ACET Fall Conference 2012
Financial Audits Update
Presenter: David McLaughlin
Interim Director, Division of Financial Audits
Texas Education Agency
(512) 463-9095
Email: schoolaudits@tea.state.tx.us
What role does TEA play in Federal Funds?
TEA is required to monitor federal awards to
ensure awards are used in compliance with laws,
regulations, and the provisions of contracts or
grant agreements and that performance goals
are achieved.
Supplement vs. Supplant Rules
Auditors will presume supplanting
occurred if federal fund were used to
provide services that:
• Were required to be made available under
other federal, state, or local laws.
• The subrecipient conducted in the prior year
with non-Federal funds.
What documents will auditors review?
Purchase orders
Payment authorization forms
Payroll authorization forms
Travel reimbursement forms
Employee reimbursement forms
What documents will auditors review?
Journal vouchers
Cost allocation plans and working papers
Budget working papers
Original third-party itemized invoices/receipts
Contracts, including amendments
What documents will auditors review?
Bank statements
Grant Application and amendments
Inventory of assets and equipment purchased
Bidding records for purchases
Common Findings in TEA Federal Audits
Local policies and procedures did not address:
Preparation, review, approval and submission of
expenditure reports for federal awards
The process that subrecipient personnel are
required to follow for the expenditure of grant
funds for travel costs
Common Findings in TEA Federal Audits
Local policies and procedures did not address:
The process used to develop and amend the
budget
A specific administrative procedure requiring the
filing of written correspondence with the TEA
regarding the disposal of personal or real
property purchased with federal funds
Common Findings in TEA Federal Audits
The positions paid out of grant funds did not
agree with the positions approved in the
budget
The subrecipient failed to maintain adequate
and sufficient source documentation to
support the expenditures charged to the grants
and reported to TEA as the basis for its
reimbursement from the applicable grant
program
Common Findings in TEA Federal Audits
The subrecipient did not maintain adequate
documentation to support the payroll costs
charged to the grant (time and effort
documentation, extra duty pay agreements, time
sheets, etc.)
The subrecipient obligated grant funds outside
of the grant period that was not approved as a
pre-award cost in the grant application as
amended
Common Findings in TEA Federal Audits
The expenditures charged to the grant did not
align with the objectives outlined in the
campus/district improvement plan
Inability to reconcile time and effort records with
actual payroll costs
Texas Education Agency website for Division of
NCLB Program Coordination:
http://www.tea.state.tx.us/index4.aspx?id=4261&menu_id=798
This site includes links to a number of other pages with information
about numerous Federal Programs.
Purpose of State Compensatory Education
SCE is defined in law as programs and/or
services designed to supplement the regular
education program for students identified as at
risk of dropping out of school.
The purpose is to increase the academic
achievement and reduce the dropout rate of
these students.
How are Texas LEAs funded for SCE?
Funding is based on the number of students reported on
the free- or reduced-price lunch count from the average of
the district’s best six-months’ enrollment from the previous
school year or in the manner provided by commissioner’s
rule, if no campus in the district participated in the national
school lunch program of free or reduced-price lunches
during the preceding school year (HB 2879, 77th
Legislature)
Common Findings in TEA SCE Audits

Lack of documentation

No evaluation of SCE program

At risk students incorrectly identified

Lack of supporting documentation in CIPs/DIPs


Funding of State Mandated rules, programs, or
positions
Lack of policies and procedures outlining the
SCE program
Texas Education Agency website for SCE:
http://www.tea.state.tx.us/index4.aspx?id=4082
The frequently asked questions is continually
updated with the most recent questions/answers
Perception is everything
“Flags” in an auditor's world
Auditors are trained to identify “flags”



“Flags” tell an auditor that something unexpected was
found.
Every “flag” expands the time spent on an audit and
can potentially expand the scope of an audit.
When auditors see a number of “flags”, they tend to
lose faith in the LEA's financial and other data.
Top Twelve Ways to Raise an Audit “Flag”
Top Twelve Ways to Raise an Audit “Flag”
1. Throw away receipts. Auditors love to see
original receipts when possible, because they
represent third party confirmation of a purchase.
By not keeping these receipts with the
Purchase Order and other financial records, you
raise a “flag”.
Top Twelve Ways to Raise an Audit “Flag”
2. Never use Purchase Orders. Auditors love to
see Purchase Orders because they help
document purchasing approvals of the LEA.
Auditors love purchase orders even more when
they are dated prior to the actual purchases.
By not using Purchase Orders, the auditors will
now question other portions of the approval
process of the LEA, and will see a “flag” raised.
Top Twelve Ways to Raise an Audit “Flag”
3. Purchase personal items with school district
money. One aspect of auditing financial
transactions is making sure the expenditures
were legally allowable.
A Texas ISD once spent a large amount of money to
decorate the top of their baseball dugouts with tile.
Later, it was discovered that the same tile showed up
on the Superintendent's house, and was installed by
District maintenance workers during school hours.
Top Twelve Ways to Raise an Audit “Flag”
4. Spend money on items that are specifically not
allowed in your Notice of Grant Award (NOGA).
Another aspect of an audit is comparing actual
expenditures to the allowable types of expenditures.
Anything that violates these allowable expenditures
will raise a “flag”.
Top Twelve Ways to Raise an Audit “Flag”
5. Charge everything to local funds, and then
when those run out, start charging costs to
Federal programs.
A Texas district had several Principals that charged
everything to their local funds, and then when those
funds ran out in March, they started charging Federal
grants for supplies. This raised a “flag” and auditors
challenged the LEA to prove that the costs charged to
the federal program were appropriate.
Top Twelve Ways to Raise an Audit “Flag”
6. Use the same Campus Improvement Plan
(CIP) and District Improvement Plan (DIP) each
year.
If your LEA had areas needing improvement, doing the
same things each year would likely achieve the same
results. Auditors will compare your CIP and DIP to the
expenditures to make sure you spent money the way
you planned to spend money to help your students.
Repeating CIPs and DIPs can represent a “flag”.
Top Twelve Ways to Raise an Audit “Flag”
7. Take capital assets purchased with Federal
money home for personal use.
A Superintendent once took an old school bus to his
deer lease and converted it into a deer blind. When
auditors inquired, he took the auditors to the bus
(which still had the tax exempt license plate on the
back end). This was a very large “flag”.
Top Twelve Ways to Raise an Audit “Flag”
8. Use Federal Plans to replace funds that were
spent locally in prior years (Supplanting).
A Texas LEA started a drug testing program for their
students. After three years, they were awarded a
federal grant for drug testing. Instead of adding
another layer to the local drug testing program, the
LEA stopped using local funds and operated their drug
testing program with the Federal grant money. This is
Supplanting, and a “flag”.
Top Twelve Ways to Raise an Audit “Flag”
9. Spend an enormous amount of money for food
and charge it to a federal program.
A Texas LEA went from spending about $1,000
annually for food for administrative meetings to
spending over $45,000 annually for meals for
administrative meetings. This was a “flag” for the
auditors, but the LEA also charged $15,000 of these
meals to federal programs where meals were not an
allowable expenditure. This earned the LEA two
“flags”.
Top Twelve Ways to Raise an Audit “Flag”
10. Charge travel costs for a Board retreat to a
federal program that did not allow this as an
expenditure.
A Texas LEA had their School Board attend a National
Convention in Las Vegas, and charged this to a federal
program (“flag” 1). The LEA had a Board policy that forbid
travel outside of Texas (“flag” 2). The LEA compounded this by
paying for Board Member spouses (“flag” 3). The LEA then
earned a fourth “flag” when auditors realized that the Board
traveled to Las Vegas the week after the National Convention.
Top Twelve Ways to Raise an Audit “Flag”
11. Put your auditors in a basement with no air
conditioning in 107 degree weather.
Top Twelve Ways to Raise an Audit “Flag”
12. File required reports consistently late.
Another step that auditors perform is to check for
compliance. One of those checks involves insuring
that the LEA files their reports on time and accurately.
Each compliance violation represents another “flag” to
the auditor.
Top Ten Ways to Shorten an Audit
Top Ten Ways to Shorten an Audit
1. Organize your documents prior to the arrival of
the auditors.
An LEA that is constantly “searching” for
documentation during the audit can trigger a
“flag”. But being prepared and able to produce
documentation quickly for the auditor will
shorten the audit as the auditor has more faith
in your LEA.
Top Ten Ways to Shorten an Audit
2. Make sure your documents have a logical
“flow”.
Auditors love to see an organized process
where an LEA identifies needs, plans processes
to address those needs, and assigns
appropriate resources to attain the goal.
Top Ten Ways to Shorten an Audit
3. Understand your financial system.
Make sure that you know the capabilities and
limitations of your financial software. You may
be asked to provide additional information to the
auditors, and the quicker you are able to
produce this documentation, the faster your
audit will get completed.
Top Ten Ways to Shorten an Audit
4. Know where all of your supporting
documentation is located.
Plan ahead to try to anticipate documents that
the auditors may ask for. Start by reviewing
your NOGA, and then follow the flow in the
NOGA where it discusses reporting
requirements (fiscal and program).
Top Ten Ways to Shorten an Audit
5. Make sure your time and effort documentation
matches the expenditures in your federal
grants.
Your time and effort documentation should
drive the costs charged in payroll to your federal
grant. It is critical that all departments
communicate any change in duties for
personnel that are charged to federal programs,
in order to adjust the payroll (if necessary).
Top Ten Ways to Shorten an Audit
6. Demonstrate that you know Supplement vs.
Supplant.
Your auditor will be looking for Supplant issues
when they test expenditures. Make sure that
your costs are supplemental and do not replace
State or local funds that were used in prior
years. If you are able to demonstrate to the
auditor that you routinely check for this
compliance, you should have a shorter audit.
Top Ten Ways to Shorten an Audit
7. Make sure that everyone in your LEA
understands the process and pieces.
Your auditors may question staff at all levels to
see if they understand how the program works,
what is allowable, what is required, etc. If you
communicate this information to all of your staff
involved with that program, then the auditors
will be less likely to add additional audit tests,
which will shorten your audit.
Top Ten Ways to Shorten an Audit
8. Make sure you amend your federal grant
budget on your LEA books when you amend
your Federal Grant with TEA.
Auditors will perform tests to insure that your
LEA federal program budgets match the
budgets that TEA has approved for that
program. By insuring that these match, you will
shorten your audit.
Top Ten Ways to Shorten an Audit
9. Make sure your Board Policies match your
actions.
Auditors will perform tests to insure that your
federal expenditures not only meet Federal law,
but they will also insure that these expenditures
do not violate your School Board Policy. If you
have a practice that violates Board Policy, you
need to change Board Policy or change your
process.
Top Ten Ways to Shorten an Audit
10. Make sure your activities match the allowable
expenditures in your NOGA.
Auditors will perform tests to insure that your
federal expenditures are allowable costs
according to your NOGA. This should be an
ongoing step in your budget process.
Questions to ask yourself when
looking at a possible expenditure
1. Does this break a Federal law?
2. Does this violate a Federal grant rule?
3. Does this violate a State law?
4. Does this violate a School Board Policy?
5. Is there a local precedence for this
expenditure?
6. Is this the best use of funds for students?
Specific questions should be directed to:
schoolaudits@tea.state.tx.us
TEA Division of Financial Audits mailbox