State comptroller: Sullivan school officials responsible for negative findings in financial audit

BLOUNTVILLE — The state's annual audit of Sullivan County's finances, for the fiscal year that ended June 30, 2021, is not good when it comes to how the county's school system was keeping its books.The audit includes eight findings, all related to school system finances. Audit officials said school system personnel stopped doing things they had been doing, even though they remained their responsibility.Tennessee Comptroller of the Treasury Jason Mumpower told the Times News on Wednesday that he wants the public to understand the bad audit reflects the past and not the present or future financial picture of the county.As of July 1, 2021 the county's finance department began handling the school system's accounting. The consolidation of the what had been separate accounting offices for the school system and the rest of county government came after the Tennessee General Assembly approved a private act requested by the Sullivan County Commission.It was known for months ahead of time that the county finance department would be taking over the school system's accounting.Mumpower said as much as anything, the eight negative findings were the result of "animosity and hard feelings" from school system officials."It's unfortunate the school system shut down on some of its financial duties and wasn't as cooperative as the could have been," Mumpower. "This is why consolidation was needed. The people of Sullivan County should not be discouraged. The results will be better in next year's audit."The Times News asked Director of Schools Evelyn Rafalowski if she had any response to Mumpower's comments. Rafalowski said she would simply stand on written responses she and Assistant Director of School Ingrid DeLoach submitted to auditors and included in the audit.Details within the eight findings range from the school system not keeping track of its payroll to the extent it was paying former employees for up to four months after they'd left the system, to capital assets, net of accumulated depreciation, having been understated by nearly $20 million.The eight findings:1) School department funds required material audit adjustments for proper financial statement preparation. (A material weakness.)2) Deficiencies were noted in the maintenance of capital asset records. (A material weakness.)3) The accounting records for various funds had not been maintained properly. (A significant deficiency.)4) The school department had deficiencies in budget operations.5) The school department failed to request reimbursement for grant expenditures on a timely basis resulting in a deficit in unassigned fund balance in the School Federal Projects Fund. (A material weakness.)6) The school department had deficiencies related to the administration of payroll that resulted in overpayments to some employees. (A significant deficiency.)7) Financial reports were not presented to the county commission in compliance with state statutes.8) The school department made payments based on expired contracts for student transportation. (A significant deficiency.)Sample details from auditors on each finding:1) " At June 30, 2021, certain general ledger account balances in the General Purpose School, School Federal Projects, Central Cafeteria, School Improvement, and Education Capital Projects funds were not materially correct, and audit adjustments totaling $3,482,566, $1,480,432, $471,663, $150,000, and $20,000,000, respectively, were required for the financial statements to be materially correct at year-end."And "It is a strong indicator of a material weakness in internal controls if the department has ineffective controls over the maintenance of its accounting records, which are used to prepare the financial statements, including the related notes to the financial statements. This deficiency is a result of a lack of management oversight."Response from Rafalowski and DeLoach: "We hereby concur with this finding, and we agree that audit adjustments were required. However, some were caused by circumstances beyond our control. The School Improvement Fund budget was keyed into the financial management system. However, there was a glitch in the software that didn't allow it to process through completely. Also, many state and federal grants were approved and awarded at the end of the year and were not keyed in because of the frenzy of activity involved in the year end close and the consolidation of the finance department."2) "Updated capital assets records were not made available as of January 9, 2022. The failure to properly maintain, complete, and close accounting records on a current basis diminishes the usefulness of the financial records as a management tool, results in the loss of accounting controls, and increases the risk that errors will not be discovered and corrected in a timely manner."Since capital asset records had not been updated since June 30, 2020, auditors used alternate methods to determine amounts, which should have been recognized for capital assets activity in the financial statements."From our review of accounting records and school board minutes, as well as other audit procedures, we determined that capital assets, net of accumulated depreciation, were understated by $19,455,680."Response from Rafalowski and DeLoach: "We hereby concur with this finding. Capital asset records were pulled and available, but the final report was not completed until January 9, 2022. This was the result of the transition of duties to the newly created consolidated finance department."3) "Our audit revealed deficiencies related to the administration and maintenance of the fund accounting records. These deficiencies are the result of management's failure to correct the findings noted in the prior-year audit report and the failure to implement their corrective action plan."Response from Rafalowski and DeLoach: "We hereby concur with this finding but believe some additional information should be shared. While the final audit log does show that April, May, and June 2021 were closed in January, 2022, proper reconciliation and closure did occur timely."4) "These deficiencies exist due to a lack of management oversight and management's failure to hold spending to the limits authorized by the county commission, which resulted in unauthorized expenditures. These deficiencies have been reported in the prior-year audit report. Management has previously provided written responses and corrective action plans to address these deficiencies; however, these deficiencies continue to exist."Response from Rafalowski and DeLoach: "We hereby concur with this finding and will work to ensure that all budget amendments are approved and accounted for."5) "School department personnel failed to request reimbursement for grant expenditures related to the COVID-19 – Education Stabilization Fund Program – Elementary and Secondary School Emergency Relief Fund (ESSER II) federal program on a timely basis. Requests totaling $1,741,872 were not submitted to the Tennessee Department of Education for reimbursement until December 8, 2021, for expenditures made from the School Federal Projects Fund from March 2021 through June 2021 plus encumbrances outstanding at June 30, 2021."Response from Rafalowski and DeLoach: "We hereby concur with this finding. Some Elementary and Secondary School Emergency Relief Fund grant applications were caught up in review status through the approval process and would not allow for a reimbursement to occur."6) " Two former school department employees notified the department that they had continued to receive payroll checks for several months after they had terminated employment with the department. These employees remained on the payroll for two to four months resulting in overpayments totaling $31,033. The former employees reimbursed the department for these overpayments. This deficiency is due to a lack of management oversight."Response from Rafalowski and DeLoach: The human resources department has been continually offering assistance to the finance department to identify and remedy each case. The overpayments occurred after July 2021 and after appropriate documentation had been shared with the newly established payroll department."Response from Finance Director Bailey: The employees were entered into the payroll system for the 2021-22 school year by the school system's human resource staff. There was no process in place to prevent and identify these issues when the Sullivan County Finance Department assumed the responsibility of the school payroll in August of 2021.7) The school department's annual financial report was not filed with the county mayor and with the county clerk to be presented to the county commission at the next commission meeting after June 30, 2021, as required by state law. Additionally, quarterly reports were not filed with the county commission, another requirement of state law.Response from Rafalowski and DeLoach: "It was our understanding that the county finance director would be presenting said reports. Access was requested to the financial management system in order to accomplish this task. Access was granted, and it was assumed those reports were being presented."Response from Bailey: "The Sullivan County Finance Department was not responsible for publishing the financial (budget) report for the various funds of Sullivan County Schools for the fiscal year ending June 30, 2021. In addition, this office did not have access to the school's records to produce the reports for the 2021 FY.8) The school system's contracts with bus companies expired during the 2020-2021 school year and in March new bids were sought. The Board of Education did not award bids and the contracts were re-bid in September. As of January 19, the school board has taken no action on awarding any bids. The school system has continued making payments to bus companies based on expired contracts, a deficiency auditors said leaves the school system open to liability.Response from Rafalowski and DeLoach: "We hereby concur with this finding. Contracts for student transportation are very complex and involve weeks' worth of review and negotiation. Unfortunately, that wasn't completed in a timely manner with the contracts that expired during the current year. The payment on expired contracts was not because of lack of effort or planning."