Greenburg: Scottsdale Schools financial oversight is in dire straits

In March of this year, the president of SUSD’s Governing Board, Ms. Barbara Perleberg, gave a 15-minute interview in which she stated the following: “[SUSD’s] checks and balances systems have proven to be weaker than we had hoped.”

Jann-Michael Greenburg

It should be noted that at the time of this interview Ms. Perleberg had served on the board for 5.25 years, and for her to just then come to this realization is evidence of her gross negligence and incompetence in fulfilling her obligations to the Scottsdale Unified School District.

Now, ignoring the fact that it is the Governing Board’s job to ensure the necessary internal controls are in place to help reduce — and hopefully eliminate — the risk of fraud, waste, and corruption, the recent board discussions in April and in June seem to indicate the Governing Board is actually unwilling to implement them.

At a minimum, any organization, which handles “revenues” of $170 million or more per year, as our District does, ought to have an internal auditing department. In fact, the aptly titled Policy DIE requires the district hire an internal auditor — though, likely several are needed, and I personally support the creation of a department dedicated to it).

And yet, SUSD for the majority of the time this policy has been on the books has not had one — this includes almost the entirety of Dr. Denise Birdwell’s tenure as superintendent. This should not be surprising. Not enforcing laws and policies is standard practice for a board comprised of unqualified members whose time has been spent on condemning teachers, students, and community members alike, while ushering in Birdwell and her associates to the district, culminating in the $200,000 payout to our former Superintendent and COO after their corruption and fraud was essentially proved by our district’s outside counsel.

The full extent of their fraud and corruption against the District might never be known.

As a candidate, I have already proposed two key internal controls:

  1. the creation of the office of an inspector general, capable of investigating specific allegations of wrongdoing made against our District and its personnel; and
  2. the re-introduction of an internal auditing department. Both of these departments would have prevented this corruption and fraud from occurring as well as routine compliance and conflicts of interest checks and self-reporting.

Unfortunately, with the exception of Ms. Sandy Kravetz, the majority of our current board members see little intrinsic value in having an active internal auditor. Perhaps this is caused by a lack of understanding of what it is an internal auditor does — a fact that would not normally be problematic were we discussing the general population. But it is extremely troubling given that three of our board members claim to have a background in accounting and finance, and two of our board members are certified public accountants.

Given the extremely varied discussions they have had, it would be useful to actually explain what it is an internal auditor does and why it is necessary to have this function in our district.

What does an internal auditor do?

To borrow from the Chartered Institute of Internal Auditors, “the role of an internal audit is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively.”

Internal auditors are generally tasked with reviewing various activities of an organization and assessing whether those activities are being conducted in accordance with all applicable rules and regulations, whether they are being conducted efficiently and correctly, and whether the internal controls in place at the organization are working and effectively reducing the risk of fraud, mismanagement, waste, abuse, or other unsavory behavior.

IAA chooses to break these tasks into a few broad categories: evaluating controls and advising managers at all levels, evaluating risks, analyzing operations and confirm information, and working with other assurance providers (e.g., the external auditors).

A simple example using procurement activities should suffice for illustrating the importance of an internal auditor.

For procurements, the internal auditor would likely begin his or her review by identifying what the current procurement practices are and what risks are associated with procurement in general. A common issue in procurement is fraud.

For example, an employee may create and approve a fake purchase order payable to an entity owned by that employee. If the organization pays it, it is paying for goods or services that it never actually received or needed, and the employee is obtaining money he or she is not due.

A similar situation was discovered by Wake County Public School System (“WCPSS”) in 2006, in which it realized it had paid at least $3.8 million to a fake company, which was issuing invoices to WCPSS for work that had not been done. In turn, the fake company kicked back some of those ill-gotten gains to WCPSS employees, including the Director of Transportation.

The internal auditor will then assess the procurement process, from start to finish, and assess whether the process is being properly followed and whether the controls in place prevent — or largely reduce — the “risk(s)” identified from materializing.

For example, is there a manager who reviews the purchase order and ensures the work purchased was actually completed? Is there a possibility that the manager and employee can collude? Who can create a purchase order? Who has access to the internal systems? Can a person who creates a purchase order also approve it for payment?

There are many methods for conducting assessments and analyses, including indirect assessment techniques — reviewing manuals, data spreadsheets, etc. — and direct assessment techniques. Analysis might require transaction matching, inventory counting, data entry error reviews, and the like.

The activities that can be reviewed are likewise endless. Given the events at SUSD, two key areas ripe for review are procurement (the Office of the Attorney General is suing the district for bid-rigging after all) and human resources (the Governing Board hired the superintendent, her de facto brother-in-law as CSO and COO, and the superintendent’s close friends to serve in high-level roles).

At the end of these analyses and assessments, the internal auditor prepares a report to the Governing Board and explains where the district is falling short. The internal auditor will then provide options for improving these processes and internal controls, which the Governing Board could (and should) adopt.

The aim is that over time, as the internal auditing department identifies more shortcomings, school employees become better trained, and the Governing Board approves the adoption of more internal controls, the risks of fraud, embezzlement, nepotism, and corruption, which have plagued SUSD for decades, will be dramatically reduced.

This is, in fact, supported by research into the effects of such oversight. Where there are gaps, the office of the inspector general ought to complement the internal audits by investigating specific allegations of wrongdoing.

The role of an internal auditor is a necessary one.

Schools are just as susceptible to wrongdoing as any other enterprise, regardless of the form it takes, which can be extremely costly. In the private sector, news of fraud tends to drop share-prices by at least 17 percent on average — nearly a fifth of the overall value of a company. Crowe Clark Whitehill and the Centre for Counter Fraud Studies’ “The Financial Cost of Fraud 2017” report evidenced that fraud generally accounts for 3 percent to 10 percent of an organization’s expenditure, with a 19-year average of 5.85 percent, which has increased by a fifth since 2007 (from 2007 onwards, the average is above 6 percent).

These are by no means small sums, but the report also finds that organizations “which have undertaken repeated exercises to measure losses […] have reduced the losses over time” — and to do so, an internal auditing department is required. By tackling this fraud, the report supports the argument that fraud reduction can give organizations a competitive advantage, decrease the impact of public funding cuts, and increase their overall available resources.

The fact that a school district like SUSD handles $170 million each year in public funds means that any such wrongdoing can be extensive. At SUSD, such potential waste and losses have already been reported on extensively due to the likely fraud perpetrated by our former superintendent, former chief operating office, former chief financial officer, Mr. Brian Robichaux, and even current administrators and principals still serving in our district.

Such fraud can blossom in environments where there are few internal controls in place to counter them and the responsibility for oversight is placed entirely on educators and community members, as was the case at SUSD. In an extensive 2009 article discussing fighting fraud in schools, Mr. Mullinax, the former inspector general for Los Angeles Unified School District, stated that “there is a lot more [fraud] than administrators are aware of because they’re not looking for it […].

What’s scary is that a lot of administrators and principals figure that’s not their job. They are hired to be educators, and they don’t have a background in financial management or accounting or auditing, so they don’t focus on fraud. They wouldn’t see it if it walks up and hits them in the face.”

In June, Ms. Susan Segal, outside counsel for SUSD, began to change that. She presented new policies to the Governing Board, which would see the district implement numerous new conflicts of interest policies and training at SUSD. These are of course positive and necessary steps, but they are not enough.

The State of Arizona (and SUSD) already has conflicts of interest laws and regulations on the books. While they are outdated and are not robust enough, the fact is that individuals like Ms. Laura Smith, SUSD’s former CFO who has now been indicted on several felony counts for fraud and conflicts of interest, was able to commit those alleged acts of wrongdoing despite laws and regulations prohibiting them.

Much like a speed limit on a road, without supervision, review, and some degree of enforcement, these laws and regulations are largely meaningless — a point highlighted very clearly by the New York’s Office of the Comptroller in 2010.

That is where an internal auditing department and an office of the inspector general can really make a difference: by assessing our controls, assessing our practices, and investigating all allegations of wrongdoing if and when they are made.

The benefits of these departments are not even the savings that can be made on preventing corruption. Because the internal auditor also reviews inefficiencies in an organization, savings can also be made there. However, without these steps, any changes in policies and training will only go so far before failing students and taxpayers once again.

Editor’s note: Mr. Greenburg is a Scottsdale resident and candidate for the Scottsdale Unified School District Governing Board

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