Confidence in the Stafford County school system’s finance department is shaken and an internal auditor is needed, a School Board committee has concluded.

“Incidents indicate an acceptable culture within [Stafford schools] to operate with little to no supervision or oversight,” three School Board members serving on the Finance, Audit and Budget Committee wrote in a report to be presented to the School Board on Tuesday.

The committee of two junior and one senior members is recommending that the full board hire an internal auditor.

The recommendation followed at least four instances when concerns surfaced over the handling of millions of dollars, the latest being the discovery of almost $9 million in unspent funds amassed over several years. It also follows warnings from an external auditor and consultants about the finance department’s organization and systems.

School Board and finance committee member Nanette Kidby supports hiring an internal auditor, but says some of the report’s language is too strong and partially misleading.

“There was no misappropriation of funds. There was no illegal activity. The area we had the weakness was budget transfers,” she said.

What happened before?

In 2009, it became known as the “mystery money.”

A county-commissioned report found that an accounting error caused a $5.6 million schools surplus that went unnoticed for about two years. The school’s auditor determined, however, that the county report had erroneously excluded and included some payroll numbers.

The finance director at the time said the school system needed a more-modern financial system, which is only now being put in place.

“For the last 10 to 12 years, the School Board has been requesting a new financial system,” said Kidby, who served on the board from 2006–09 and was re-elected in 2012. “And we haven’t had that support from the Board of Supervisors. ... The education priorities have been: Put money in the classroom.”

The next year, in 2010, unspent money discovered at the end of the year was transferred into the health benefits fund “without reporting or returning the monies to the Board of Supervisors” as required, the finance committee wrote.

“Prior to that coming to our attention, there was some broad authority to transfer funds. That was tightened up. That was shocking to me that that was being done,” said Patricia Healy, the longest-serving School Board member with 15 years in office.

Two years later, in August 2012, auditors looked into $1.8 million that was budgeted in one fiscal year but spent in another. The schools are supposed to return unspent money at the end of the fiscal year to the Board of Supervisors.

The most recent incident took place this summer, when the $9 million in unspent funds from a $256 million fiscal 2015 operating budget was discovered. If the surplus had been detected earlier, 55 positions that were eliminated through attrition could have been saved, some School Board members said.

How did it happen?

Most of the previous instances were caused by a lack of financial controls, the committee said. “Individual members of the department had overreaching authority to make transfers and maintain budget and financial records with little or no oversight,” it wrote.

Antiquated financial software allowed a limited number of school employees to keep transactions undetectable by department and division leadership, the committee added. The division is now installing a new system that will give real-time updates on salary changes.

But will that be enough? A March 2015 consultant’s report noted that payroll staff interviews indicated that, “The group fully intends to continue many of the manual processes with the new system as a matter of ‘ultimate control.’”

The finance department recently put in new controls. For example, at least two people must sign off on all budget adjustments of $10,000 or more. Plans call for more frequent reports and revamping the budget process, among other things.

Superintendent Bruce Benson, who took over in April 2014, has ended a strategy that based budgets on previous projections rather than actual expenditures. That strategy also allowed unused money from one fund to be transferred to other needs such as equipment or textbooks, sometimes without the approval of higher-ups.

The school’s finances received a clean bill of health from the same outside auditor from fiscal 2007–12. A new auditor found no major issues in January, but recommended a greater segregation in payroll duties.

“I don’t see how we could catch [some of the problems cited], unless we are going through every transaction,” Healy said. “You have to depend on the information that is presented.”

Kidby said that while board members had been told best accounting practices were being used in the past, it became “painfully aware” that was not the case this year. The internal auditor, she said, can help ensure best practices are used.

PRIOR WARNINGS

Warnings about the finance department date back to 2004. That’s when a consultant wrote that the department relied on one primary staff member for a variety of duties, including developing budget spreadsheets, manually entering data and maintaining division-wide salary schedules.

Healy said that consultant had many recommendations, but she doesn’t remember specific actions by board.

“I think we did take care of it,” she said. “There was certainly nothing that I was aware of that would lead me to think that information being provided to the School Board was not accurate.”

The March consultant, Evergreen Solutions, arrived at similar findings. It noted the use of a manual system and spreadsheets, but also cited silos of knowledge between the finance and budget and grants departments.

Evergreen also recommended an internal auditor.

Benson favors the idea of an internal auditor to provide a fresh, objective look at finances.

The finance committee said the auditor must have “broad, unrestricted access” to every facet of the division’s infrastructure. The committee also wants to expand its oversight to include audit monitoring.

School Board member Holly Hazard, who was on the finance committee, agrees with two supervisors who want a forensic audit on top of the regular school audit. It would compare the approved budget with actual expenditures and account for all adjustments.

The sad part, board and committee member Scott Hirons said, is that the cost of reform — such as $133,000 for an auditor — will probably come from classroom funds.

And fellow board member Dewayne McOsker said that’s the most painful part of losing track of funds.

“The biggest impact was to the kids of this county,” he said. “Our kids are stuck in a class with 28 to 36 kids. . . . It is unacceptable.”

This article has been updated to correct inaccurate information about what the schools' auditor concluded regarding the $5.6 million "mystery money."

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​Vanessa Remmers: 540.735.1975

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