oversight

Los Angeles Unified School District's Internal Controls Over Nonpayroll Purchases Using U.S. Department of Education Funds

Published by the Department of Education, Office of Inspector General on 2014-05-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                       UNITED STATES DEPARTMENT OF EDUCATION
                                             OFFICE OF INSPECTOR GENERAL


                                                                                                                   AUDIT SERVICES
                                                                                                              Sacramento Audit Region


                                                                 May 6, 2014


                                                                                                              Control Number
                                                                                                              ED-OIG/A09N0009


Dr. John E. Deasy
Superintendent
Los Angeles Unified School District
333 S. Beaudry Ave.
Los Angeles, CA 90017


Dear Superintendent Deasy:

This final audit report, “Los Angeles Unified School District’s Internal Controls Over
Nonpayroll Purchases Using U.S. Department of Education Funds,” presents the results of our
audit. The purpose of the audit was to determine whether Los Angeles Unified School District
(LAUSD) designed internal controls that would provide reasonable assurance that nonpayroll
purchases using U.S. Department of Education (Department) funds were in accordance with
applicable Federal requirements. The audit covered nonpayroll purchases charged to Department
programs from July 1, 2012, through June 30, 2013.




                                                      BACKGROUND


LAUSD is the second largest school district in the nation, based on an enrollment of more than
640,000 students in kindergarten through grade 12 at more than 900 schools and 187 public
charter schools. The district administers numerous Department grant programs such as Title I,
Grants to Local Educational Agencies; Special Education Grants to States; 21st Century
Community Learning Centers; and Title II, Improving Teacher Quality State Grants. LAUSD
charged more than $151 million of nonpayroll purchases to Department programs from
July 1, 2012, through June 30, 2013 as listed below.




 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
Final Audit Report
ED-OIG/A09N0009                                                                                          Page 2 of 7

                         Nonpayroll Purchases Charged to Department Grant Programs
                                    From July 1, 2012, through June 30, 2013
                                                              Number of
    Department Grant Program                                                 Total Nonpayroll Purchases
                                                              Transactions
    Title I, Grants to Local Educational Agencies                 67,935                    $81,807,699
    Special Education Grants to States                                739                     18,292,808
    21st Century Community Learning Centers                         2,457                    13,947,803
    Title II, Improving Teacher Quality State Grants                3,742                      7,226,974
    School Improvement Grants                                       1,542                      6,412,565
    Career and Technical Education-Basic Grants to States           4,277                     5,296,005
    All Other Department Programs                                 11,777                    18,414,145
    Total Nonpayroll Purchases                                    92,469                  $151,397,999




                                            AUDIT RESULTS


LAUSD designed internal controls that provided reasonable assurance that district personnel used
Department funds for nonpayroll purchases during our audit period in accordance with applicable
Federal requirements. LAUSD had written policies and procedures that helped ensure that the
district’s nonpayroll purchases were allowable, if followed. The district also established approval
procedures over various types and amounts of transactions. In addition to its own system of
controls, LAUSD was also subject to oversight, monitoring, and audits from multiple entities,
including the California Department of Education (CDE) and the district’s own inspector general. 1
Our internal control assessment covered transactions that district personnel made using either a
purchase order or a procurement card (referred to as purchase card throughout the remainder of this
report). We also analyzed multiple nonpayroll purchases the district made during our audit period
using funds it received from the Department.

We provided a draft of this report to LAUSD for comment on April 11, 2014. LAUSD’s controller
informed us on April 28, 2014, that the district does not have any comments.

Purchase Order Transactions
We determined that the district’s policies and procedures over procurement and accounting
processes for purchase order transactions were appropriate to provide reasonable assurance that
nonpayroll purchases using Department funds were allowable. Specifically, the policies and
procedures addressed control mechanisms such as requiring (1) specific approvals for different
purchase thresholds for tangible (supplies, equipment) and intangible (professional services) items;
(2) the unit or school making the purchase to confirm receipt with the accounts payable department
before vendors could be paid; and (3) a three-way document match of the purchase order, invoice,
and receipt before the accounts payable department approved payments.


1
 LAUSD is also required by Office of Management and Budget Circular A-133 to have an annual Single Audit, as are
all non-Federal entities with annual expenditures of $500,000 or more in Federal awards. LAUSD’s Single Audits are
conducted by independent public accountants.
Final Audit Report
ED-OIG/A09N0009                                                                            Page 3 of 7

For seven judgmentally selected nonpayroll transactions, we reviewed purchase orders and other
documents generated from LAUSD’s accounting system and external documents, such as invoices,
to gain an understanding of the purchasing process and determine whether district personnel
followed controls. We verified that personnel obtained approvals from the initiating unit or school
and Procurement Services Division and the district received goods and services before it paid the
vendors. We determined that LAUSD personnel were following the policies and procedures
applicable to these seven purchase order transactions, and the purchases they made using
Department funds were allowable under Department programs.

Purchase Card Transactions
We determined that the district’s policies and procedures over procurement and accounting
processes for purchase card transactions were appropriate to provide reasonable assurance that
nonpayroll purchases that district personnel made using Department funds were allowable. LAUSD
schools and departments had several types of purchase cards, including separate cards for office
supplies and instructional materials, travel, and fuel that personnel used to make nonpayroll
purchases. The district required personnel who had a purchase card to sign the card agreement and
its assurances, take a training class, and pass a test before they could use the card. Purchase card
approvers are either department heads or school principals. Purchase card users must reconcile their
purchases to monthly statements that credit card companies send to LAUSD’s credit card unit and
identify the specific programs that the costs were charged to. The purchase card approver reviews
and approves these reconciliations and checks the appropriateness and accuracy of amounts charged
to Department programs. In addition, LAUSD’s purchase cards are restricted at the time of the
transaction to specific types of purchases that would be appropriate based on authorized merchant
category codes. For example, personnel cannot use a purchase card designated for office supply
purchases at merchants in the travel industry, such as airlines or hotels. We reviewed the
reconciliation process for two judgmentally selected nonpayroll purchases using purchase cards and
concluded that LAUSD adhered to its policies and procedures and properly accounted for the two
purchases.

Nonpayroll Purchases Analyses
We also analyzed and assessed actual expenditures for multiple nonpayroll purchases that LAUSD
personnel made using Department funds. We performed vendor level analyses for four cost types:
professional and consultant services, subagreements for services, material and supplies, and
noncapitalized equipment. We identified the cost types based on factors such as the total amount of
expenditures, the existence of high-dollar or high-volume vendors, or a large proportion of total
payments made to specific vendors at the end of the fiscal year. For these cost categories, we
reviewed the vendors for each cost type and determined that the vendors appeared to supply
educational goods or services associated with the cost type.

When we had concerns regarding specific purchases under the four cost types, we asked for more
information from LAUSD officials and obtained reasonable responses. We did not find any unusual
or questionable charges to Department grant programs. For example, we were concerned that about
$14.7 million of special education purchases charged to subagreements for services had no vendor
information. This amount accounted for more than half of the $27.6 million LAUSD charged to the
subagreements for services for our audit period. LAUSD’s deputy controller explained that the
subagreements for services costs charged to the special education program represented allocations of
Final Audit Report
ED-OIG/A09N0009                                                                             Page 4 of 7

funds to certain charter schools. LAUSD’s explanation for the allocations to the charter schools
appeared to be reasonable.

Oversight and Monitoring Controls
In conjunction with LAUSD’s system of internal controls, other entities provide supplemental
controls such as oversight, monitoring, and audit activities that can detect errors and identify
appropriate corrective actions. These supplemental controls can result in improved internal controls
going forward. Program offices within the CDE perform periodic monitoring reviews of LAUSD’s
administration of Department grant programs. In addition, the LAUSD inspector general conducts
various audits of district operations. We concluded that the activities that these entities performed
are an appropriate oversight mechanism, especially in detecting and resolving errors that can lead to
enhanced internal controls.

A finding from the independent public accountant’s recent Single Audit report covering LAUSD’s
fiscal year 2012–2013 (July 1, 2012–June 30, 2013) illustrates how external audits can identify
errors and lead to enhanced controls. In this case, the independent public accountant determined that
LAUSD staff had erroneously charged more than $84,000 to the Federal Teacher Incentive Fund
grant program as a result of training stipend overpayments. The error occurred because district
accounting personnel used incorrect payroll information to calculate the stipends. LAUSD reported
to the independent public accountant that it implemented monitoring and review procedures,
including a monthly tracking system for the program expenditures, biweekly budget meetings, and a
review process for budget reports. Although we did not verify that the corrective actions were
implemented, the actions should improve controls over the Federal Teacher Incentive Fund grant
program expenditures and help ensure that errors of this type do not occur in the future.




                     OBJECTIVE, SCOPE, AND METHODOLOGY


The purpose of our audit was to determine whether LAUSD designed internal controls that would
provide reasonable assurance that nonpayroll purchases using Department funds were in accordance
with applicable Federal requirements. We modified our original audit objective to limit our review
to LAUSD’s system of internal controls because we determined that extending the audit to
transaction testing was not necessary based on our risk assessment and conclusion on the district’s
design of its system of internal controls. The audit covered nonpayroll purchases charged to
Department programs from July 1, 2012, through June 30, 2013.

To achieve our revised objective, we performed the audit steps below to assess LAUSD’s internal
controls over nonpayroll purchases using Department funds and external oversight of its nonpayroll
purchases. We also obtained LAUSD’s expenditure data for our audit period and performed
assessments of its nonpayroll purchases.
Final Audit Report
ED-OIG/A09N0009                                                                                       Page 5 of 7

LAUSD’s Internal Controls Over Nonpayroll Purchases
We interviewed LAUSD fiscal and accounting officials and staff to gain an understanding of the
district’s organization and internal control structures; reviewed the district’s policies, procedures,
and guidance for purchasing nonpayroll goods and services using Department funds; and
reviewed district accounting records and contract documents. We also interviewed LAUSD staff
responsible for administering the Title I program to gain an understanding of additional controls
over nonpayroll purchases using Department funds and reviewed their policies and procedures
that also cover the Title II and Title III programs. 2

We gained an understanding of LAUSD’s use of an automated financial system to manage purchases
of nonpayroll goods and services and charge the costs to the funding source (programs). The system
is also used to account for other transaction information such as the type of expenditure, amount,
vendor, transaction date, and type of transaction.

We reviewed LAUSD’s procurement manuals that were in effect during our audit period. We also
reviewed documentation generated by LAUSD’s accounting system and external documents such as
invoices and contract documents for seven transactions to gain an understanding of the purchasing
process. We gained an understanding of LAUSD’s controls over the use of various types of
purchase cards used to make nonpayroll purchases and reviewed accounting documents used for the
reconciliation process for two nonpayroll purchases made using purchase cards. In total, we
reviewed nine transactions totaling $827,555 of the $151,397,999 of nonpayroll purchases charged
to the Department programs during our audit period to assess the district’s implementation of
applicable internal control policies and procedures. The nine transactions are not representative of
LAUSD’s total nonpayroll purchases using Department funds and therefore the results cannot be
projected. To determine whether the nine transactions were allowable, we reviewed the
requirements under Office of Management and Budget Circular A-87, “Cost Principles for State,
Local, and Indian Tribal Governments.”

We judgmentally selected the nine transactions; each represented larger transactions in the different
procurement approval thresholds in LAUSD’s current procurement manual. We also considered the
different Department programs and payment methods when selecting the transactions. The
transactions included three Title I transactions totaling $352,310, of which two were purchase card
transactions totaling $12,136; two Title II transactions totaling $247,807; one 21st Century
Community Learning Center transaction for $134,593; one Career Technical Education transaction
for $64,941; one School Improvement Grants transaction for $24,999; and one special education
transaction for $2,905. The number of transactions and purchase totals for each of the programs
during the fiscal year are listed in the table in the Background section.

External Oversight of Nonpayroll Purchases
We interviewed CDE personnel responsible for program oversight, an LAUSD inspector general
official who oversees internal audits, and personnel at LAUSD’s independent public accountant who
perform the annual Single Audit to gain an understanding of the oversight, monitoring, and audit
activities performed. We also reviewed their reports to evaluate oversight, monitoring, and audit



2
    For this report, the Title III program refers to the English Language Acquisition State Grants.
Final Audit Report
ED-OIG/A09N0009                                                                                              Page 6 of 7

activities related to LAUSD’s policies, procedures, and processes for nonpayroll purchases using
Department funds.

Analyses of Nonpayroll Purchases
We analyzed the electronic file provided by LAUSD that contained all nonpayroll purchases during
our audit period to identify and further analyze cost types with at least one of the factors described in
the Audit Results under the “Nonpayroll Purchases Analyses” section. We then analyzed the
vendors in four cost types: professional and consultant services, subagreements for services, material
and supplies, and noncapitalized equipment and contacted LAUSD to clarify any transactions or
vendors that appeared unusual.

We relied on computer-processed data contained in the LAUSD accounting system to identify the
universe of nonpayroll purchases related to Department grant programs. LAUSD provided us an
electronic file with all nonpayroll purchases from July 1, 2012, through June 30, 2013, using Federal
funds, and we extracted the more than $151 million of nonpayroll purchases charged to Department
grant programs during our audit period.3 We verified the completeness of the data in the electronic
file by comparing expenditure amounts to those reported to the Department for the special education
and 21st Century Community Learning Center programs. We also verified the authenticity of
selected data by comparing the costs recorded in the file for our sample to source documentation that
LAUSD provided. Based on our assessment, we concluded that LAUSD’s accounting records were
sufficiently reliable for the purposes of our review.

We performed fieldwork from July 2013 through March 2014, including a site visit at the school
district offices in Los Angeles, California. We held an exit conference with LAUSD officials on
March 14, 2014. We conducted this audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objective. We believe that the evidence obtained provides a reasonable basis for our
conclusions based on our audit objective.




3
  The electronic file of nonpayroll purchases was created by LAUSD one day after the end of the fiscal year. Thus, the
file does not reflect all year-end adjustments.
Final Audit Report
ED-OIG/A09N0009                                                                            Page 7 of 7



                             ADMINISTRATIVE MATTERS


In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the Office of
Inspector General are available to members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

If you have any questions regarding the information in this report, please contact Beverly Dalman,
Assistant Regional Inspector General for Audit, at (916) 930-2393, or myself at (916) 930-2399.


                                         Sincerely,

                                             /s/

                                         Raymond Hendren
                                         Regional Inspector General for Audit


Electronic cc:
   Kevin Chan, Director, Audits & Investigations Division, CDE