSACHUSETTS REPORT ON APPLYING AGREED-UPON PROCEDURES OVER COMPLIANCE IN RELATION TO THE STUDENT ACTIVITY ACCOUNTS GUIDELINES FOR MASSACHUSETTS SCHOOL DISTRICTS JUNE 30, 2013 TABLE OF CONTENTS INDEPENDENT ACCOUNTANTS’ REPORT ON APPLYING AGREED-UPON PROCEDURES…………………………………………….. 1 AGREED UPON PROCEDURES (Schedule I)………………………………………………... 2 FINDINGS AND OBSERVATIONS (Schedule II)….………………………………………… 3 - 14 INDEPENDENT ACCOUNTANTS’ REPORT ON APPLYING AGREED-UPON PROCEDURES To the Town of Nantucket School Committee, Town Finance Department and Superintendent of Schools: We have performed the procedures specified in Schedule I, which was agreed to by the Nantucket Public Schools. The procedures were performed, solely to assist you in evaluating the Town of Nantucket, Massachusetts’ assertion that with regards to its School Student Activity Accounts, it has complied with the Student Activity Accounts Guidelines for Massachusetts School Districts issued in 1997 by the Massachusetts’ Association of School Business Officials. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures specified on Schedule I either for the purpose for which this report has been requested or for any other purpose. We have attached to this report our findings as Schedule II. We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the Town of Nantucket, Massachusetts’ compliance with Student Activity Accounts Guidelines for Massachusetts School Districts. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the Town of Nantucket, Massachusetts’ School Committee, the Superintendent of Schools and the Town of Nantucket Massachusetts’ Finance Department, and is not intended to be and should not be used by anyone other than the specified parties. However, this report is a matter of public record and its distribution is not limited. Roselli, Clark and Associates Woburn, Massachusetts December 5, 2013 Nantucket Public Schools Page 1 of 14 Report On Student Activities SCHEDULE I – AGREED UPON PROCEDURES FISCAL YEAR ENDED JUNE 30, 2013 1. We familiarized ourselves with Student Activity Accounts Guidelines for Massachusetts School Districts issued in 1997 by the Massachusetts Association of School Business Officials. 2. We inquired if Student Activities are authorized by the School Committee. 3. We inquired if money handlers are bonded. 4. We inquired if 1099’s are issued for independent contractors required to receive such a document. 5. We inquired if pre-numbered receipts are used as a control for cash handling. 6. We inquired if bank reconciliations are performed on a regular basis. 7. We reviewed all twelve monthly bank statements to determine if the banking activity was properly recorded in the general ledger. a. We identified sample deposits recorded on the bank statement and attempted to trace these to a deposit slip and an entry in the general ledger. b. We identified sample disbursements recorded on the bank statement and attempted to trace these to a cancelled check and an entry in the general ledger. 8. We tested each of these sample disbursements for the following attributes: a. Is it as proper disbursement for the express purpose of conducting a student activity? b. Is it properly posted to the correct student activity? c. Are all disbursements supported by an invoice or equivalent? d. Does the amount on the invoice agree to the amount disbursed? e. Is the disbursement adequately authorized? f. Are all disbursements made by check? g. Are all checks accounted for in a sequential manner? h. Are checks signed by an authorized signer? 9. We reviewed excess cash balances to determine if they were in an interest bearing account. 10. We determined if the School Committee has a policy for disposing of money held in class accounts for classes that have graduated. 11. We determined if the School Committee has a policy for disposing of inactive accounts. Nantucket Public Schools Page 2 of 14 Report On Student Activities SCHEDULE II – FINDINGS AND OBSERVATIONS FISCAL YEAR ENDED JUNE 30, 2013 Introduction A student activity account shall be used for monies raised by students or student organizations and which will be expended by those students or student organizations for their benefit. Monies deposited to a student activity account are governed by Massachusetts General Law (“MGL”) Chapter 71 paragraph 47, as well as the policies of the School Committee. These provisions include procedures with respect to (1) the establishment of an interest bearing bank account and a checking account through the involvement of the Town Treasurer, (2) certain disbursement procedures, and (3) auditing and reporting requirements. This report will assist the District to gain further compliance with the applicable laws and regulations. This report is broken up into four sections: Section 1 – General findings and discussion that relate to all the Schools in the Nantucket Public School District. Section 2 – Specific findings that relate to Nantucket High School. Section 3 – Specific findings that relate to the Cyrus Peirce Middle School Section 4 – Specific findings that relate to the Nantucket Elementary School Nantucket Public Schools Page 3 of 14 Report On Student Activities Section 1 – General Findings Finding 1 – Policy and Procedure Considerations The Nantucket School Committee has adopted policies for the administration of student activities in accordance with the MGL Chapter 71 paragraph 47. These were adopted May 2000, and have been revised four times since, the latest being June 7, 2011. We reviewed these policies and they are written to follow the administrative protocol of the law fairly well. However, there is some doubt if the policies have been communicated to the individuals administering the accounts since we discovered many compliance issues in the manner with which these activities are administered at all three schools. Consequently, it appears that these policies are currently not being strictly enforced at any of the schools. In addition, these mandates are policy driven and not procedural driven, so procedures are left to the discretion of the specific individual activity administrators, who are not accountants, but mainly school secretaries. As a result, sound procedures are lacking and are followed in an inconsistent manner by the three schools. This is compounded by the lack of formal training for any of the specific activity administrators who, often during our process, sited this lack of training as the major cause for the majority of the deficiencies sited in this report. We agree completely with this assertion. We suggest, in addition to the policies currently in place, that the School Committee adopt standardized procedures (including forms) that clearly communicate a philosophy of strong internal control and include but not limited to the following: a) initial authorization, annual approval and termination of class accounts, clubs and organizations; b) receipt and handling of cash receipts; c) turnover procedures between the individual clubs and organizations to their school and the subsequent timely turnover from the school to the Town; d) disbursement of cash to third parties, including vendors, students and parents; e) reimbursement of monies paid by students, teachers and advisors for student activities; f) purchase and custody of equipment; g) recording of transactions into an accounting system (including the use of pre-numbered receipts or similar controls); h) the timely reconciliation of bank accounts to the information contained in the accounting system; i) requirements to issue IRS Forms 1099’s to third parties; and j) the periodic (i.e., monthly or quarterly) reporting of this financial information to all stakeholders (i.e., High School Principal and class/club advisors and officers). The implementation of strong standard procedures is a key element in any set of internal controls. Formal procedures as well as the use of standardized forms to document the approval of disbursements and the turnover of cash collections are necessary to provide the administrators of the individual student Nantucket Public Schools Page 4 of 14 Report On Student Activities activities guidance and would better ensure that disbursements made from student activity accounts are authorized and used for their intended purpose and that student monies are adequately safeguarded. In addition, in the event of personnel turnover, formal procedures provide a good basis for the new student activity fund administrator. We also suggest that the School Committee sponsor several formal training sessions for the individual activity administrators/secretaries. The individuals at the three schools who currently perform this function are extremely conscientious, diligent and want to do the right thing, but need to be more educated in the process. Finding 2 – Request of funds from the savings account Presently, the schools have properly set up savings accounts with the Town Treasurer. Checking accounts are administered at the individual school level. All deposits are required to be deposited with the Treasurer to the savings account and all disbursements are made from the checking account at the school. As the checking account depletes, a request of funds is made to the Treasurer. This is processed through a town warrant and goes through the normal approval process at Town Hall. The mechanism of having this saving/checking account relationship is consistent with the MGL however the request for funds is flawed. Presently, the back up to support the request is a memorandum of what the funds will be spent on and thus does not satisfy the necessity for complete and accurate support for the proper disbursement of the funds. The process should be amended to include with the request, copies of invoices of all disbursements made at the school level. This will allow the Finance Office to properly verify that the warrant is supported by a valid transaction. Finding 3 – Lack of fidelity insurance for cash handlers MASBO recommends, and the School Committee has it written into their policies, that all cash handlers are required to be insured against theft or loss of cash through a fidelity bond. We inquired of this requirement in all three schools and none of the schools are aware of carrying such coverage. We suggest this is addressed immediately. Not only does this provide the schools with protection over the student’s money, it is a School Committee policy to carry the insurance. Finding 4 – Reconciliation between School ledgers, Town ledgers and bank MASBO recommends in its Student Activity Account Guidelines for Massachusetts School Districts that, at a minimum, bank reconciliations be performed quarterly. In addition, MASBO recommends that copies of these quarterly bank reconciliations be provided to the school business administrator, the school committee and the student officers and teacher advisors of the individual clubs and organizations. We discovered that the checking account reconciliations are performed at the individual school level for the High School and Elementary School, but not at the Peirce Middle School. We also determined that the Treasurer reconciles the savings account at the Town level. However no attempt is made to reconcile the combined total of the School activity ledgers with the amounts held in the banks by any of Nantucket Public Schools Page 5 of 14 Report On Student Activities the schools. In fact, none of the three student activity administrators were aware of how much money existed in the savings account held by the Treasurer and likewise, they have never been requested to send the reconciliations of their checking accounts to Town Hall. We attempted to perform this reconciliation and discovered significant variances in the process delineated in the chart below: Since the student activity accounts have never been reviewed independently, it is not possible to determine if the school balances are accurate. There has been turnover, particularly at the High School, and the current High School administrator does not know what the balances of many of the activities in the current ledger represent since they predate her tenure. She indicated there was never a reconciliation process in place prior to October, 2008 (her start date) and many of the balances may not be accurate or complete and expenses may not have been posted correctly prior to this period. We suggest that the School Committee, Superintendent, Principals and administrators determine what the best course of action is to address this issue. The following are the possible solutions: 1. Perform analysis going back several years to determine if errors have occurred between the schools; both at the School level and the Town level. This could be an exhaustive process and many records are no longer available. 2. Conduct a forensic procedure of the High School activity to determine if funds are short due to inappropriate transactions. Same issue as (1) applies with respect to records. 3. Direct the Treasurer to transfer balances between the cash accounts to equal the school ledgers and then distribute the excess $19,026 proportionally to the three schools. This is the least desirable option since the true reason for the variances will never be known, but may be the only option. High Middle Elementary School School School Total Agency Account 164,157.40$ 24,964.14$ 85,834.61$ 274,956.15$ Per Town General Ledger Checking Account 1,915.68 5,502.42 7,745.28 15,163.38 Per School Checking Accounts Available cash 166,073.08 30,466.56 93,579.89 290,119.53 Per School records 242,653.54 20,694.57 7,745.28 271,093.39 variance (76,580.46)$ 9,771.99$ 85,834.61$ 19,026.14$ Nantucket Public Schools Page 6 of 14 Report On Student Activities Finding 5 – No annual approval from School Committee for various accounts MASBO suggests, and the School Committee has written into their policy the need to approve activity accounts prior to their use. We could not find evidence of any activity at any of the three schools that have been approved by the School Committee. We suggest that this becomes part of their annual process with these accounts. Each year, each account should be presented to the School Committee for approval. The accounts should be presented with a mission statement, funding source and manner in which the funds are to be spent; the School Committee should then vote whether to accept the activity or not. This beginning of the year process could be choreographed by a dedicated Student Activity Administrator (see next comment). Finding 6 – Appoint Dedicated Student Activity Administrator In the sections that follow we discuss the numerous deficiencies specific to the individual schools. This combined with the issues that have already been discussed above create a situation that is problematic for the schools. One common denominator is the fact that the recordkeeping and administration of the activities is currently assigned to each of the school secretaries, who have numerous other tasks to conduct in the school function and are not accountants educated in the field of reconciling and recordkeeping. This is one of the contributing factors to these problems that have manifested themselves. As such, we suggest the Superintendent evaluate the option of appointing one dedicated Student Activity Administrator for all three schools and make this their primary function. This individual could be trained thoroughly in the handling of student accounts and be the point person for reconciling with Town Hall. Given that the current High School Student Activities Administrator is retiring, this may now be an ideal time to begin this evaluation. Nantucket Public Schools Page 7 of 14 Report On Student Activities Section 2 – High School The High School by far conducts the largest amount of activity between the three schools. During fiscal 2013 there were approximately 200 disbursements totaling about $170,000. The current High School Administrator has been handling the accounting and recordkeeping function for about 5 years. She reconciles the checking account to her check ledger and this generally balances every month. As noted previously, no attempts are made to reconcile to either the Town Hall general ledger or the Treasurer, or vice versa. Finding 1 – Inactive accounts The High School maintains 134 different accounts. Only 33 are known to have activity by the High School Administrator. The remaining 100+ consist of inactive, stagnant accounts that have a net amount of about $45,000 and some are negative. The High School Administrator does not know what these accounts are for and basically nobody else does either. It appears some were set up years ago and never closed out. The DESE, in conjunction with MASBO, is in the process of updating the MASBO guidelines. Addressing how inactive accounts are to be disposed of is one of the topics that will be addressed. One of the possibilities is to allocate the inactive accounts back to the active accounts on a pro-rata basis based on a School Committee policy. If such a procedure is allowed we suggest the School Committee adopt this policy. Finding 2 – Lost books The Schools have set up lost books as a student activity. This is not appropriate since lost books are by statute a revolving fund and are required to be carried on the Town’s ledgers. We suggest that the balance in this account is transferred to the Town and handled as a revolving fund prospectively. Finding 3 – Cash handling Presently, funds are collected as cash or checks and deposited with the Town Treasurer in the Town Agency account. The collections are usually administered by class advisors or individuals outside of the central office, but brought to the central office for processing prior to deposit. Presently, pre-numbered receipts are not used in the cash handling process therefore a reconciliation process between the receipts and the deposits is not possible. We suggest the School Committee evaluate a pre-numbered receipt system in order to lower the risk of theft, misappropriation or error in the cash handling process. Finding 4 – Cash disbursement issues As previously discussed, the High School processed approximately 200 individual disbursements during the year. We identified what we believe were questionable practices in the disbursement process including the following: a. We noted numerous situations in which checks were written to individuals for reimbursement rather than directly to a vendor. One individual was paid $21,665 and a second individual was paid $6,023. Several others were paid also, but in smaller amounts. Most of the original charges Nantucket Public Schools Page 8 of 14 Report On Student Activities were processed through personal credit cards and then the card statement was used as support for the disbursement. The possibility that errors, misappropriation or lack of supporting documentation increases using this form of disbursement. The High School should discourage individuals from paying for goods and services and then requesting reimbursements when at all possible. In addition, in the above situations, rewards may have been earned personally on the credit cards which could create a conflicting situation. b. A gratuity dinner was granted to the newspaper program for its volunteers at the end of the school year. The total cost of the dinner was almost $600 and the original receipt was not in presented in sufficient detail to support what was purchased. This was a 2012 expense, but was paid in fiscal 2013. While this is a nice gesture for the volunteers, a public perception could be created that the dinner is excessive. We suggest that if it is determined that this is a reasonable cost of this program then the expenditure should receive School Committee support when approving activities at the start of the school year. c. Certain expenses are incurred for the Culinary Arts activity. This closely approximates the cooking class that is part of the normal curriculum. Assurances should be made that the two are not commingled as Student Activity money may not support curriculum items. This also applies to supplies, books and other items that should be part of the school curriculum. d. There was one instance in which sales tax was paid on an invoice. This contradicts MASBO guidelines and the School Committee policy. The amount was minor and isolated so we determined that this was an isolated instance. e. Overall, each disbursement should have a purpose that meets the goals of the activity being charged. This should be outlined by the School Committee when approving the programs. Finding 5 – Disposition of class accounts MASBO recommends that, because graduates are no longer students, monies for classes that have graduated cannot legally be kept in student activity accounts. MASBO suggests that the School Committee may develop policies that determine how long funds may be retained by the school. The School Committee has adopted such policies that require the inactive class account cash balances be distributed back to the other classes once 3 years has elapsed. Presently, there is almost $100,000 in class accounts who have graduated more than 3 years ago and these remain on the school ledgers. In fact, some of these accounts revert back to the class of 1990. This contradicts the School Committee policy. We suggest the school determine how to resolve this issue since these balances get larger each year. One solution is to direct the class to spend as much as possible of their money before year-end, either discounting the prom, having a year-end cookout or making a class gift. In the event that funds will revert back to other classes, the School Committee should make best efforts to communicate to all students that this is how funds will be disposed of if they are not spent. This will cause the process to be fully transparent. Nantucket Public Schools Page 9 of 14 Report On Student Activities Finding 6 – Lack of 1099 reporting We determined that there is no process in place to assure that tax reporting for individuals who are paid more than $600 properly supply the District with a Form W9 and receive a 1099 at year-end. Steps should be taken to assure that this important tax reporting requirement is satisfied. If disbursements go through the Town warrant process as previously discussed, the School could piggy back the Town 1099 process. Nantucket Public Schools Page 10 of 14 Report On Student Activities Section 3 – Cyrus Peirce Middle School The Cyrus Peirce Middle School student activity accounts generate the lowest volume of the three schools. Approximately $17,000 was transacted during fiscal 2013. Despite this, policies should still be followed and corrective procedures in the following areas implemented. Finding 1 – Record retention policies The Middle School records were maintained electronically through quick books on a school computer. This computer was accidently donated and the hard drive wiped clean. None of the files had been backed up and hard copies of the files were not maintained, so several years of activity were lost. In addition, bank reconciliations of the checking account were not performed for the year-ended June 30, 2013. We attempted to recreate fiscal 2013 activity from the checkbook, cancelled checks and the bank statements, and were able to arrive at a balance that approximated the checkbook balance. However, we can’t emphasize enough the need to back up data on a periodic basis. This should be part of any revision to the student activity policies in the future. Finding 2 – Miscellaneous account The Middle School has an account called a miscellaneous account. Many items flow through this account that may more appropriately be set up as dedicated accounts. In addition, we determined that some of the revenues and expenses recorded here should more appropriately be classified as revolving accounts and transacted through Town Hall. We suggest that the Middle School review closely all the activity in this account and only process items that are true student activities through his account. Finding 3 – Cash handling Funds are presently collected by class advisors and teachers in the homeroom, especially for the yearbook. These funds are not turned over immediately to the central office. The central office is not sure where these funds are kept between the point of collection and the point of turn-over. This increases the risk that cash may be lost or stolen. We suggest that the School Committee create a cash policy that should be followed by all schools. Funds should be turned over immediately to the central office and not taken home or kept in drawers. In addition, a pre-numbered receipt policy should be considered in order to account for all receipts. The amount of cash in question at any one time is not significant, but nonetheless, more stringent policies are needed. Finding 4 – Cash disbursement issues As previously discussed, the Middle School processes the least amount of individual disbursements during the year. We identified what we believe were questionable practices in the disbursement process including the following: a. We noted several disbursements that more closely approximated curriculum type items than student activities. These were processed through Read-A-Thon and the Book Fair. The MGL is Nantucket Public Schools Page 11 of 14 Report On Student Activities clear that the Town must support school curriculum through its operating budget and meet net school spending requirements. Curriculum items may not be supported by student activities. We caution the Middle School to closely evaluate expenditures to assure that all disbursements are for student activities only. b. There was one instance in which the cash disbursement was not supported by an invoice or equivalent. This contradicts School Committee policies and the Middle School should try to avoid this in the future. The amount is $432 and we determined this to be an isolated incident. c. There was one instance in which sales tax was paid on an invoice. This contradicts MASBO guidelines and the School Committee policy. The amount was minor and isolated so we determined that this also was an isolated instance. Finding 5 – Program breakout As previously discussed none of the current student activities are approved by the School Committee. As a result, except for year-book, the amounts collected appear to be credited to one large fund and several small funds, but the disbursements don’t appear to match the club description in all situations, especially the miscellaneous account. We suggest that the Middle School breakout the clubs into more defined programs and the charges to those programs should only be to support those programs. Finding 6 – Lack of 1099 reporting We determined that there is no process in place to assure that tax reporting for individuals who are paid more than $600 properly supply the District with a Form W9 and receive a 1099 at year-end. Steps should be taken to assure that this important tax reporting requirement is satisfied. If disbursements go through the Town warrant process as previously discussed, the School could piggy back the Town 1099 process. We did not discover payments to any individual exceeding this amount, but a policy should still be established in case the situation does arise. Nantucket Public Schools Page 12 of 14 Report On Student Activities Section 4 – Elementary School The Elementary School student activity accounts generate a fair amount of activity for an Elementary School; almost $60,000 was processed through the accounts during fiscal 2013. The following were identified as a result of our procedures: Finding 1 – Lost books The Schools have set up lost books as a student activity. This is not appropriate since lost books are by statute a revolving fund and are required to be carried on the Town’s ledgers. We suggest that the balance in this account is transferred to the Town and handled as a revolving fund prospectively. Finding 2 – Cash Handling Funds for many of the activities are presently collected by teachers in the homeroom, especially for the yearbook which can amount to a large sum. These funds are not turned over immediately to the central office. The central office is not sure where these funds are kept between the point of collection and the point of turn-over. This increases the risk that cash may be lost or stolen. We suggest that the School Committee create a cash policy that should be followed by all schools. Funds should be turned over immediately to the central office and not taken home or kept in drawers. In addition, a pre-numbered receipt policy should be considered in order to account for all receipts, especially yearbooks and field trips which are based on head count. Finding 3 – Cash Disbursement Issues We identified what we believe were questionable practices in the disbursement process for the Elementary School including the following: a. We noted a consistent pattern of disbursements that more closely approximated curriculum type items than student activities. The MGL is clear that the Town must support school curriculum through its operating budget and meet net school spending requirements. Curriculum items may not be supported by student activities. We caution the Elementary School to closely evaluate expenditures to assure that all disbursements are for student activities only. b. The Elementary School uses a practice of having the Principal sign a blank check whenever purchases are made from Stop and Shop. This is done because it is unknown how much the purchase will be. This is very risky; if the check is lost or stolen in transit, it could cause the School to lose a significant amount of student funds. Also, since there is no insurance bond on this process, the School could not recover any lost funds. We suggest this practice is discontinued immediately. c. There were a number of instances in which sales tax was paid on an invoice. This contradicts MASBO guidelines and the School Committee policy. The Elementary School should be conscious of this requirement and be more cautious when processing invoices subject to sales tax. Nantucket Public Schools Page 13 of 14 Report On Student Activities Finding 5 – Club Breakout As previously discussed none of the current student activities are approved by the School Committee and all funds are deposited into one large fund. There is no attempt to segregate deposits into different cost centers. As a result, excess funds collected in certain activities offset a deficiency in funds in other activities, which is not proper. Segregating funds into cost centers will allow the School to more properly cost out certain activities and keep revenues and expenditures of a program matched. We suggest that the Elementary School breakout the clubs into more defined programs and the charges to those programs should only be to support those programs. Finding 6 – Lack of 1099 reporting We determined that there is no process in place to assure that tax reporting for individuals who are paid more than $600 properly supply the District with a Form W9 and receive a 1099 at year-end. Steps should be taken to assure that this important tax reporting requirement is satisfied. If disbursements go through the Town warrant process as previously discussed, the School could piggy back the Town 1099 process. We discovered one individual who was paid $1,000 for a lecture. The School did not request or receive a Form W9 or remit a Form 1099 to this individual. Nantucket Public Schools Page 14 of 14 Report On Student Activities