Legislative Audit, Educational Institutions

December 1, 2022

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Rep S Berry: ..and crowd, thank you for being here. Okay, item B adoption of the minutes of the October 13, 2022, meeting. Ladies, may I have a motion? Motion and second. All those in favor say aye.


Committee members: Aye.


Rep S Berry: Opposed? Motion carried. Review of reports. Mr. Fink, you have those to share with us, please.


Fink (Audit): Thank you, Mr. Chair, and good afternoon. Today we have 10 educational reports to review. Seven of these reports were for the fiscal year 2021, and three reports were for fiscal year 2022. One report that will be reviewed today was the Earle School District, and it was classified as fiscal distress. And there were three reports with findings.

ASU Newport

So we will begin with the ASU System, which had one finding that was referred to the prosecuting attorney. Arkansas State University Newport’s internal controls failed to detect a fraudulent email received during July 2022, and payroll staff subsequently modified an employee’s bank information, resulting in a loss of almost $1,400. As of October 31, 2022, the funds had not been recovered. And that concludes the findings for Arkansas State University System.


Rep S Berry: Identify yourself for the record, please, and proceed.


Welch (ASU): Thank you, Mr. Chairman. Chuck Welch, President of the Arkansas State University System. This was a situation where we had historically had a direct deposit change form that was online. It had been taken offline, and an individual called and said, “I can’t find the form anymore. Could you send it to me?” An employee did. Subsequently, it changed the direct deposit, and we learned it was fraudulent. We have now changed it. You have to come in person now to make a direct deposit change. So that’s what happened. We changed that policy and wouldn’t anticipate this happening again, Mr. Chair.


Rep S Berry: Are there any questions of the Committee members?


Welch (ASU): Mr. Chair, if I might, I want to thank our team. Many of them are here. They came down, worked so hard. We didn’t have a single Henderson State finding this year. So if we’re going to celebrate something, we’ll do that today. But our Henderson team and Arkansas State System team, they’re all here. And I just so appreciate the great work that they do. Just want to say that and I appreciate you allowing me to.


Rep S Berry: Well, thank you. And the committee welcomes you here today. Any other questions? If not, I’d entertain a motion to file this report. Motion and second. All those in favor of the motion, say aye.


Committee members: Aye.


Rep S Berry: Opposed? Motion carried. Mr. Fink.


SAU Community College

Fink (Audit): Okay, the next report to review is South Arkansas Community College, which had one finding that was a repeat finding. I’m not going to read the entire finding, but as you can see on the synopsis, there were various accounting errors and misclassifications noted that impacted financial reporting on the statement of net position, the statement of revenues, expenses, and changes in net position, the statement of cash flows, and the notes to the financial statements. The financial statements were subsequently corrected by college personnel during audit fieldwork. And as stated in the finding, we had noted similar findings in the previous six audits. And that concludes the summary for South Arkansas Community College.


Fink (Audit): Okay, is there anyone present? Okay, just take a seat at the end of the table, identify yourself for the record, and proceed.


Wallace (SAU): Thank you. Mr. Chair and committee. My name is Bentley Wallace, and I’m the president of South Arkansas Community College.


Armstrong (SAU): Good afternoon. My name is Michael Armstrong. I’m vice president of finance and administration at South Arkansas Community College.


Rep S Berry: Okay, if you have a presentation, go ahead.


Wallace (SAU): Thank you, Mr. Chair. When we got through with our audit for the fiscal 2020 year, which was my first few months at South Ark, we recognized that we had a serious, long-standing situation with our financial reporting. The good news on that is there was no malfeasance. There was no fraud. The receipts and expenditures were all accurate. We had no findings around those. The issues that have compounded over time were misclassifications, basically errors and incompetence within the staff who was handling that and just recording things in the wrong places. And as we worked through that 2020 year, we had a few things happen that actually turned out to be pretty good for us in the end because it forced us to be better and to change. Our CFO took another job with another college in the summer of 2020. Our financial accounting manager retired. Our controller, who had been there just a year at that point, she returned to the private sector. And so in a matter of about four months, we lost the top three people in accounting at the college. And that was the summer of 2021. We kept that controller on in a part-time contract just to finish up our 2021 books as she was on her way out. But we found ourselves without those folks who had been with those books for those five or six years that these repeat findings represent. But we were also tasked with replacing all those positions. We immediately launched searches for all of them. We found a new financial accounting manager. We struggled to find a CFO and we struggled to find a controller. As we finished up the audit process a year ago, we recognized that we couldn’t continue on that same path, and we had to up the standards for that controller position. And so when we advertised for it, we required a CPA for the first time for that position. And we were able to hire somebody from the private sector, a CPA who also is a certified government financial manager and has two master’s degrees, one in accounting and one in public administration. So that was an excellent hire to get us on a path with somebody with experience and CPA.


Wallace (SAU): We continued on that path. We didn’t have a CFO last fall, so we brought in a recent retired CFO from UA, Monticello. He had just retired. He came recommended to us, and we brought him on as a consultant to guide our controller while we were still in the search for a CFO. And we went through a third round of search for CFO through last winter and identified Michael, who has been CFO and CEO in the private sector in the banking industry and also CFO in education. And so with those three new people in place, finally, after almost a year of being shorthanded in that area, we launched into this audit process. And it continued to tell the story that we were not doing a very good job with classifying and recording financials at the college. Glad to say that we were able to correct those through the audit process with the great help of audit staff. They did a great job. We’ve been fortunate to have the same auditors for several years who have guided that, and now we’ve got staff in place along with plans for remediation and plans to be better. We’ve already started that. We’ve got specific training happening with our new folks. We continue to use outside consultants and resources within the state of other CFOs. Even though we’re not part of a system, the system folks are helping to guide us. We’ve got great close relationships with them. So do we anticipate having clean audits in the future? We do. Are the challenges that led up to this, the folks who were handling it before are no longer involved? They’re not. And so our hope is that that period has passed and will not have those classification errors in the future. Again, it’s really important to note that our receivables are in good shape. Our student accounts are in good shape. Our expenditures are all recorded accurately. This really is just making errors in terms of debits and credits and where things should be recorded. And that’s the bulk of the findings. One last thing. Even though it does say that the findings are six years in a row, that we’ve had the same finding, the errors have not been the same six years in a row. It’s just that the errors we’ve had all fall under the misclassification heading. And so, yes, it’s six years of misclassification findings, not the same error six years in a row. It doesn’t make it any better, but it is a slight distinction.


Rep S Berry: Well, it sounds as though you’ve covered a lot of ground and working on your issues.


Wallace (SAU): We’re working hard to get better quick.


Rep S Berry: What size budget do you have, are you dealing with?


Wallace (SAU): Operating budget is right at $12 million.


Rep S Berry: $12 million. Okay. Are there any questions of the committee? Yes, Ms. McKenzie.


Rep McKenzie: Thank you, Mr. Chair. So six years in a row was different errors, but they’re all classification errors, it sounds like. For those six years was the cause every time lack of help, that you were shorthanded?


Wallace (SAU): Not necessarily shorthanded, but maybe personnel that weren’t up to speed on fund accounting. I’m trying to walk a fine line there and not throw anybody under the bus. But one of the things that we had was an antiquated reporting system. We had an awful lot of our financial reporting was being done manually within Excel spreadsheets that had formulaic errors built into them, and they would recycle those same spreadsheets year after year, and so problems would compound. One of our mitigation strategies is we’re working with our ERP provider to move more and more of our financial reporting into an automated system. We already own the system. We’ve just never used it adequately. And so we’re moving away from manual entry. We’re moving away from spreadsheets, relying more on the system. And we have a contract with the ERP company now to provide guidance on how to do that. We’ve already had our first meetings with them. We’ve got, through the spring, more meetings scheduled. And just the fact that we’re going to get the opportunity for human error out of a bunch of that process will make us better.


Rep McKenzie: Okay, thank you.


Wallace (SAU): Thank you for the question.


Rep S Berry: Any other questions of the committee? If not, I’d entertain a motion to file this report. Motion made and I need a second. Okay. Motion made and second. All those in favor of the motion, say aye.


Committee members: Aye.


Rep S Berry: Opposed? Motion carried.


Wallace (SAU): Thank you, Mr. Chair.


Rep S Berry: Thank you. Mr. Fink.


Kipp Delta

Fink (Audit): The final report with findings, none of which were repeat, and they were not referred to the PA, is KIPP Delta Public Schools. And they had several findings. I will not read each one, but I will provide a summary. Four of the findings were related to payroll federal compliance issues, mainly in the Title 1 program. One finding also noted similar issues in the Education Stabilization Fund. The payroll issues were mainly due to the charter school not having proper documentation related to time certifications and/or proper supporting documentation for salaries and wages in accordance with federal regulations. The other finding, which was also in the Title I program, was for purchase orders not being completed prior to purchases being made. And that concludes the summary for KIPP Delta Public Schools.


Rep S Berry: Is there anyone here with the school district? Okay, any questions of the Committee members? Okay. Any further comments on KIPP? If not, entertain motion to file this report. Motion made and second. All those in favor of the motion say aye.


Committee members: Aye.


Rep S Berry: Oppose. Motion carried. Okay, Mr. Fink.


Fink (Audit): The remaining seven reports, which are listed on the last page of the synopsis consist of audits with no findings. Included in this list is Earle School District– excuse me, which is classified as fiscal distress. Staff recommends that these reports be filed in mass.


Rep S Berry: Okay. Take a look at those if there’s any of them that you want to discuss. Otherwise, we’ll just batch them all together. Motion and second to file the reports. All those in favor say aye


Committee members: Aye.


Rep S Berry: Opposed? Motion carried. That concludes our business. Okay. Any questions? All right, well, thank you for being here. And Ms. McKenzie, you won’t be with us next time, and we appreciate you, your attendance, and your comments. And we’ll miss you. So if no any other business to come before the committee, this committee is adjourned. Thank you.