Alexandria City Public Schools Superintendent Dr. Morton Sherman presented the findings of an outside audit of Capital Improvement Program projects to the School Board in closed session last night. The audit identified numerous violations of existing policies and procedures and a lack of internal financial controls.
“The Board received the final audit report from the superintendent and expects all recommendations to be executed to the fullest extent,” said School Board Chairman Sheryl Gorsuch. “The integrity of the CIP budget and the projects that will benefit our students must not be compromised.”
Sherman initiated an internal investigation and commissioned an outside audit when he discovered inconsistencies in a monthly financial report last fall. The internal review led to the resignation or dismissal of two members of the ACPS facilities staff and the implementation of new policies and procedures regarding capital project funds.
The audit firm of Robinson, Farmer, Cox Associates began their review in November, 2011, and presented their findings to Sherman earlier this week. The audit team examined budgetary and monetary transactions between July 1, 2010, and October 31, 2011. The team analyzed budget and financial activity for capital projects at six different schools: John Adams, Charles Barrett, Patrick Henry, Douglas MacArthur, James K. Polk and William Ramsay. While the auditors found that some capital projects at these schools had exceeded their budget, all accounts have now been reconciled. City Council approved the transfer of $6.36 Million to cover these and other capital project costs. These funds were within ACPS’ approved CIP budget.
“Changes are necessary to achieve the goals of this division,” said Sherman. “I am outraged at the actions of some staff and it is clear that our internal documents and procedures have to be updated and made more rigorous. While transitions and changes occurred in recent years, I have personally viewed documents dating back to 2001 that validate that established processes, procedures and guidelines regarding the management of CIP funds were in place. Staffing changes and additional internal controls have already begun to address the recommendations.”
The auditors identified deficiencies in the areas of internal controls, procurement, budget and facilities and made a number of recommendations about how ACPS should move forward. ”These are pretty basic accounting and financial procedures that should have been in place,” said Alexandria Vice Mayor Kerry Donley who questioned ACPS Deputy Superintendent Margaret Byess about this issue before Council approved the transfer of CIP funds to cover expenditures. “After reading the audit report, I can certainly understand how this happened. Without good monitoring, the fact that staff wasn’t following policies and procedures would have gone undetected.
“I do not understand how, in a multi-million dollar operation, this could have been allowed to happen. It gives me a great deal of concern about providing additional funds for capital projects until this situation is corrected. How can Council have any confidence that funds requested for maintenance are really going to be used for that purpose?
“This didn’t just happen because of a couple of employees in the facilities department. The superintendent and the School Board need to take responsibility for this mess and fix it,” Donley said.
The audit report included the following analysis:
During the course of our interviews it became evident that ACPS has operated in a dysfunctional environment in relation to CIP related activities. It should be noted that over a period of years a process that fragments procurement, budget, facilities, and City Office of Management and Budget has been present. This fragmentation and a lack of transparency between departments have created significant internal control weaknesses in monitoring CIP financial transactions. During the interview process the presence of this fragmentation and corresponding internal control weaknesses were consistently reinforced by ACPS staff interviewed. Further, it should be noted that while the School Board and Superintendent were not apprised of the internal control weaknesses discussed in this report before budget and vendor payment problems were discovered, some of these issues had earlier been brought to the attention of certain upper-level management for consideration of corrective action. ACPS does not record budgetary or financial transactions within its accounting system. The City of Alexandria Finance Department maintains both budgetary and expenditure controls for ACPS CIP expenditures within their accounting system (performance of accounting). This fragmentation created inconsistencies in the monitoring of ACPS CIP transactions both budgetary and expenditures. It was noted that staff in Facilities and Budget independently maintain separate spreadsheets to monitor CIP activities. Access by ACPS personnel to the City’s accounting system is limited making it difficult to reconcile CIP projects by OCA (Occupational Code Assignment) code.
Contracting For Services
It was noted that ACPS CIP contracts are not being reviewed by ACPS legal counsel prior to being awarded nor is there a policy in place requiring School Board approval of the awarding of contracts over a specified dollar amount.
A policy should be developed for CIP contracts exceeding a specified dollar amount that requires review by ACPS legal counsel. Subsequent to legal counsel’s review, the awarding of these contracts should be approved by the School Board.
Contract Change Orders
During the course of our interviews it became evident that there is a lack of a formal process for the approval of contract change orders. In at least one instance a change order was included in the contract sum to date on an application for payment prior to the receipt and approval of the actual change order by ACPS.
Contract change orders should be forwarded to Procurement along with a detailed explanation of the reasons for the change order. Procurement should communicate with budget staff to ensure the availability of funds prior to approving the change order. Contract change orders exceeding a specified amount should be approved by the Superintendent or their designee. Facilities should notify the contractor that services related to the change order may be performed only after receiving these approvals.
Communication with Procurement
Vendor invoices, Payment Vouchers and Purchase Orders are sent from Facilities to the ACPS Budget office. Budget staff determines if funds are available in the OCA code for which Facilities has coded the expenditure. In making this assessment of available funds, budget staff utilizes an independent excel spreadsheet which they maintain. When this spreadsheet reflects no available budget in a given OCA code the invoice is then sent back to Facilities. However, this spreadsheet only includes expenditures for which vendor invoices have been received from Facilities. This spreadsheet does not account for remaining contract balances that would indicate an OCA code may not have sufficient available budget for the total project expenditures.
Procurement should notify the Budget office when all CIP contracts are awarded so that these contracts can be monitored from award to completion and possible budgetary overages can be identified.
Communication with Facilities
It was noted that contracts were not consistently awarded based on available budget in a given OCA code. The budget office should approve that funds are available for contracts awarded by the procurement office including contracts under $50,000 and other task order contracts.
A determination of which OCA code a contract will relate to should be made prior to awarding a contract. An assessment of the available budget should be made to determine if funds are available prior to the awarding of the contract. If it is determined that a given OCA code will not have sufficient budget available, the contract should not be awarded or ACPS staff should go through the proper process to obtain a transfer of available budget from another OCA code.
School Board policy requires that all budget transfers over $50,000 be approved by the School Board. A budget transfer in the amount of $1,255,229 was approved by City Council on May 24, 2011 at the direction of ACPS Facilities staff members. This transfer was not presented to the School Board for approval.
School Board policy related to budget transfers should be followed at all times. The policy states that budget transfers greater than $50,000 that cross projects must be approved by the School Board. Additionally we recommend that School Board policy be amended to require that transfers less than $50,000 be approved by the Superintendent or their designee.
Budget staff utilizes an independent excel spreadsheet which they maintain. During our review it became evident that this spreadsheet was not reconciled to the City’s accounting system and did not accurately reflect available budget amounts. Furthermore, the School Board is not being provided accurate and timely reports related to CIP budgetary and financial transactions.
The excel spreadsheet should be reconciled to the City’s accounting system on a monthly basis. Further, the School Board should be updated on CIP budgetary and financial transactions on a quarterly basis. A report reflecting contract, budget and expenditures to date by CIP project should be provided to the School Board.
Facilities staff prepares purchase orders for various CIP expenditures. However, the purchase orders are frequently completed subsequent to the receipt of vendor invoices, if at all.
Purchase orders should be prepared when the contract for goods or services is awarded. For CIP projects the purchase order should reflect the contract amount. The purchase order should be updated after each progress payment to reflect the available balance remaining on the purchase order. The updated purchase order should accompany the invoice and payment voucher that are sent to the Budget office for the approval of available funds.
Prompt Payment of Vendor Invoices
CIP vendor invoices are received by various staff in Facilities. The vendor invoices are reviewed and approved by Facilities staff. Subsequent to Facilities approval the vendor invoices are forwarded to the ACPS budget office. During the period tested vendor invoices were retained in Facilities and not promptly forwarded to the budget office for processing. In October 2011 over $3 million of unprocessed vendor invoices were forwarded to the budget office which had been retained by Facilities. Several of these vendor invoices had been retained by Facilities for a significant period of time including two vendor invoices from a contractor totaling $1,531,212 for work completed as of July 31, 2011.
Vendor invoices should be received by finance staff prior to forwarding to Facilities for processing and approval. Subsequent to Facilities review and approval, vendor invoices should be forwarded to the budget office in a timely manner to ensure that vendor invoices are paid in accordance with the Code of Virginia. Section 2.2-4352 of the Code of Virginia states that the required payment date for goods and services obtained by local governments shall be “either: (i) the date on which payment is due under the terms of the contract for the provision of the goods or services; or (ii) if a date is not established by contract, not more than forty-five days after goods or services are received or not more than forty-five days after the invoice is rendered, whichever is later.”
Recording of Expenditures in the Proper Accounting Period
In the review of vendor invoices for the selected schools the following vendor invoices were recorded to the wrong accounting period:
• Invoice in the amount of $835,000 for the period to 6/30/10 from HITT Contracting for John Adams Phase 2, recorded in the accounting system in fiscal year 2011. This expenditure should have been recorded as fiscal year 2010 expenditure.
• Invoice in the amount of $1,206,028 for the period to 6/30/10 from HITT Contracting for Polk Phased Modern recorded in the accounting system in fiscal year 2011. This expenditure should have been recorded as fiscal year 2010 expenditure.
• Invoice in the amount of $423,405 for the period to 7/1/11 from HITT Contracting for Polk Phased Modern recorded in the accounting system in fiscal year 2012. This expenditure should have been recorded as fiscal year 2011 expenditure. This was application number 10 and it was noted that application number 9 was for the period ended 2/28/11.
• Invoice in the amount of $638,844 for the period to 7/1/11 from HITT Contracting for Polk Modular recorded in the accounting system in fiscal year 2012. This expenditure should have been recorded as fiscal year 2011 expenditure.
• Invoice in the amount of $107,487 for the period to 7/1/11 from HITT Contracting for John Adams Phase 2 recorded in the accounting system in fiscal year 2012. This expenditure should have been recorded as fiscal year 2011 expenditure. This was application number 10 and it was noted that application number 9 was for the period ended 1/31/11.
• Invoice in the amount of $187,480 for the period to 7/1/11 from HITT Contracting for John Adams Phase 2 recorded in the accounting system in fiscal year 2012. This expenditure should have been recorded as fiscal year 2011 expenditure. This was application number 11 and it was submitted for processing at the same time as application number 10 in the amount of $107,487 aforementioned which was for the same project and was also identified as being for the period to 7/1/11.
• Invoice in the amount of $120,015.11 for the period to 6/16/11 from Harry Braswell, Inc. for John Adams Ceiling recorded in the accounting system in fiscal year 2012. This expenditure should have been recorded as fiscal year 2011 expenditure. Further, documentation indicates that the contractor was asked to bill ACPS in July.
All expenditures for goods and services should be recorded in the proper accounting period. Expenditures for goods should be recorded in the accounting period in which they are received and expenditures for services performed should be recorded in the accounting period in which those services were performed. Rather than budget returning the expenditure documents to Facilities, these documents should be forwarded to ACPS finance staff. ACPS finance staff should ensure that the expenditure is identified to the proper accounting period prior to forwarding the vendor invoice and all related documents to the City to be recorded in their accounting system.
Potential Conflict of Interest
During the course of our interviews it became evident that there was a potential conflict of interest in relation to a staff member of Facilities. Information provided during the interview process indicated that this staff member had at least one ACPS contracted vendor perform work on the staff member’s personal residence and also that the staff member was previously employed by an ACPS contracted vendor. Also, it should be noted that this staff member owns and/or operates a design/build company (the website for this company has subsequently been removed from the web).
Procedures should be developed to identify any potential conflicts of interests as they relate to staff members involved in the procurement, approval, and other aspects of financial transactions.
In a review of vendor invoices $317,092.90 was identified which was paid to a vendor for work performed at Douglas MacArthur and was processed and coded to OCA codes related to William Ramsey. Included in this amount was a payment in the amount of $165,505 for which a contractor’s application for payment was submitted indicating work was performed at Douglas MacArthur and subsequently a one page invoice was submitted indicating the work was done at William Ramsey (Building Envelope Repair) in this same amount. The payment was processed and recorded to William Ramsey. Further, it should be noted that during the interview process ACPS staff members indicated that Facilities staff members had requested that vendors submit vendor invoices under a project different than the one for which services were actually performed.
All vendor invoices should be reviewed to ensure that all aspects of the vendor invoice are correct including ensuring that the project identified on the vendor invoice is accurate and is not a duplicate vendor invoice.
Allocation of Vendor Invoices
Various vendor invoices were split between different OCA codes within the same school. In many instances there was no documentation supporting the allocation between OCA codes.
The methodology for the allocation of expenditure amounts assigned to more than one OCA code should be documented to support the basis for this allocation.
Small Contracts and Task Orders
Currently Facilities staff is awarding contracts under $50,000 and other task order contracts.
Contracts under $50,000 and other task order contracts should be approved by the Superintendent or their designee prior to award.