Elected officials said they were deeply concerned by the preliminary audit report, which showed that the system failed to collect millions of dollars of debts, could not substantiate the bulk of overtime payments, and paid contracts and bills without verifying them.
The system's persistent problems tracking spending could pose a serious barrier when school officials lobby state lawmakers to increase funding for school construction next year, critics said. The school system needs $2.5 billion to repair and replace its dilapidated buildings.
"When the school system comes down to the Annapolis General Assembly to look for the block grant funds, this won't help," Mitchell said.
A spokesman for Mayor Stephanie Rawlings-Blake declined to comment in detail about the preliminary independent audit, which was obtained by The Baltimore Sun before a final report had been issued by the Office of Legislative Audits, the state legislature's research arm. The findings in the final report — which is expected to be released this week — could change, or problems could have been resolved.
Spokesman Ryan O'Doherty said the mayor was "confident" that schools CEO Andrés Alonso "knows that any audit error findings are unacceptable and will need to be addressed."
"She expects the school system will prepare a full response to be presented to the school board for review and will take any needed corrective actions," O'Doherty said, adding that the school board must "continue to demand better."
The mayor and governor jointly appoint the city school board members, who hire the superintendent. Gov. Martin O'Malley's office did not respond to a request for comment.
A spokeswoman for the school district declined to comment on the preliminary audit but said schools officials would fully address the final report. In a response included with the audit, system officials said they had been working on new policies and improvements, particularly in payroll.
A spokesman said City Council President Bernard C. "Jack" Young had spoken with Alonso about the audit, raising concerns that it would affect the system's efforts to secure more school construction funding.
The audit showed that the district paid employees for $2.8 million in overtime in 2010, even though it was doubtful that employees worked all those hours. Auditors found many cases in which overtime claims were not backed up by time sheets or a supervisor's approval.
The system also failed to collect $3.9 million in debts, including more than $300,000 in bonuses that former employees were required to repay because they left the system before they had earned them.
One unnamed school administrator was overpaid by $100,000 after a demotion and pay cut failed to take place, according to the audit. Dozens of teachers and administrators earned more than their pay grade, and four employees received a total of 200 more vacation days than their union contracts specified.
One part-time employee was found to work in the school system's main office on North Avenue while simultaneously owning an instructional contracting company that earned $34,500 from the system. More than 100 system employees had home addresses that matched the addresses of contractors that provided instructional, special education and consulting services, the audit showed.
In addition, three employees earned a combined $250,000 in salaries while working for both the school system and a state agency during the same hours.
Mitchell said he was particularly disturbed by findings that showed lax oversight over contracts and procurements. The audit showed that the system paid $6.9 million for a special education instruction contract two years after it expired. The audit doesn't specify whether any work was done in that time.
The system also failed to scrutinize invoices from school bus companies, paying one contractor for two days during which no students were transported after a water main break shut down a school, according to the audit.
"One of the things relevant to school construction is work being done that's not substantiated," Mitchell said.
The audit's release comes during a period when city school officials have come under fire for a series of expenses. They include about $65 million paid out as part of liberal accrued-leave policies during Alonso's administration, $500,000 in credit card charges by administrators that included expensive dinners and extensive travel, and the $250,000 renovation of an executive suite.
City Councilwoman Mary Pat Clarke, who had lobbied for the school construction funding, warned that the system needs to fix oversight issues before renewing pitches to state lawmakers. A report issued in June showed the system needed about $2.5 billion to renovate and repair city schools, which are plagued by leaky roofs, broken windows and malfunctioning boilers.
"We need clean hands going down to Annapolis," said Clarke, chair of the council's education committee.
Clarke called for the school board to direct more money to student spending and less to North Avenue headquarters. Alonso has pushed for such a plan, with some success, but Clarke says those efforts need to be expanded.
"The school board is going to have to demonstrate an independent response to this audit that puts the money where it belongs now," Clarke said.
The audit, Clarke said, shows that the fiscal problems that have long dogged the system still linger.
"Clearly, a lot of players have been playing the old game, but it has to end," said Clarke.