There is no Internal Audit for either entity
by Ira Kaylin
Ira Kaylin is a former City Council Member and, among other positions, was the Internal Auditor of the Inter-American Development Bank.
It was recently reported by Hunter Kimble, as directed by the Justin Castillo led School Board, that our Auditors Brown Edwards have done a careful review of the City and School financial disclosures and found them to be satisfactory; that is, they accurately reflect revenues and expenses and that both entities adhere to formal accounting principles. For all intents and purposes the presentation might well have been made by Justin Castillo or John Lawrence.
The School Board’s presentation was intended to allay concerns raised by parents and others regarding the transparency and financial integrity of School management.
As has become “standard operating procedure” the School Board’s comments were one sided, incomplete, self serving, and above all intended to misdirect the focus of the citizen concern.
The primary purpose of an External Audit is to protect investors and funding entities (e.g. State and Federal authorities). These entities require assurance that the information contained in the Comprehensive Financial Annual Report is accurate and that the methodology used to produce the numbers, often referred to as Internal Controls, and are acceptable.
In other words the External Audit primarily (but not exclusively) serves three purposes:
- to protect those entities who have provided school funding,
- to protect investors who already have purchased bonds and
- to provide information to potential investors who need to have accurate data on which to base a decision of whether to invest and at what price.
However the role of the External Auditor is limited and not intended to address the types of pressing concern raised by many citizens.
Specifically, the External Auditor does:
- Not address real or potential Conflicts of Interest,
- Not address transparency as it relates to information provided to citizens,
- Not address efficiency of City or School operations; that is, does not offer an opinion as to whether the City and Schools are well run or poorly run,
- Not address whether goods purchased or services rendered were delivered on time or as promised. Their focus is simply on whether the vouchers and payments were properly recorded.
- Not address how large or small, justified or not justified, is the School Fund Balance.
THE EXTERNAL AUDITOR DOES NOT CARE IF THE SCHOOLS HAVE WISELY SPENT THEIR FUNDING.
On the other hand an Internal Auditor would:
Address all of the above and would assure that proper procedures are followed; e.g. not issue a bond such as the one issued for Mt. Daniel without certainty that the project would be, approved by Fairfax.
There are areas where the work of the External and Internal Auditors overlap. The most important of which is the area of Internal Controls and the related issue of “Segregation of Duties”.
The School Board did not mention that the External Auditor did reference internal control weakness in a separate document entitled “City of Falls Church, Virginia and Falls Church Public Schools; Comments On Internal Controls and Other Suggestions For Your Consideration”.
In 2012, 2013, 2014 and 2015 Brown Edwards commented, in the above mentioned document, that the Schools have three Significant Deficiencies (segregation of duties risk) which run the risk of malfeasance. These deficiencies have been noted for four years without the School Board having taken any action to address these exposures.
With these deficiencies the School Division is exposed to risk of:
- fraud and,
Having raised these issues the External Auditor bears no liability should they occur.
An Internal Auditor, which we do not have, would address these deficiencies and would help avoid mistakes like those related to the Mt. Daniel “fiasco”.
It is clear why the school Board does not want to have an Internal Auditor (Fairfax recently hired two Internal Auditors). The existence of an outside independent view of the School Division would reveal shortcomings that the School Division would prefer not to address.