Northport School District Gets Good Marks on Internal Finances

The  has received good marks on its internal financial operations.

Independent auditor Peter Rodriguez, a partner at Cullen & Danowski, said the district received an unqualified opinion, which is the highest level that a district can receive.

The board voted 8-0 to accept the report of school finances for the school year ending June 30, 2010 at its Monday meeting.  

In his presentation to the Board and the community, Rodriguez said no material weaknesses and no instances of non-compliance were found.

The firm made four comments on areas that needed improvement:  timely reporting of cash receipts; a recommendation to update the policy and procedure manual; the need to address the school lunch deficit; and proper reconciliation of  capital projects. In last year's financial records, the firm found four material weaknesses and made nine comments.

Rodriguez said the district has made "great improvement" in responding to these concerns. The material weaknesses have been resolved, and five of the nine comments have been addressed.

Vice-President Karen Wills questioned whether the size of the reserve fund was appropriate.  Rodriguez said that the reserves are 12% of the budget, which he felt was adequate in light of anticipated future costs in the employee retirement system, which is expected to increase from 11% to 15% in 2012. 

"You're going to need them to get through some tough times in the future," he told the Board.  Rodriguez said the 12% is in line with the other approximately 50 school districts that the firm audits.

Warren Arthur, president of the audit committee, reported that at its closed-door session on Nov. 10, the committee voted 4-2 to accept the external auditor's report. Larry Beck and Armand D'Accordo, the only two CPAs on the committee, cast the dissenting votes. Arthur commended Superintendent of Schools Marylou McDermott and Assistant Superintendent Kathleen Molander for the positive report.

Rodriguez was asked why the report was filed past the Oct. 15 deadline. He said that the report was filed within the 30-day grace period which is allowed by the New York State Department of Education. He said time is needed for the district to close its books properly, which typically takes place by the end of August or beginning of September.

A third-party firm is also used to prepare the financial documents. When questioned about the use of a third party, Rodriguez said that, as an independent auditor, the firm can't be responsible for preparing documents. He said that half the districts audited by Cullen & Danowski also use third party firms. McDermott questioned whether the other districts also take advantage of the 30-day grace period. Rodriguez confirmed that roughly 80 percent do, and that failure to file within that time frame results in a deferral of state-education payments.

Wills asked if the external auditor's report is contingent on the internal report. Rodriguez said it's only one piece of information that is utilized. "We do our own risk assessment," he said, adding that the firm  found no material weaknesses in the internal report. 

Dr. Nina Dorata, a member of United Taxpayers of Northport-East Northport and a former audit committee member, questioned the reason for the lateness of the report, and asked if it was due to a lack of internal controls and the fact that the district treasurer left in June. Rodriguez replied that the firm did its own tests on bank reconciliations, and Molander confirmed that a deputy treasurer for the district filled in during the four to five weeks that the position was vacant.

Dorata also questioned the size of the reserve fund. Of the $9.8 million in the reserve, $4.4 million is earmarked for the teacher's retirement system. Rodriguez explained that the money was meant to account for increases in the employee retirement system, not the teachers retirement system. The ERS is the larger of the two. He said that the determination of the amount is a management function, and that the external auditor's role was to examine the resolution to establish the fund and the resolution to fund it. 

Dorata argued that, as a component of the financial statement, the firm should have done tests to validate the amount of the reserve.

"We have no assurance on the actual estimation of probability with respect to the use of the reserves."  Expressing skepticism, she said the number is just a journal entry.

Wills clarified that the use of reserves was meant to avoid spikes in the budget, and Rodriguez agreed. "Without reserves, you're operating on a cash basis. Without them, you have a lot of spikes in your tax levy."

Northport resident Joe Sabia questioned why two members of the audit committee voted against acceptance of the external audit, and if there was any documentation explaining the reasons for their dissent. Waldenburg said he was unaware of any document.

Jean Baron, of United Taxpayers of Northport-East Northport, suggested that it was part of the Board's responsibility to find out why. Waldenburg disagreed, saying that the two members weren't present to explain their actions. He said that he had heard some of their concerns, and read from a letter written by Larry Beck which cited concerns about weaknesses with the district's internal accounting procedures. He said he specifically asked Rodriguez if he had any concerns with internal procedures and Rodriguez said no. Therefore, Waldenburg said he felt comfortable with his decision to accept the report. Wills echoed that sentiment.

Larry Rapiejko, a Board trustee and member of the Audit Committee, agreed. "I don't understand the rationale of the members opposing this external report because they had an issue with the internal report. They're two different reports."

But Dorata disagreed. "Internal accounting controls protect the district. Without a strong system of internal accounting controls, you cannot rely on the controls to find improprieties. I could use a stronger word but I won't. Internal controls do matter. Without a strong system, the financial statement has no relevance."