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Putnam Valley Central School District Risk Assessment Update FY 2015/2016 & Recommended Audit Plan December PDF

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Risk Assessment Update FY 2015/2016 & Recommended Audit Plan December 2015 December 18, 2015 Ms. Jeanine Rufo President, Board of Education 146 Peekskill Hollow Road Putnam Valley, NY Dear Ms. Rufo:
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Risk Assessment Update FY 2015/2016 & Recommended Audit Plan December 2015 December 18, 2015 Ms. Jeanine Rufo President, Board of Education 146 Peekskill Hollow Road Putnam Valley, NY Dear Ms. Rufo: We have recently completed our risk assessment update for the Putnam Valley Central School District (the District ) on behalf of the Board of Education and Audit Committee. Our risk assessment of District operations identified and prioritized risks in accordance with New York s Chapter 263 of the Laws of In our risk assessment update, we re-evaluated the major functional areas of District operations to determine if there were any significant changes that would impact the risk evaluation from the previous fiscal year. Based upon the results of this current fiscal year risk assessment, we have updated our proposed risk-based audit plan that is attached to this report for your review and consideration. Our risk assessment update and corresponding recommended audit plan identifies the following areas as candidates for audit: Human Resources and Payroll A summary for each functional area reviewed and related risk rating is in the attached risk assessment update report. We met with the Audit Committee on December 17th to discuss the report and the recommended internal audit plan. We shall be available to meet with the Board to discuss the report at its convenience. We appreciate the cooperation and assistance provided by District staff. Very truly yours, Accume Partners 1500 Broadway, Suite 903 New York, NY p: f: Accume Partners Risk Assessment Approach We have performed an audit risk assessment update for the Putnam Valley Central School District ( District ), on behalf of the District Audit Committee and Board of Trustees in accordance with New York s Chapter 263 of the Laws of A risk assessment is a systematic process for identifying and controlling risk. Risk can be defined as the possibility that something could negatively affect the District. More specifically, risk can be defined as the internal and external factors that threaten the achievement of the District s mission, goals, and objectives. As the District s Internal Auditor, our primary responsibility is two-fold. First, internal audit s role is to assist the Board in ensuring that the District s risks are identified. Second, Internal Audit provides the Board and Management with a systematic assessment of risk to ensure that appropriate internal controls are in place to mitigate those risks. The recommended internal audit plan is derived from the risk assessment. The internal audit plan summarizes the recommended audits or test of controls the District should conduct to evaluate its risk management strategies. Effective and efficient internal controls, or risk management strategies, gives the Board and Management greater assurance that the District can achieve its mission, goals and objectives. The operational effectiveness of internal controls is then tested during the internal audit. Our risk assessment includes a District-wide analysis of the major District functions, processes, and controls. We consider qualitative and quantitative factors such as materiality to the financial statements, policies and procedures, strategic planning, and organizational change. Also, the risk assessment includes a quantitative risk rating that represents an aggregate assessment of risk relative to the financial and operating environment, information technology, governance, internal controls and compliance factors. In the initial risk assessment, our overall goal was to determine the degree of risk within the major functional areas of District operations. This resulted in our designing an annual audit plan to focus on those areas which were most at risk. In our risk assessment update, we re-evaluated the same functional areas to determine if there were any significant changes that would impact the risk evaluation. Internal Audit does not strictly recommend auditing only the functional areas with the highest risk rating score. Other factors affecting the recommendation include Board/Management priorities, limited resources, prior audit results, the opportunity for a greater impact in adding value to the organization, and the degree of organizational change in the functional area. All of these factors are addressed when devising the recommended audit plan. A Risk Assessment Report Page 1 Risk Rating Methodology In performing our risk assessment we categorized the District into nine functional areas. We then utilized a rating methodology that takes into account sixteen quantitative and qualitative factors such as: policies and procedures; financial materiality; operational change; employee knowledge & training; internal controls; management reporting; and laws and regulations. The sixteen factors were individually weighted by relevance and importance. Then, a risk matrix was developed to comprise the sixteen factors across all nine functional areas. The risk matrix is used to provide a systematic evaluation of risk. Each functional area s composite risk rating score is derived from the sum of the individual ratings scores of the sixteen factors. The rating system represents an aggregate assessment of risk, with the level of risk determined by the composite risk score as defined in the table below: Composite Risk Rating Score and Level Low 131 Medium High The qualitative and quantitative factors are individually weighted for relevance and significance. Thus, some factors will affect the overall risk rating more than others. In other words, the financial significance, materiality or criticality of a particular function to the organization s operations can increase the risk rating of a function. For example, in Payroll and Purchasing, the risk rating score for most Districts will be relatively higher than other areas because of the financial significance or materiality of these operations. This explains that some areas within the District may have higher inherent risks associated with them relative to other operations. Another factor that can increase the risk rating is the design of internal controls. Although our risk assessment does not test and evaluate the operational effectiveness of internal controls, our methodology includes the identification of internal controls, as well as an evaluation of the design of internal controls. If the District was lacking in a key control over a functional area such as adequate segregation of duties or policies and procedures, that would create more risk. In addition, we review for a system of internal controls that both prevent and detect errors. Preventative internal controls are controls that may prevent errors from occurring, whereas detective controls are controls that may detect errors once they have occurred. If the District has more controls in place that prevent errors, then the overall control environment would be stronger, and hence there would be less risk, than if the District relied solely on detective controls. The ultimate goal is to effectively manage the risks in all functional areas through the implementation of a system of internal controls that help to ensure that errors, irregularities, and fraud are less likely to occur or go undetected. A Risk Assessment Report Page 2 Risk Score Accume Partners Executive Summary FY15/16 FY14/15 Functional Area Risk Level Risk Level Internal Audit Conducted Rating Rating Budget, Financial Accounting & Reporting 187 Medium 197 Medium FY14/15 Debt, Investments and Cash 145 Medium 150 Medium FY08/09 Revenues and Accounts Receivable 170 Medium 170 Medium FY09/10 Purchasing and Accounts Payable 172 Medium 172 Medium FY12/13 Human Resources and Payroll 158 Medium 158 Medium Recommended FY15/16 Facilities and Capital Assets 173 Medium 182 Medium FY13/14 Student Services 156 Medium 156 Medium FY10/11 & FY11/12 Information Technology 191 Medium 191 Medium Government Aid and Grants 129 Low 129 Low Composite Risk Ratings High Medium Low A Risk Assessment Report Page 3 Discussion and Risk Rating by Functional Areas BUDGET, FINANCIAL ACCOUNTING and REPORTING Risk Rating 187 Medium This area is concerned with the budget development, implementation and monitoring process; financial accounting and reporting; and operations of the Business Office, Superintendent, and Board governance. The external auditor, O Connor Davies LLP, has issued their audit report, which had an unqualified opinion and did not identify any deficiencies in internal control over compliance that would be considered a material weakness. As of June 30, 2015 the District had Net Assets of $29.1 million, an increase of $8.6 million from the previous year. Total Revenues were $48.5 million for the year ended June 30, 2015, an increase of $454,912 from the previous year and Total Expenses were $42.8 million, a decrease of $4.4 million. Any reduction in state aid due to budget shortfalls on the state level and any significant change in tax certiorari payments could impact the District s financial position. State legislative requirements will affect the District s budget development process for FY15/16. The state passed a cap to restrict the growth in the property tax levy to two percent a year or the rate of inflation, whichever is lower. A majority vote of at least sixty percent of voters can override the tax cap, and some provisions are made to exclude items such as voter approved capital expenditures and certain pension costs that exceed two percentage points per year. The extremely low inflation rate could result in a 0% increase for next year. The District s Board of Trustees consists of five members. Board members serve three year terms. Overall, the Board sets a good example of internal control awareness and toneat-the-top. Specifically, the Board exercises transparency in its decision-making and governing by posting Board Agendas, Meeting Minutes, Policies, and presentations to the Board on the District s website. Board Sub-Committees regularly report to the full Board. In addition, Board Meetings are taped and made available to the public via video on demand link posted on the District s website. Internal audit noted that the District may want to post the internal audit reports on the web-site, following their summary presentations to the Board. A Risk Assessment Report Page 4 The District s Business Office personnel have stabilized over the past 2 years. The Account Clerk, the Payroll & Benefits Clerk, the Office Assistant 1 and the Assistant Treasurer have all completed approximately 2 years in their new positions and are also trained on the new Finance Manager system. The new Director of Operations has also completed a 2 nd year with the District and assumed the oversight role of Information Technology. The risk rating level was evaluated as Medium. A Risk Assessment Report Page 5 DEBT, INVESTMENTS and CASH Risk Rating 145 Medium Accume Partners Debt, Investments and Cash review looks at the processes the District has in place to oversee issuing, monitoring and recording of debt; as well as policies and procedures for managing and monitoring investments and collateral, and cash management controls. The Long-Term Indebtedness outstanding for the District totaled $26.7 million for the fiscal year ended June 30, 2015, compared to $26.2 million at the end of the previous year. At fiscal year ending June 30, 2015, the District held approximately $18.7 million in cash and investments which had increased from the previous year s total of approximately $17.5 million. The District s main source of revenue, property taxes, is collected at the beginning of the year and spent down as the year progresses. The District has an investment policy and has procedures in place to determine whether cash is available for investment. Excess cash balances are transferred to interest bearing accounts to maximize revenue. A summary record of key information is maintained for all investments to properly monitor and account for investments. The Business Office has adequate segregation of duties with respect to cash management. The Account Clerk opens mail; The Assistant Treasurer logs and posts cash received; and prepares the bank deposit. The Assistant Treasurer prepares the Treasurer s Receipts, and the Senior Account Clerk performs the bank reconciliations. In light of recent cybercrimes against local municipalities in New York, the District has taken steps to ensure it has adequate cash technology controls over its electronic funds transfers and online banking transactions. Proper cash technology controls require layers of internal controls to prevent misappropriation of district assets. The District follows best practices such as separation of duties with electronic funds transfers, use of complex passwords, daily monitoring of bank accounts, and use of dedicated computers for online banking transactions. Internal Audit notes that the District Treasurer approves all wire transfers initiated by the Assistant Treasurer. In addition, the District ensures that computers used to make online banking transactions are formally registered with its banking institutions, and that alerts are enabled to ensure proper monitoring of banking activity. This area was rated a Medium risk. A Risk Assessment Report Page 6 REVENUE and ACCOUNTS RECEIVABLE Risk Rating 170 Medium The review of this area focuses on property tax and non-tax revenue, recording and reporting revenue, billing and maintaining accounts receivable, and other Treasury functions in the Business Office. Revenues are collected from multiple sources, including taxes, tuition payments, extraclassroom activity funds, state aid, unrestricted earnings on investments, sale of property and miscellaneous items. Total revenues were $45.9 million for fiscal year 2015 and $45.4 million for the previous year. Of that amount real property taxes were $30.9 million for fiscal year The District has a reserve fund for tax certiorari claims of $699,140 at June 30, 2015 versus $698,093 at June 30, Maintaining an adequate level of tax certiorari reserves helps to lower the risk of any tax certiorari charges. The District collects its own taxes. This can increase the overall risk involved in collecting and receiving property tax revenues. However, the District mitigates the risk by collecting and processing the majority of its taxes through a Lockbox operation with its primary bank. This enables District residents to mail their payments directly to the bank, or make payments at the bank. The Senior Account Clerk has a significant number of responsibilities in the District, including preparation of bank reconciliations; mailing of tax bills; collecting cash payments and posting of all tax payments. The Senior Account Clerk does not reconcile tax revenues. There is also a part time Assistant Tax Collector. After October 31 st uncollected tax accounts go to the Towns of Putnam Valley, Carmel, and Cortland which then fund the District. This area continues to be rated Medium. A Risk Assessment Report Page 7 PURCHASING and ACCOUNTS PAYABLE Risk Rating 172 Medium This area is concerned with the Purchasing function and Accounts Payable, Cash Disbursements, and the Internal Claims Audit processes. The District has introduced improvements in the purchasing and accounts payable system. These include unique accounts and passwords for each system user, thereby limiting any changes to their own codes. The vendor database is controlled by the Human Resources Clerk. This individual also coordinates all purchasing for the District/Business Office and generates requisitions for the Business Office. She also creates purchase orders for all approved requisitions for the District and ensures the proper flow of purchasing transactions. Another improvement in the purchase order system is that the requisitions are processed electronically, and are approved at the Principals and Assistant Superintendent s levels thereby increasing its efficiencies and eliminating paper. The Accounts Clerk enters invoice batches into the District s Finance Manager accounting system to schedule payments; prints a check register for the Internal Claims Auditor s verification; and prints checks and mails them to vendors after verification. This individual performs a three way match of Purchase Order (P.O.) to invoice to receiving report, prior to entering the claim into the system. If a receiving report is not available, the requestor must sign the invoice as evidence of receipt of goods or that services were rendered. The District s Internal Claims Auditor conducts her audit of claims on behalf of the Board on the school premises. This is a best practice and facilitates the review of claims and allows for direct communication with the Accounts Payable Clerk to address audit findings and questions in a timely manner. The Internal Claims Auditor provides monthly reports of detailed audit findings to Management and the Board. By providing reports to both Management and the Board, the Claims Auditor communicates valuable information to the District, thereby assisting Management in monitoring compliance with purchasing polices and regulations. In addition, communicating detailed audit findings gives Management the opportunity to analyze procedures and find ways to improve the process and limit audit deficiencies going forward. The risk rating level was evaluated as Medium. A Risk Assessment Report Page 8 HUMAN RESOURCES and PAYROLL Risk Rating 158 Medium Accume Partners Both Human Resources and Payroll areas are closely linked in the administration of personnel, payroll, and benefits. In addition, this area is concerned with District compliance to Board Policies, union contracts and bargaining agreements, and applicable state and federal laws and regulations. The District s largest expense is salaries, wages and fringe benefits. This functional area is a highly significant one, not only due to the magnitude of its share of the District s budget, but also due to the complexity and sensitivity of its operations and ensuring compliance. Each final bi-weekly payroll register is reviewed by the District Treasurer before it is certified and payroll is distributed. The payroll certification process includes a review of changes to payroll. Hourly employees are paid on an annualized basis. Thus, the review of the Preliminary Payroll Report by the Assistant Treasurer, as well as the Final Payroll Report which is reviewed and signed by the District Treasurer, include both full and parttime employees. Timesheets are submitted for additional hours, stipends, and overtime. Timesheets are signed by both the Employee and Supervisor. Also, Internal Audit notes that the Payroll/Benefits Clerk prepares, files, and signs the state and federal quarterly payroll tax reports. The preparation of quarterly payroll taxes is independently reviewed by the District Treasurer, who makes the tax payments. In conjunction with the Finance Manager implementation, Management has restructured the duties of the Payroll/Benefits Clerk, the Human Resources Clerk and the Account Clerk to allow for increased segregation of duties, thereby strengthening the controls over the human resources and payroll processes. The risk rating level was evaluated as Medium. A Risk Assessment Report Page 9 FACILITIES and CAPITAL ASSETS Risk Rating 173 Medium Accume Partners This area includes buildings and grounds, facilities maintenance, capital improvements and new construction, fixed assets and inventory controls. The Director of Operations is in charge of the District s buildings, grounds, facilities maintenance and Information Technology. Work orders are maintained and tracked on an automated system within the Department. Capital assets, net of accumulated depreciations as of June 30, 2015, were $30.6 million, approximately the same amount as the previous year, and included equipment, machinery, land, and buildings and improv
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