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Harford schools need more improvement in financial practices, state audit concludes

Harford schools financial practices come under scrutiny in state audit

The most recent six-year, state-mandated audit of Harford County Public Schools' financial practices points out failings in numerous areas, including the handling of cash and checks, controls over payments to vendors, security of electronic financial data and other things that led the school system's internal auditor to say the audit's findings are made to "sound dire."

Many of the shortcomings are the same ones cited in the previous audit.

The last time HCPS was audited by the state – the final report released May 30, 2008 – there were 27 findings that resulted in 20 detailed recommendations. According to the executive summary of the latest report, the auditors followed up on the 2008 findings.

"We determined that HCPS satisfactorily addressed 13 of these findings," the auditors wrote. "The remaining 10 findings are repeated as nine findings in this report."

The state's Office of Legislative Audits has been conducting a review of the finances of each of Maryland's 24 school districts every six years. The most recent audit, which covered the 2012-2013 fiscal year, was released in late January and was presented to the Harford County Board of Education Monday.

The objectives of the audit are to evaluate the effectiveness and efficiency of the school system's financial management practices, Jennifer Birkelien, internal auditor for HCPS, said.

"No one person or organization is perfect," Birkelien told board members.

She stressed that the state auditors did not find any instances of errors, fraud or mistakes and that HCPS staff have worked to address the auditors' findings.

"I would just caution you, they make it sound dire, but we are working on it," Birkelien added.

In painting that dire picture, Legislative Auditor Thomas J. Barnickel III, wrote in a transmittal letter to members of the Maryland General Assembly's Joint Audit Committee that "Our audit disclosed that HCPS needs to improve internal controls over information systems."

"HCPS did not sufficiently ensure that the system capabilities assigned to employees to process procurements, payroll and payments to vendors were necessary and appropriate," he wrote.

The state auditors said the Harford school system needs to do a better job of tracking the accuracy of payments for health care claims of employees and their dependents, which Barnickel's letter notes totaled $67.3 million in the 2013 fiscal year.

The audit also criticizes the amount of money HCPS pays to private school bus contractors and the way the Harford system has accounted for payments of accrued sick leave to retirees, which the auditors say resulted in significant overpayments by the state retirement system. HCPS officials have disputed both findings.

Another finding was that HCPS "does not adequately monitor payments made for special education services." The auditors cited instances in which time records for service providers employed by HCPS were given back to the providers' employees, rather than being sent directly to contract monitors.

"This practice allows the opportunity for unauthorized changes to the time records that could go undetected," they wrote.

"These are recommendations," HCPS Director of Communications Jillian Lader said Tuesday, noting that some of the auditors findings, though not all, are either in the process of being implemented or have been.

"HCPS has already completed an action item regarding the implementation of a new security function for its business management software and has restricted user access to reduce system users' abilities to perform incompatible duties," she noted.

The auditors did praise the school system's management of federal grants it receives, the procedures for making purchases by credit cards and procurement, its procedures for capital projects and contracts, the ethics policy and the establishment of a hotline to report any cases of fraud, according to an HCPS news release.

The auditors noted, however, that school officials must improve their "internal controls" for collecting and securing their cash and check receipts, such as the state's reimbursements for medical assistance, and a secure "chain of custody" for checks must be established.

"Rather certain collections, including Medical Assistance reimbursement checks, were handled by multiple HCPS employees before being restrictively endorsed and recorded," according to the audit.

Birkelien told board members school officials have developed a chain of custody system to trace a payment "back to its initial receipt."

"All undeposited funds are secured in a locked safe," she explained.

Regarding bus service, the state auditors recommended that HCPS implement routing software to improve the efficiency of bus routes, and adjust payments to contractors based on market conditions or the contractors' "actual costs."

Birkelien noted the school system has acquired the routing software and staffers began training in late 2014.

She said the method of paying contractors is determined by a "per-vehicle allotment," as well as administrative costs such as training and drug testing of drivers.

The formula is a combination of the per-vehicle allotment, hourly labor costs, per-mile maintenance and fuel costs and administrative costs, according to school system documents.

Birkelien said the bus contractor payment formula is "definitely not unique" to Harford County, and is used statewide.

The auditors, however, concluded that "certain payments to contractors were not based on market conditions or actual costs" and that Harford is one of the few districts that reimburses contractors for their federal fuel excise tax costs.

School board Vice President Francis "Rick" Grambo said he thought the bus issue "was very interesting."

HCPS Chief of Administration Joe Licata said the payment formula is "almost a statewide kind of methodology for years and years and years."

"There's nobody left in the state who remembers how they came about that model," he said.

Harford school officials have created an internal group to review bus contractor compensation, but "HCPS has always felt that the use of market investment rates as a basis for establishing the PVA is not competitive," according to the school system's response to the audit.

"HCPS will substantiate the basis for the ROI [Return on Investment] rate that is recommended by the group if market investment rates are not recommended," according to the response.

Board member James Thornton, who is also a member of the school system's audit committee, praised the overall financial practices of HCPS.

"I think a half-billion dollar business is well managed here," he said.

The state's full report is online at http://www.ola.state.md.us/Reports/Schools/HarfordSchls15.pdf. The school system's responses are also online at http://www.hcps.org/boe/BoeAgendaExhibits.aspx?MeetingID=1567.

Aegis staff member Allan Vought contributed to this article.

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