Harrisburg superintendent thought district was ‘running smoothly,’: 11 findings from state audit

The district also paid more than $900,000 to substitute service agencies for work that potentially wasn’t performed.

• Christine Vendel/PennLive
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  New to PA, covering Harrisburg for PennLive, former reporter for The KC Star, who writes while standing because prolonged sitting is as harmful as smoking

(Harrisburg) — A recently-released audit of the Harrisburg School District revealed $5 million in questioned costs and provided a glimpse into the district’s finances.

But it may not be the full picture.

That’s because the report by Wessel & Company analyzed a sampling of documents, not every contract, account and employee file.

A team from the Montgomery County Intermediate Unit that was put in place last week by the district’s newly-appointed receiver will be reviewing individual accounts and employee files, potentially giving the public a more-detailed account of the district’s financial situation in about 90 days. The team was brought in by Receiver Janet Samuels after she eliminated 14 positions, including the superintendent, acting business manager, and in-house solicitor.

The report by Wessel & Company, meanwhile, was intended to look at specific areas of concern including transportation (after an embezzlement case,) human resources (after a series of scandals including over-hiring 37 teachers) and grants management (after federal grants were suspended) as well as trying to determine why the district had been unable to create accurate budgets in recent years.

The audit documented $2.6 million in “potential questioned costs,” and an additional $2.5 million in unsupported expenditures over the past three years.

But the scope of the report was limited, which officials explained in the beginning of the report.

“We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion,” the report said. “Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.”

Still, the report turned up plenty of interesting details.

• The report confirmed 132 terminated employees were getting free continuous health benefits, which is more than double the amount previously thought and represented a loss of more than $800,000.
• The district also paid more than $900,000 to substitute service agencies for work that potentially wasn’t performed.
• Auditors noted that two of the most helpful employees during the audit were removed from the district in the middle of the audit, which prevented further cooperation with auditors.
• The district also overpaid at least 16 vendors more than $210,000 more than their board-approved contracts, auditors found after pulling a sample of 47 contracts. That works out to 34 percent of the sampled contracts being overpaid.

Here are 11 more findings tucked into the report that haven’t been previously highlighted:

Superintendent thought everything was fine

Auditors interviewed district employees and found their views of the district differed depending on their place in the district’s hierarchy.

Top-level management, including the superintendent, acting human resources director and acting business manager, believed “the district overall was running smoothly and effectively,” according to the audit.

Any processes that were inefficient or not being performed was someone else’s fault, according to the interviews.

Mid-level managers, which includes principals, however, voiced concerns about processes, procedures and a lack of communication. Specifically, these managers believed there was no exchange of information between their level and the top-level management.

Employees at the bottom were focused solely on doing their job and did not show concern for tasks that weren’t being completed. They reflected the top-managers’ way of thinking that “it’s someone else’s responsibility,” auditors reported.

The lack of effective communication across the district resulted in “excessive waste and abuse of financial resources,” according to auditors.

Auditors concluded the district’s leadership was ineffective.

“They have displayed poor decision making and have not placed enough attention on increasing student performance or improving financial results. The tone set by Management has a trickle-down effect on employees,” auditors wrote. “If the tone set by Management upholds ethics and integrity, employees will be more inclined to uphold those same values. However, when Senior Management appears unconcerned with ethics and accountability and have not placed enough emphasis on executing initiatives identified in the Recovery Plan, employees tend to feel that ethical conduct and accountability is not a focus or priority within the organization.”

Employees who tried to monitor expenses ignored

The district’s payroll supervisor tried to alert her boss that overtime costs were exploding for custodial services. She provided evidence to auditors of attempts to relay her concerns regarding excessive overtime costs for custodial services to the acting business manager, Bilal Hasan.

The custodial employees were under the supervision of an outside contractor, Aramark. The supervisor reported her findings to Hasan on several occasions. But her attempts to monitor payroll costs were ignored, auditors said.

Annual overtime costs ballooned from $122,477 in the 2015-16 school year to $215,688 in 2017-18. Several custodians earned overtime pay equal to, or more than, their yearly salary.

Auditors met with Aramark representatives who said, according to their contract with the district, existing custodial staff were to remain school district employees while any new hires would be Aramark employees. When asked about the rising overtime costs, Aramark officials said they were responsible for approving all overtime worked by both Aramark employees and Harrisburg School District employees.

Auditors concluded the district has no procedures in place to monitor facilities management costs or overtime costs incurred under Aramark management. Auditors also asked Hasan to provide them with any cost-benefit analyses that were performed when the district decided to outsource custodial management to Aramark in 2014. Hasan did not provide anything.

No records management

During the auditors’ examination, they noted that district staff had difficulty locating multiple records, such as vendor contracts, bid documentation, employee data and licensure documents and time-and-effort documentation required by federal grants.

The district has a records management policy that requires the appointment of a record coordinator, who would have the responsibility for developing a records management plan that complies with federal and state laws and regulations. The policy also requires the district to have a comprehensive record retention schedule and a records management committee.

But the superintendent has not complied with this district policy, auditors concluded.

“A committee has not been formed, a Records Coordinator has not been appointed, and a records management plan has not been developed,” auditors wrote.

Budget out of whack each year

The school district’s actual expenses each year did not resemble the overall budgeted dollars, and in fact was off by millions of dollars each year.

The district spent nearly $4 million more than its budget in 2015-16; $2.4 million less than budget in 2016-17 and more than $4.2 million in 2017-18.

The discrepancies were noted in required annual audits but the problems persisted.

When Wessel & Company auditors asked the acting business manager for any documents or analyses to support assumptions used during budget preparation and variances between budgeted and actual expenditures, they were given “generic system-generated reports” from the district’s eFinance system.

“Mr. Hasan was unable to provide variance explanations or analyses that could be used to explain why certain line items were either over/under budget,” auditors said.

Auditors also noted the acting business manager had not performed the following routine tasks, such as:

• Timely year-end closing procedures (Based on the number year end audit entries)
• Maintenance and reconciliation of detailed fixed asset listing to audited financial statement balances.
• Financial statement conversion workpapers necessitated by the Government Accounting Standards Board (GASB.)
• Preparation of an independent analyses for pension and OPEB related financial statement balances as required by GASB.

A “significant fraud risk”

The Harrisburg School District has a policy of paying administrators for up to 10 days of unused vacation time every year.

But that policy can help conceal fraud and is considered a “significant fraud risk,” according to the Association of Certified Fraud Examiners. The association stresses the importance of mandatory vacation days taken by key employees as a “proven effort” to detect fraud because “many internal fraud schemes are continuous in nature and require ongoing efforts by the employee to conceal the fraud.”

It is important that while the employee is on vacation another employee or group of employees, take over. Such procedures also serve to cross-train employees, auditors said.

As it stands, few if any school district employees are cross-trained.

Most of the district’s top-25 paid employees made more than their base salaries last year in part due to vacation payback. The district paid about $47,000 to those 25 employees last year above their normal salaries, so a new policy also would save the district money, especially if additional administrators are getting paid for unused vacation.

School board failed

Auditors did not reserve their fault-finding for the superintendent and other top managers in the district. They dished out some specific criticism for the elected school board as well.

The report flatly said the board of nine volunteer members “has not provided the leadership necessary and have not been good stewards of the District’s resources.”

The board has not complied with its own policy of standards and code of conduct, according to the report.

The policy says the board will “ensure strong management of the school system by hiring, setting goals and evaluating the superintendent; employ qualified staff to meet student and program needs and balance their responsibility to provide educational programs with the need to be effective stewards of public resources.”

Based on a review of board meeting minutes, auditors wrote, it does not appear that the school board was “making a strong enough effort to fill key management positions with competent qualified individuals, thereby not fulfilling their duty to effectively manage the district’s resources.”

That said, a minority of school board members tried to ask questions and push for positive changes, but they were regularly overruled by the five-member majority.

Auditors also recommended school board members should undergo training to understand and follow the district’s policies and procedures, specifically in the areas of procurement, bid requirements, the state’s cooperative purchasing program (Costars,) and suspended or debarred vendors, “so that they understand what is required.”

Hired attorney with questionable reputation

The controversial hiring of James Ellison as in-house attorney in April garnered its own section in the Wessel & Company report.

While examining the district’s culture, the audit found that district leaders were setting a very poor “tone from the top.” As an example, the report cited the school board’s hiring of Ellison even after then-Chief Recovery Officer Janet Samuels expressed concerns over the hiring process.

Ellison, the report said, “has displayed many moments of questionable moral character, but was hired despite that information.” No details about his history were included in the audit, but it has been widely reported in the media that his prior job at the Coatesville School District ended with him named 200 times in a grand jury report. The report was published in 2014.

Less than two years later, Ellison and Rhoads & Sinon, his former law firm, agreed to pay the school district $420,000 to settle a lawsuit that alleged he provided flawed advice and overbilled the district.

“We believe such decisions greatly impacts the culture of the entire organization,” Wessel& Company auditors wrote. “Employees and senior management are led to believe that even if they act with questionable moral behavior, and are friends or relatives of certain board members or senior management, they will not be penalized, or will be given a second chance, just as with Attorney Ellison.”

The audit further concluded that district leaders did not consistently reprimand employees for improper conduct. The lack of accountability district-wide was demonstrated by district leaders’ “withholding of access to the eFinancePlus software and other documentation requested during the audit process,” auditors said, as well their belief that there would not be any penalties for withholding that information.

Bilal Hasan said he was following “legal advice” when he initially refused to provide access to the district’s electronic financial system, but he never said which attorney provided him the advice. The refusal occurred immediately before the district hired Ellison.

Cash reserves drop

The school district’s General Fund total fund balance — the district’s cash reserve — dropped from $30.1 million in 2015-2016 to $19.1 million in 2017-2018.

Auditors were particularly concerned that the district’s “Unassigned Fund Balance” had dropped below five percent of the district’s budget.

A district policy says if the fund balance falls below that mark, the district is required to prepare a report for the board on how it will increase the fund balance. The district’s financial recovery plan also calls for the chief financial officer to “annually prepare a fund balance report for the school board’s Budget, Finance and Facilities committee.”

Wessel & Company requested copies of the fund balance reports made and no such reports were received.

Meanwhile, the district’s fund balance has since dropped to $11.7 million, according to this year’s budget, which has a $3 million deficit.

One-third of sampled contractors overpaid

When auditors looked at a sample of 47 contracts, they found 16 contractors had been paid more than the maximum listed on their approved contracts. Some were significantly overpaid.

The bulk of those overpaid (12) were for so-called “independent contractors.” (And most of those independent contractors were former school district employees.)

In addition to instituting measures to ensure contractors are not overpaid in the future, auditors noted that “when hiring independent contractors, a formal cost-benefit analysis should be prepared and retained to formally document and support” the decision.

“In addition, work performed by independent contractors should be reviewed and evaluated every six months and annually to determine whether the contractor should be retained.”

What the district fixed/didn’t fix from Auditor General’s last audit

As part of its assignment from the state department of education, Wessel & Company reviewed how the school district was doing in five key areas cited by the auditor general in 2015.

Wessel & Company officials concluded the district had corrected one finding, partially corrected two findings, and two findings remained uncorrected four years later. From the audit:

• A.G. Finding No. 1: The district continues to face significant, persistent financial challenges. Has not been corrected; all of the financial challenges previously identified, are still present and limiting the District from achieving financial stability
• Finding No. 2: Continual poor management of the district’s cafeteria operations resulted in loss of nearly $1.3 Million and a fund deficit of $875,000. Has been fully corrected; the financial condition and cafeteria operations have significantly improved and no longer rely on general fund subsidies.
• Finding No. 3: The district employed unlicensed health room aides and an uncertified school nurse who provided medical services to students. Has not been corrected; while auditors did not identify any unlicensed or uncertified health service employees, there is a lack of internal controls over the documentation and monitoring of licensed health professionals.
• Finding No. 4: The district’s student membership data, which was submitted to the Pennsylvania Department of Education not only to calculate subsidies but also for educational decision-making, was deemed unverifiable, and therefore unreliable. Has been partially corrected; the district has made significant improvements within its Child Accounting Department, however for fiscal year 2017-2018 auditors did note a variance of 7.148 between reporting systems.
• Finding No. 5: The district’s continued failure to implement stronger access controls, require a non-disclosure agreement, and develop a disaster recovery plan. Has been partially corrected; both password security controls and non-disclosure clauses for software vendors have been implemented; however, the district has not yet developed a written formal disaster recovery plan.

Can’t substantiate federal grants

Previous routine annual audits of the district had flagged lack of documentation of federal grant spending as a problem.

As such, the district was required to develop procedures to “track and complete time and effort documents in a timely manner for all grants,” according to a corrective action plan.

But Wessel & Company officials could not document whether federal money paid to employees in recent years was properly spent because proper documentation and certifications weren’t completed.

Auditors selected 48 employees charged to the district’s School Improvement Grant (SIG) program at John Harris High School for the 2017-18 school year. They then selected three pay periods and requested approved time sheets and semi-annual certifications which are used by the district to document time and effort to federal programs. (For employees who may have multiple assignments, a distribution of their salaries must be documented by activity reports.)

“While certain payroll reports were made available upon request, the testing could not be completed because the district was unable to provide the semi-annual certifications to support payroll costs,” auditors wrote. “Total payroll and benefits charged to the 2017-2018 SIG program amounted to $228,216.58 in questioned costs.”

The district did not comply with its own board policy or federal program requirements for time and effort documentation. That could explain why state department of education officials pulled funding for the SIG money from John Harris earlier this year.

 

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