Claims auditing: Protecting the district’s bottom line

On Board Online • April 12, 2010

By Linda Bakst
Deputy Director of Policy Services

Most school board members are aware from their fiscal oversight training that the Education Law requires that before a bill is paid by the school district, the claim must be “audited and approved.” But what does this really mean? That question was answered recently in regional workshops, sponsored by NYSSBA, entitled, “Claims Auditing: Protecting Your District’s Bottom Line.”

It is easy to be confused about how claims auditing fits in with district’s internal and external auditing responsibilities.

Workshop participants learned that claims auditing – a requirement since 1960 – received increased attention in 2006 when the Office of the State Comptroller released, with the support of NYSSBA and other groups, a Five Point Plan to improve school fiscal accountability.

The purpose of the claims audit is to ensure that all claims are proper. Claims must be (a) for purchases that are in compliance with law, regulation and district policy; (b) for an actual and necessary expense; (c) supported by a budgetary appropriation and (d) supported by sufficient documentation. The more attention paid at the front end of district financial transactions (i.e., the claims audit), the less chance for mistakes, as well as fraud, waste or abuse.

The claims audit responsibility can be carried out by the board of education itself, or it can be delegated to an individual. If the duty is delegated, it must not be done by a board of education member, the district clerk, the district treasurer, the district business official or purchasing agent. It also can’t be done by staff directly involved in the accounting or purchasing functions. For smaller districts this can prove challenging. But even if a school board does delegate the job, it still has an important oversight role.

Some of the key points that emerged from the workshop were:

• Board members should be aware that the claims auditor reports directly to them, not to the superintendent or business official. In fact, some of the presenters (who are both external and internal auditors themselves), recommend that the board should meet face-to-face at least annually with the claims auditor so that they ensure that lines of communication are open.
• Claims auditors should be providing a monthly report to the board. The report should provide sufficient information to satisfy the board that claims are in fact being reviewed. The presenters pointed out that if the board is given a report that shows that every claim filed was approved, then something is wrong. Claims should be questioned, and though they may ultimately be approved, some should be flagged by the auditor for further examination. The report that the board receives should reflect this.
• The claims auditor should be included periodically in a review of district policies that cover purchasing and other related financial management policies.

One of the emerging issues discussed at the workshop is the use of electronic means for invoicing and paying bills. The main concern is to ensure that the system is set up so as to avoid duplicate payments. According to the auditors, duplicate payments are not an uncommon finding.

Other common audit findings are:

• Lack of adequate documentation to support the claim, particularly not providing board-approved contracts, or documentation of bids or price quotes to support the purchase.
• Purchase orders issued after the invoice which can be an indication that proper procedures weren’t followed.
• Checks signed and distributed prior to claims auditor review.

Finally, the board needs to focus on whether the claims auditor in place (or is being considered for the job) is the right person for the position. The individual, or board, performing the function needs to have a healthy skepticism so that they ask questions. Many of the questions are grounded in common sense, not necessarily expertise. The claims auditor also needs to be a person who is comfortable enforcing policy and procedures.