A. Introduction

The San Mateo County 1998 Grand Jury received complaints alleging inappropriate business practices by Ravenswood City School District (RCSD) personnel and members of the Board of Trustees. These allegations included:

• improper use of public funds for private financial matters by administrative officials and members of the Board of Trustees.
• use of state and private grant monies for purposes other than those for which they were intended.
• inadequate and incomplete accounting of special funds.
• inappropriate use of RCSD credit cards in violation of District policy.
• improper administration of special funds.
• failure to maintain business records.
• excessive use of school funds for travel and conferences.

Some of these same allegations were investigated by a Santa Clara County newspaper, The San Jose Mercury News, with articles published between September 1997 and March 1998.

B. Limited Scope Management Audit (LSMA) Authorized by Grand Jury (attached hereto as Exhibit A and incorporated by reference)

Following a preliminary investigation, the 1998 Grand Jury conducted a limited scope management audit of RCSD business practices focusing on the specific allegations. Harvey Rose Accountancy Corporation, an independent audit firm, was hired. The audit was not completed by December 31, 1998, the end of the 1998 Grand Jury's year. Therefore, the 1999 Grand Jury decided to continue the investigation.

The LSMA focused on a detailed examination of specific transactions that occurred between May 1993 and June 1998 concerning:

• the propriety of various financial policies and procedures of RCSD.
• the appropriateness of expenditures made from RCSD's General Fund, Needy Children's Fund (NCF), Employee Emergency Loan Fund (EELF) and the Superintendent's Discretionary Fund.
• the examination of expenses charged on RCSD credit cards as well as personal expense claims and reimbursements.

All management audits begin with an entry interview with members of the school district to establish procedures concerning the auditors' access to records and the availability of district personnel for interviews. Upon completing both the review of documents and interviews, the auditors prepare a draft report and submit it to the audited body. Approximately a week following the submission of the draft report, an exit interview is conducted with school district management. The draft report is reviewed, paragraph by paragraph, in order for the management to correct mistakes and contest findings using documents not previously submitted to the auditors.

Approximately two weeks after the exit interview, the auditors publish their final report. The school district has the opportunity to submit a written response to the final audit report.

In the RCSD limited scope management audit, the auditors were informed at the entry interview that they would be provided with full cooperation in the course of the audit, including direct access to staff and documents. However, their review of RCSD was limited by the following:

1. Various documents were missing, including documentation supporting payments, loan documentation, and other documents necessary to complete their review. RCSD enumerated various reasons why their records were in disarray or missing.

2. The auditor's access to RCSD personnel and documents was severely restricted. They were not allowed to directly question any RCSD personnel, nor were they allowed direct access to any RCSD files. The auditors were directed to ask their questions or make requests for documents only through RCSD's attorney who would obtain the information. The attorney justified restricting direct access to school district files and personnel as a way to assure the auditors received all their requested information. The auditors were told that the attorney would simply review the requested data to ensure that all requested information was provided. However, the auditors were confronted with a situation where it appeared that within a two day period, someone altered an original document after it was copied , but before the original document was presented to the auditors.

3. Upon submission of the draft audit to both RCSD and the grand jury, a date was set for the exit interview. A letter was sent to RCSD stating that this meeting was for school district personnel only and that attorneys are not allowed to attend grand jury proceedings. On the date of the scheduled exit interview, no RCSD personnel attended. The attorneys and an accountant, who stated that he had not reviewed the audit, were the only representatives for RCSD who attempted to attend. They were denied admittance. Because RCSD management elected not to attend the exit interview, the draft report submitted by the auditors was unchallenged and was accepted as written.

C. Independent Research by Grand Jury

Under California Education Code, every school district is required to have an annual independent audit. The auditors are selected and paid for by the individual school districts. Copies of the RCSD deficiencies and corrections from the 1994 to 1998 independent audits were obtained from the San Mateo County Office of Education.

Copies of fiscal years 1995 to 1998 independent audits were obtained for all elementary school districts in the county. All school districts were reviewed for common deficiencies. Deficiencies found by the auditors were noted and subsequent audits were reviewed to see if the noted deficiencies had been corrected.

A questionnaire was sent to all 26 county school districts requesting specific information regarding their policies on the use of district issued credit cards and the district's authorization for travel by their personnel. All school districts responded to the questionnaire. Responses to the questions were provided primarily by the school districts' business manager or superintendent. RCSD was the only school district whose responses were submitted by their attorney.

The investigation by both the 1998 and 1999 Grand Juries and the auditors commissioned to conduct the Limited Scope Management Audit (LSMA) was restricted by the lack of an open exchange of information between the grand juries, auditors and RCSD. All information had to be specifically requested by the auditors and was first screened by RCSD's attorney. Many of the documents requested were missing. Without direct communication between the auditors and the RCSD's personnel who prepared and maintained the business records, the ability of the auditors to perform their investigation of the District's policies and procedures was hampered.

All findings in this report are based on the documentation that was made available to the auditors and the Grand Jury by RCSD. It is possible that additional issues might have been identified if all documentation and support for transactions had been provided. The auditors made every effort to ensure that the findings in their report were accurate and in accordance with of the policies and procedures that RCSD had in place.

RCSD was informed in writing prior to the exit interview that attorneys are not allowed to attend grand jury proceedings. RCSD did not send any of their personnel to attend the exit interview. Attendance of the District's personnel at the exit interview would have allowed the auditors and members of the grand jury to ask questions and District personnel to explain the findings of the audit. RCSD's failure to attend resulted in the Grand Jury having no alternative but to accept the LSMA as written.

Upon receipt of the information requested by the Grand Jury, the following findings were made:

A. Specific Findings Based on the LSMA

1. Credit Card Policies and Procedures

a. The RCSD does not have adequate procedures to ensure that all credit card charges are consistent with the District's policies, fully documented and accounted for on a timely basis. These procedures for payments are not adequate to prevent improper or duplicate payment.

b. A review of a sampling of charges and credits to District credit cards identified:

• improper support for payments.
• payments made for items that were not charged on the District credit card.
• duplicate payments or overpayments totaling approximately $5,200.
• charges and credits that were not cleared from the accounts on a timely basis.

The auditors found charges dating back to late 1995 that have never been paid and have identified charges that were paid more than four years after they were incurred. Because payments were not timely, RCSD incurred more than $12,000 in finance charges over the course of approximately four years. Additionally, credit cards were used to circumvent the District's purchase order policies which allowed charges up to $2,500 for materials and supplies.

The auditors identified personal charges to District credit cards which are strictly prohibited by District policy. Not all of these charges were reimbursed in a timely manner, and it appears that some might not have been reimbursed.

RCSD's written response to the LSMA was in basic agreement with the findings. RCSD stated there were no formal policies and procedures adopted as to the appropriate use of credit cards when they were first issued in 1991. When the District extended the use of credit cards to school principals and key administrators in 1995, a written policy was developed. RCSD stated interim procedures were established in July 1998 and a finalized credit card procedure will be submitted to the RCSD Board of Trustees at the conclusion of the Grand Jury inquiry to assure that all agreed upon issues are addressed.

RCSD also responded that incurring finance charges on the credit cards cannot be eliminated because of an unavoidable lag between even the most efficient reconciliation of receipts and statements at the District and the amount of time subsequently required for the San Mateo County Office of Education to process the payment. However, RCSD stated that a new credit card policy, which has not been written at the time of this report, will greatly reduce the amount of finance charges.

2. Cash Advance Policy

The auditors concluded that RCSD does not have a comprehensive cash advance policy. Because of the lack of a comprehensive policy, the District incurred excessive travel expenses. The auditors reviewed approximately 100 cash advances for conferences attended by the trustees, superintendent and business manager. Twenty-six cash advances had one or more of the following problems:

• advances were taken for more days than the actual travel incurred on District business.
• advances were taken for meals already included in the registration fee.
• advances were made and later duplicated in charges to District credit cards paid by the District.

In addition, there were another 12 advances the auditors were unable to evaluate because of missing documentation. As a consequence of the accounting method used by RCSD for cash advances, the auditors were unable to determine if any of these expenses were actually duplicate payments. The result of the current policy is the District has no way to ensure that all funds advanced to employees are used for proper District purposes, and that the District does not incur duplicate expenses.

RCSD responded that they have no objection to developing a comprehensive written policy for staff to use when traveling on District business. However, the response stated, "In practice, at the present time and in the past, users of District credit cards have consistently followed policies that mirror those recommended." The response offered a justification for each of the challenged expenses. RCSD also responded that the new procedures adopted in 1998 address the problem of duplicate payments.

3. Unusual Expenditures Identified

RCSD does not have procedures in place to ensure that all payments made by the District are for proper District expense. The auditors identified the following inconsistencies:

• payments for attendance at fund raisers which were specifically prohibited by board resolution.
• expenses incurred by the District that appeared to be expenditures for other organizations.
• unusual reimbursements to the Superintendent for purchases that did not have adequate supporting documentation.
• payments that appeared to be for individuals.
• an excessive expenditure for an eighth grade graduation speaker.
• duplicate payments submitted with duplicate original invoices.
• expenses for excessive number of attendees at an out-of-state conference.
• expenditures for clothing, shoes and accessories.
• excessive expenditures to florists.

RCSD responded that each item identified reflects an appropriate district expenditure.

4. Commingling Nonprofit Agency Business with District Business

According to the Limited Scope Management Audit report, RCSD is commingling the business of a nonprofit agency with that of the District. As a result of this commingling, an interested party might be misled about the relationship between the nonprofit agency and the District which could lead to liability for the District. Added to the exposure, the District might be incurring expenses that are not proper for the purpose of District business.

A district administrator, who is a check signer for a nonprofit agency, has a name on the District credit card that might be confused with the name of the nonprofit agency. The Administrator has made approximately $3,100 in payments from nonprofit agency funds to the District credit card account for which the Administrator has responsibility. Although there was no supporting documentation identifying which charges were paid with these funds, such a payment indicates that the District credit card might be used for the benefit of this agency. In addition, expenses paid on the Administrator's District credit card with district funds appear to be questionable expenditures.

RCSD responded that the District did not commingle nonprofit agency business with District business. The written response states:

The relationship between the District and the nonprofit organization Cities In Schools is a cooperative partnership accruing to the benefit of the public and does not constitute "commingling" in any sense. The partnership should remain as currently instituted.

RCSD also responded that the business office had removed the name of the nonprofit organization from the district credit card. The Superintendent has reviewed all past charges related to the issues identified in the audit and determined they were appropriate.

5. Accounting for Grants and Donations

The auditors concluded that the District failed to account properly for donations and grants intended for specific purposes. The District has established separate bank accounts for certain donations that are administered outside the purview of the County Superintendent of Schools. Commingling of monies between funds, personal disbursements by the superintendent, and poor administrative practices related to the disbursements resulted in RCSD being unable to demonstrate that such donations and grants were actually expended for the purposes intended by the grantors from which the monies were received.

RCSD responded that the District properly accounts for all grants and donations received. The District stated that they established separate bank accounts for the Needy Children's and the Employee Emergency Loan Funds in full compliance with the California Education Code after consultation with the staff of the San Mateo County Office of Education.

6. Needy Children's Fund (NCF)

The auditors concluded that some expenditures from the NCF have not been expended for the benefit of needy children. Other expenditures have not been adequately documented, making it difficult or impossible to determine the purpose for which the NCF disbursements have been expended.

RCSD responded that the Board of Trustees unanimously approved acceptance of grants and donations to the NCF.

7. Employee Emergency Loan Fund (EELF)

The auditors concluded that the policies and procedures for administering the District's EELF are inadequate and inequitable.

Loans were made for purposes that did not appear to be classified as an emergency (such as purchase of car for an employee's child or purchase of real property). The 12% interest charged was applied to all loans, regardless of the duration of the loan, resulting in a vastly different effective annual interest charge ranging from 8.2% to 162.2%. The duration of loans ranged from 27 days to 29 months.

Various administrative problems related to these loans were identified, such as:

• repayment schedule did not result in full recovery of the principal and interest or resulted in overcharges.
• disbursements were made from the EELF for purposes other than employee loans.
• approvals of the loans by the EELF Committee were not always documented.

RCSD responded that the EELF was properly administered. According to RCSD, "Historically, loans from the EEF were disbursed for any legitimate purpose if the individual applying was qualified and agreed to meet the repayment terms...Thus, the term `emergency' in the title of the fund has always been broadly interpreted."

The District explained that the 12% across the board interest charge was a way to: "keep the application process uncomplicated; keep the repayment cost equitable; render the repayment terms readily understood by all who might apply; prevent the fund from becoming a drain on the District by being self-sustaining; create as little administrative paperwork as possible; and not require coordination by an individual skilled in finance."

8. District Procurement Policies and Procedures

The auditors concluded that procedures in place do not ensure that all payments are supported by properly approved documentation and prevent duplicate payments. The prevalence of the above findings suggests a breakdown in the District's procurement procedures.

RCSD responded that some purchases noted in the audit were made in advance of preparation of the purchase orders. The purchases at a hardware chain store were generated either by a school building emergency or a prioritized work order. The District further stated that the policy concerning purchase orders was changed in 1998 to eliminate the problem of duplicate payments. According to RCSD, the business office has already revised all procurement policies and procedures, ensuring that appropriate approvals are obtained before a purchase is made. The District stated that it is strictly enforcing these revised policies.

B. Specific Findings from the Review of the Independent Annual Audits

The Grand Jury reviewed RCSD's independent annual audits for the years 1995 through 1998.

• Prior to 1995-96, RCSD's Board of Trustee meeting minutes were not completed in a timely manner. Subsequently, the auditor noted that, although timely, minutes were so brief as to be considered insufficient to be useful.
• District did not hold required public meetings regarding State Instructional Materials.
• District did not have formal procedures to record changes in location, sale, and disposal of equipment/fixed assets as required by Education Code §35168.
• Equipment donated to the District is neither tagged nor logged when received. Instead, the equipment is tagged when it is issued to a user.
• Student applications at the Child Development Center were not properly filled out and/or filed.
• Expenditures per student at the District's "private school" were in excess of amounts allocated for public school students and, as a result, were out of compliance with Federal Title I Program.
• Detailed listing of the accounts payable and accounts receivable were not available for audit. An accounts payable disbursement of $57,713 had neither invoice nor receipt documentation.
• There was a lack of controls to prevent invoices being paid more than once.
• Foundation Fund bank accounts were not reconciled: one of the accounts had a negative balance; another account's bank statements could not be located.
• Purchase orders were not used for purchases made with a credit card.
• The amount recorded on one cash receipt was $220 greater than the amount deposited.

• There was a lack of separation of duties for personnel handling cash clearing accounts.

• A cash receipt transmittal to the county was not recorded on RCSD's general ledger.

• Incorrect numbers of meals were entered on the monthly claim for Federal reimbursement under the National School Lunch Program.

• A review of the cafeteria cash disbursements found that some invoices were dated before the approved purchase order; some invoices did not have a copy of the purchase order or the voucher attached; some 15 invoices could not be located; and payments were not made in a timely manner in order to take advantage of cash discounts.

• A lack of separation of duties between the employees of the payroll and personnel departments existed.

• Inaccurately and inadequately maintained personnel showed: no approval was in the personnel file for advanced step placement for an individual; two teachers did not possess valid California teaching credentials; some files did not have I-9's (Immigration documentation); and a certified employee without a master's degree was paid at the MA/Ph.D. pay level.

• The health insurance billings were not verified to match the employee's name and/or social security number.

• Attendance records were frequently prepared in pencil and traced over later in ink.

• Attendance reporting for both students and faculty was inaccurate and inadequate in many areas.

• Categorical funding expenditures lacked program director's signature.

• Multi-funded employees did not always indicate how many hours were charged to each program.

C. Questionnaire Regarding Credit Card Policies and Travel Policies

The 1999 Grand Jury sent a questionnaire to all school districts in the county requesting specific information on each district's policies and procedures regarding district travel and the use of district issued credit cards. The responses from the school districts indicated the number of credit cards issued by RCSD were high in comparison to all other school districts in the county.

The responses from the questionnaire also noted differences between RCSD and other school districts:

• There was a lack of procedures controlling the use of credit cards.

• No other kindergarten through 12th grade school district allowed personal charges on district issued credit cards.

• Other school districts' credit cards were issued for specific usages or specific stores rather than for the individual use of district personnel.

• RCSD was the only school district that does not pay the credit card balance monthly.

• Expenses for authorized travel were greater than those in any other elementary school district in the county. RCSD operates 11 schools with an approximate student population of 5,250. RCSD's 1998-1999 school year budget for travel was $323,000. In comparison, Laguna Salada Union School District, a slightly smaller district, operates 10 schools with an approximate student population of 4,000. Their 1998-1999 school year budget for travel was $86,000. Jefferson School District operates 16 schools with an approximate student population of 8,600. Their 1998-1999 school year budget for travel was $305,000. The largest elementary school district in the county, San Mateo-Foster City School District, operates 19 schools with an approximate student population of 10,500. Their 1998-1999 school year budget for travel was $309,000.

Recommendation 1

Because of the numerous, serious and repeated deficiencies reported in the Ravenswood City School District's annual audit reports and the Limited Scope Management Audit Report, the San Mateo County 1999 Grand Jury recommends that the San Mateo County Superintendent of Schools, exercising his oversight authority, appoint an administrator to establish systems, procedures and controls that comply with the State Education Code and train the District staff to operate these systems, procedures and controls on a daily basis.

The San Mateo County 1999 Grand Jury recommends that the Ravenswood City School District Trustees direct the Superintendent to revise, implement, and then strictly enforce the District's credit card policies to:

• significantly reduce the number of District credit cards issued to individuals.

• prohibit cash advances on District credit cards.

• abolish the use of credit cards by anyone other than the person designated on the card.

• prohibit all authorized cardholders from placing personal charges on District credit cards.

• prohibit District credit cards from incurring expenses for other entities, e.g. the Needy Children's Fund.

• require documentation to support each credit card charge.

The San Mateo County 1999 Grand Jury recommends that the Ravenswood City School District Trustees should direct the Superintendent to implement credit card procedures to:

• reconcile the credit card statements for each of the District credit cards on a monthly basis.

• ensure the District will not incur finance charges.

• keep the District from making duplicate or improper payments.

• make properly supported and properly posted entries for all credit card charges on each account.

• have all credit card charges approved by the appropriate level of management.

• strictly enforce all District policies related to the use of district credit cards.