6th Annual Report on School Spending Financial mismanaging, misspending, over budgeting, squandering, embezzling-by any verb, school dist By Julie Sturgeon September 2006

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The headlines can be brutal: School superintendent arrested. Officials say embezzlement scheme netted $8 million. And suddenly a Google search turns up criticism of the district's practice not just from standard media articles, but CPA newsletters, trade publications and professional blogs.

Officials in Roslyn Public Schools in New York know the story by heart as they start the next chapter after becoming the poster child for criminal charges.

Yet far more districts wind up behind the eight-ball from sheer financial mismanagement than fraud, assures Jack Dougherty, the assistant director of audit services at New York's Office of the State Comptroller. "Over the years I've heard many administrators comment, 'We got a clean bill of health because the CPAs didn't find any fraud.' You can have something less than fraud and still need to improve your internal controls," he says. "Our experience is that the Roslyns are few and far between."

Today's district budgets are riddled with uncontrollable costs, of course: fuel, energy, salaries, health insurance premiums. And that makes the dollars that schools can control still more precious, contends Michael J. Osnato, director of the Institute for Educational Leadership, Research and Renewal at Seton Hall University in South Orange, N.J. Before joining the training ranks, Osnato spent 25 years as a school superintendent, most recently at the helm of Montclair Board of Education in New Jersey in 2004.

No one can produce hard facts on the number of districts nationwide that are bleeding unnecessarily. Joe Spinelli's educated guess as co-founder of Daylight Forensic and Advisory fraud risk management firm in Manhattan stands at 70 percent of districts that have at least one problem.

"Superintendents see themselves as instructional leaders, but they are really in charge of a large corporation with significant financial issues," Osnato points out. "You don't want to hire a CPA as a superintendent, but an important part of the job is to instill confidence by managing the public's money effectively." In the long term, he advocates state-required fiscal oversight for school leaders-in the meantime, he is reaching out to first-year superintendents with a four-hour course to introduce them to red flags.

The lessons involve poring over a monthly treasurer's report to understand expenditures by codes, and to look at enrollment projections. He gives them an overview on how to look for transfers, where people are moving money in and out of accounts frequently, and cautions them to watch grant money. "Too many times, busy superintendents just sign state reports. They need to look at it and ask questions," says Osnato.

It sounds elementary, but districts trip over these basics every day. Take, for example, the Manhasset Union Free School District in New York that oversees just four schools, 2,600 students and 407 employees. When New York State Comptroller Alan G. Hevesi released details on its audit in October 2005, he found reimbursements totaling $5,313.85 for conference expenses, which exceeded federal reimbursement rates by more than $1,200. They district had also honored receipts totaling $2,382 for five days in California when that conference lasted just two days. That form included a $165 dinner.

Auditors also discovered $321,000 worth of checks that did not have a required second signature; another 12 checks totaling $29,590 cleared the bank before the internal claims auditor had signed off on them. Checks were written out of sequence, and vendor names didn't match. Nor could auditors find purchase orders for 29 expense claims (another $132,000 unaccounted for), and the accounting software package was open to a slew of people who could delete files anonymously.

"The best defense against fraud, waste and mismanagement is strong internal controls," Hevesi said in his statement. "In too many areas, our auditors identified instances where the Manhasset school district failed to do what needed to be done." He has since expressed approval of the district's actions to correct the gaps.

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