Why Do City School Systems’ Audits Cost Almost 3 Times More Than County Systems?

Why is it that a county school system’s mandated annual audit cost $11,040 in fiscal year 2012, while city school systems paid almost three times that amount on average during the same time period?

The Code of Alabama, Section 16-3A-7 requires a yearly financial audit of each board of education’s books and accounts “including a legal compliance audit and program compliance audit.”

County school boards, plus the city systems of Birmingham and Tuscaloosa, are audited by the Alabama Department of Examiners of Public Accounts (DEPA).

Also, “a city system which has had any financial form of intervention by the State Superintendent of Education shall be audited by the Department of Examiners of Public Accounts, or if any such intervention should become necessary at any future date, such city system shall be audited for three future years by the Department of Examiners of Public Accounts.” If a city school system has not had an intervention, city school boards are allowed to hire a private Certified Public Accounting (CPA) firm of their choosing to perform the audit. CPA services are not subject to Alabama bid laws, meaning a school board can choose a firm without first asking for bids.

Here is an example of a county school board audit performed by DEPA.  Here is an example of an audit performed by a private CPA firm hired by a city school board.  The audit standards are the same for each.  But that County board paid a total of $13,800 for all auditing services, as reported on their year-end financial statements filed with the ALSDE, while the City board paid $46,330 for all auditing services as reported on their year-end financial statement filed with the ALSDE.

The county system had nearly three times as many students as the city system in the example.  Yet the audit cost nearly four times as much for the city board as for the county board.  This really confuses me.

Before you start with the “but it’s such a little bit of money compared to the overall budget” argument, let me be clear about what it is that I am confused.  Why do county systems get a legislatively-mandated bargain on audits while city systems pay on average three times as much for the same service?

And, in the spirit of full disclosure, this is not a new frustration for me. I challenged my local city school district about the cost of their audit (then $75,000 per year by a private CPA firm) in 2008 (the link is from the continued challenge in 2009)…even convinced a board member to ask the question at the board table…and was resoundingly rebuffed by the school district.  At that point, though, I was not savvy enough to look at statewide data and do the math. Five years later, I decided to do the math. Almost wish I hadn’t.

Here’s what it looks like:

So what’s the deal?  Why is a city school board audit so much more expensive to conduct?

Let me explain where the numbers came from.  From this web site, you can download a large amount of financial data about our school districts. I looked at “Financial Summary Detail” under the “Optional Reports”, and located amounts attributed to object code 323, auditing.  It became obvious that county boards of education were charged $11,040 by DEPA for FY12. I made some assumptions about nine school systems that failed to identify “auditing” as such, but rather identified an amount as “accounting”, or in another way that appeared to be an amount that could be a fee for auditing services.  Please see Note 1 at the end of this post for those districts.  An additional nine districts classified no amounts as “auditing” or “accounting”, and no assumptions could be made.  Those districts are identified at the end of this post.

I was fortunate to attend the Alabama Association of School Boards school finance training in March where ALSDE Deputy Chief of Staff Craig Pouncey spoke about this very subject. He spoke about the importance of having an objective auditing firm conduct the annual audit and warned city school board members about “getting too cozy” with their CPA firms, acknowledging that those CPA firms had little motivation to produce any mention of any wrongdoing by city school boards recognizing that they could lose the contract to conduct the audit if they produce too much bad news.

What surprises me, I suppose, is that the ALSDE provides no oversight where fees for audits are concerned, as audits are paid for with “local money”.

Only the local community can provide oversight for the expenditure of local money.

Say that again, you ask? Only the local community can provide oversight for the expenditure of local money.

I had the good fortune to learn that rule back in 2006, when I asked Pouncey if the state department could help oversee the expenditure of nearly $80 million in local tax money for my school district. (I was concerned that school officials would treat it as a Christmas bonus and blow through it all. Looks like I may have had something to worry about after all.)

Pouncey said the Alabama State Department of Education (ALSDE) wasn’t able to oversee the expenditure of local money. He said that the federal government oversees the expenditure of federal monies, the ALSDE oversees the expenditures of state monies, but it is up to the local community to oversee the expenditure of local monies. That was a life-changing moment for me.

How on earth are us local folks supposed to rightly oversee the expenditure of local monies, I asked. With a straight face, Pouncey answered that we just are.

So it’s up to us, the local communities in our local school districts, to ask questions about how much money our city school boards spend on these audits. Again, please don’t fall prey to the “it’s only a few tens of thousands of dollars” argument. Our local school teachers can do an awful lot with a few tens of thousands of dollars.

We expect our elected and appointed board of education members to be good stewards of our local tax dollars, right? So maybe we should ask our local board members what they pay for an audit and why our city boards pay two, three, four and more times the amount our county boards pay for their audit. It never hurts to ask.

Representative Rod Scott introduced HB535 at the beginning of April, which would require all city boards to post their yearly audits online, but no restrictions on how much money can be expended to do so. Representative Scott lives in Fairfield. Fairfield City Schools spent $35,635 on auditing services and an additional $7,500 on auditing for their Child Nutrition Program (the federal school lunch program). I wonder if he realizes that his local city system spent nearly four times the amount on their audit that the county boards spend for their audit.

Perhaps legislation should be introduced to mandate the Department of Examiners of Public Accounts conduct all board of education audits. Considering that the 67 county boards of education expenditures for auditing amount to $756,000, while the 65 city systems’ expenditures amount to $1.6 million for the same services, I feel certain that DEPA would appreciate the additional money be spent with their agency rather than in the private sector.

The privatization of school support services is under fire. Perhaps rightfully so.

School budget hearings are underway in a couple of school districts. School districts must submit their budgets to the ALSDE not later than September 16, 2013.

Alabama’s public schools spend nearly $8 billion a year educating 740,000+ students. Every penny counts. The budget hearing is your opportunity to hear directly from those responsible for creating the budget through which your community’s tax dollars will be spent.

A simple e-mail to someone at your school district’s central office should provide you with the dates of your district’s budget hearings. Make the time this year to learn the plan for spending your community’s money.

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NOTE 1: The districts that failed to identify “auditing”, but an amount was found under “accounting” or another classification that appeared to be an amount that could be a fee for auditing services are:

1. Crenshaw County – nothing listed for “auditing”, but found $7,500 in “other purchased services” in Fiscal Services
2. Dale County – nothing listed for “auditing”, but found $11,040 in “accounting” in Fiscal Services
3. Guntersville City – nothing listed for “auditing”, but found $18,250 for “accounting” in Internal Auditing
4. Homewood City – nothing listed for “auditing”, but found $44,680 listed for “accounting” under General Administrative Services in Board of Education services
5. Jackson County – nothing listed for “auditing”, but found $11,040 listed in “accounting” under General Administrative Services in Board of Education services
6. Lawrence County – nothing listed for “auditing”, but found $11,040 listed under “accounting” in General Administrative Services in Board of Education services
7. Oneonta City – nothing listed for “auditing”, but found $11,040 listed under “accounting” in General Administrative Services in Board of Education services
8. Oxford City – nothing listed for “auditing”, but found $50,000 listed under “accounting” in General Administrative Services in Board of Education services
9. Ozark City – nothing listed for “auditing”, but found $10,000 listed under “accounting” in General Administrative Services in Board of Education services

The following school districts had no amounts that could be identified as auditing or accounting:

1. Brewton City
2. Coffee County
3. Lanett City
4. Montgomery County
5. Opp City
6. Russell County
7. Talladega City
8. Tallapoosa County
9. Winfield City

No attempt was made to ask these school districts for this information given prior response rate to my requests.