Public Accountability

An Interview with New York State Comptroller Alan Hevesi

By Robert H. Colson

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The CPA Journal: Please explain your view of the problems in the Roslyn and William Floyd school districts that have caused such public concern.
Alan Hevesi: Let me focus on the big picture and the background for the problems. There are 701 school districts in New York State, and 127 of them are in Nassau and Suffolk counties on Long Island. About 20 years ago, the Comptroller’s Office made a strategic judgment that it would focus its scarce audit resources on the state agencies and the approximately 1,600 local governmental units. Explicit in this decision, made because of insufficient capacity to cover all audit needs, was the outcome that school districts would no longer be audited by the Comptroller’s Office. Over the past 20 years, by the way, the audit resources in the Comptroller’s Office have declined by about one-half as a result of continuously tighter state budgets.

CPAJ: Does this mean that there has been no state supervision of school districts for the past 20 years?
Hevesi: Not at all. Part of the rationale for the Comptroller’s Office to no longer audit school districts was that school districts are directly supervised by the New York State Education Department (SED). In addition, by requirement of law, every school district is required to have an audit by an independent certified public accountant. There is no other state agency that supervises the state agencies and governments, nor is there an independent audit requirement for them. It made sense to focus our attention on them.

CPAJ: What happened in the case of the Long Island school districts? Were there audit failures?
Hevesi: The SED has labored under the same budget constraints as the Comptroller’s Office, and has not established its own audit program for school districts. Now, we have also learned the bitter lesson that independent audits of financial statements are fairly narrow in scope and do not necessarily address issues of critical importance to government and the public trust. I’m talking about such things as fraud, internal control, mismanagement, misconduct, and compliance with budgets. While financial statement audits may provide information for outsiders to evaluate the creditworthiness of the school district, their focus does not make them a substitute for the fundamentals of making sure that money intended for educational purposes is expended appropriately.

CPAJ: What is the status of your office’s involvement in the Long Island cases?
Hevesi: In the case of the Roslyn school district, where there are allegations of criminal behavior in the misuse of $8 million, the district attorney has asked us to conduct a complete investigation of the situation. We have an 18-member team there now conducting an in-depth investigation of the fiscal affairs of the district. On the other hand, we are not at this time pursuing a similar investigation in the William Floyd school district, because the district attorney there is concerned about the integrity of a possible criminal investigation.

CPAJ: Does the Comptroller’s Office have its own investigations group?
Hevesi: We do have our own investigations division, which has recently been reorganized and expanded. The head of the division is an experienced former New York City prosecutor. The division currently is investigating 18 cases involving potential criminal offenses in local government, which were identified either by our local government audit process or from tips by whistle-blowers.

CPAJ: Should the Comptroller’s Office be conducting audits of school districts?
Hevesi: Yes, we should. I have asked the legislature for $5.4 million annually to support a corps of 89 auditors dedicated to audits of school districts. This request would translate into $2.9 million this year because it is almost half over. With such a corps, the Comptroller would be able to audit each school district at least once every five years, but the intent would be to create a more flexible audit approach that would trigger audits and follow-up audits on a more frequent basis in districts with problems. Such an audit corps would place school districts on an audit schedule similar to towns, villages, and counties. When you think about it, $5.4 million is a very reasonable expenditure to avoid $8 million losses.

CPAJ: What was your immediate response to the problems on Long Island?
Hevesi: I announced early in August that the Lawrence, Manhasset, and Hempstead school districts in Nassau County and the Brentwood school district in Suffolk County would be the subjects of in-depth audits performed by my office. I also announced a fifth audit to examine administrative expenses in at least 15 other districts, including East Meadow, Locust Valley, North Shore, Plainedge, Syosset, and Westbury in Nassau County and Three Village, Central Islip, and Wyandanch in Suffolk County. We have also established a process to select other school districts for such audits.

CPAJ: How do you select districts for such in-depth audits?
Hevesi: In some cases, we have knowledge of management problems in certain districts from past experience. We also receive a large number of tips from whistleblowers. Currently, 65 whistle-blowers have told us about 140 different events in 32 school districts. Just because someone blows a whistle on a school district does not make anything factual or true, but the public is concerned about how their dollars for education are being spent, and when members of the public suspect mismanagement, misconduct, or fraud, we frequently hear about it. These tips are leads for us to follow and investigate.

CPAJ: What has been the effect on the public of the school district problems?
Hevesi: School districts and their budgets are fundamentally part of the public process. School board members are elected officials, and budgets are voted on by the citizenry. Citizens expect that money budgeted for educating children actually is expended for that purpose. I have been impressed by the public response on Long Island. This is the first time that I have seen the announcement of a pending audit make front-page newspaper headlines. It’s not uncommon for the announcement of the Comptroller’s audit findings of some fiscal scandal to appear in the newspaper, but in this case the announcement that audits will occur is not only in the newspaper but in front-page headlines. I would say that the public is keenly interested in the fiscal responsibility of their school districts.

CPAJ: Is the problem related only to the narrowness of financial statement audits? Are better and more audits the only solution needed?
Hevesi: The problem is broader than what can be addressed in audits. Even the most detailed audit is not necessarily a foolproof protection against fraud, mismanagement, and other types of misconduct. Audits and appropriate state supervision are necessary, but the best protection against the types of problems that arose on Long Island is effective internal controls. The Comptroller’s Office is organizing an extensive training program for school board members, school officials, superintendents, and independent auditors to help establish and maintain the proper fiscal culture in school districts.

CPAJ: What does the training program include?
Hevesi: The program has the following components:

• We are working cooperatively with the New York State School Boards Association (NYSSBA), Council of School Superintendents (NYSCOSS), and Association of School Business Officials (NYSASBO). The Office of the State Comptroller (OSC) will participate with them in up to 20 hands-on training seminars during the 2004–2005 school year. OSC staff will deliver training on internal controls, fraud prevention and detection, and auditing standards.
• OSC will cosponsor a special seminar at the NYSCOSS state meeting in Saratoga Springs on September 21. I will deliver
  a keynote address on ethics and accountability.
• OSC will cosponsor a conference, “Preserving the Public’s Trust,” with the Nassau-Suffolk School Board Association, the Nassau County Council of School Superintendents, and the Suffolk County School Superintendents Association on Long Island on October 5. I will speak on governance and accountability.
• OSC will air statewide a public teleconference for school board members
  and superintendents, “Leadership and Accountability: Preventative Medicine for Fraud,” on October 26. A panel of experts in preventing and detecting fraud will join me in a panel discussion.
• OSC is also updating its training manuals and reference guides for school business officials and is developing “sensible practices” for school superintendents and school board members.

CPAJ: Are you considering any changes to the regulatory requirements for school districts?
Hevesi: Yes, we are. OSC is meeting with the SED to review existing regulations regarding independent audits. In addition, a working group composed of staff from SED, NYSCOSS, NYSSBA, NYSASBO, and the NYSSCPA is meeting under the OSC’s leadership to develop specific recommendations for strengthening auditing, training, and financial oversight by school district officials and their boards. Some of the areas we are discussing include:

• Enhanced standards for financial statement audits;
• Expanded internal control auditing and training by OSC and SED;
• Creating school district audit committees;
• Selection and rotation of audit firms;
• Mandatory and recommended financial training for school officials; and
• Ethics and disclosure standards.

CPAJ: What are your concerns about the selection and rotation of audit firms?
Hevesi: A difficult logistical problem arises because of the small number of audit firms that engage in school district audits. A periodic change in the auditor provides a fresh look at the situation and reduces the potential for the development of overly close and friendly relationships that could create a conflict of interest. Some CPA firms are large enough to rotate the audit partner periodically, which is very helpful. Other CPA firms, on the other hand, are just not large enough to provide alternative audit partners. In such cases, audit firm rotation should occur on a periodic basis. We’re looking at the auditor selection process, too, in order to make sure it is as objective and independent as possible and that school districts are not choosing auditors solely on the basis of quoted fees without carefully considering the work plan associated with the fees.

CPAJ: Are you concerned that there are similar problems of corruption and mismanagement in other units of state government?
Hevesi: Our office has continuously audited and supervised state agencies, town, villages, and counties. I feel confident that these supervised entities are in much better shape than the school districts, which have been left unsupervised. The program I outlined earlier focuses on the OSC, in cooperation with the SED, supervising school districts much more closely.

CPAJ: Does your audit authority also extend to state authorities?
Hevesi: Yes, it does. We have focused attention on them much more closely since I took office in 2002, because of the problems in the authorities caused by inadequate supervision. Authorities have been called the “secret government.” Not because we do not know about them: They are critical for our daily lives and have a very positive impact on them. But they are secretive, preferring not to disclose their affairs in the way that we expect governmental agencies to do. Nor are they subject to the same transparency requirements as the state government. Essentially, our experience indicates that unsupervised entities have more problems with corruption, fraud, misconduct, and management than do supervised entities. Supervision, monitoring, and auditing are keys to healthy governmental units.

CPAJ: What are you doing about the state authorities?
Hevesi: We’re trying to get our hands around the problem and to establish the same fundamental accountability and monitoring as we have in other areas.

Here’s a little background on the state authorities: The first was established in 1921. In 1956, the state government decided there were too many authorities, and a commission was appointed to study the problem. Upon the commission’s recommendation, the legislature eliminated 20 authorities—seven that were already out of business and 13 that should have been out of business—to bring the total number of authorities to 33. Just after I took office in 2002, we decided to enumerate all the authorities created by the state. We initiated a survey and were astonished when we found 642 authorities. When we published our survey, we continued to receive leads about authorities we had missed. We’re pretty certain now that we have just about all of them identified, and that number exceeds 700.

The MTA [Metropolitan Transportation Authority] is a good example of our recent activity related to authorities. The MTA suffered from very difficult corruption issues and management problems. Our office performed an in-depth investigation and worked out a plan of action with the MTA. The MTA adopted the plan and cleaned up its act. They made the necessary reforms to their governance, management, and fiscal procedures. The OSC issued new regulations on budgetary and administration processes for them. We plan to issue these regulations more widely in the near future.

CPAJ: What are the statutory responsibilities of the Comptroller?
Hevesi: The New York State Comptroller has a very broad set of responsibilities. Let me enumerate them for you:

• Audit authority for any expenditure of state funds or funds that should be received by the state. This authority extends to private-sector organizations as well as governmental units.
• Contract officer for New York State. The state enters about 44,000 contracts every year. The Comptroller reviews them all and has veto authority over them. If you recall, I exercised that veto in a somewhat controversial situation involving the sale of development rights along the Erie Canal. My predecessor had approved a contract subject to the information available at the time. When we reviewed the contract at a later date, much of the information submitted by the Canal Authority to support the contract was false. Consequently, I vetoed the contract.
• Budget review and analysis. The OSC analyzes the state budget and the budgets of state governmental units, and exercises review authority over them.
• Sole trustee of the New York State Pension Fund. Our state pension fund involves more than 964,000 individuals and $100 billion in investments. It is the second-largest pension fund in the country. The Comptroller is the sole trustee of the fund.

CPAJ: How large is the OSC staff?
Hevesi: We have about 2,400 staff members, mostly professionals and their support staffs. They all help me fulfill the constitutional and statutory obligations of the Comptroller. We have responsibility for the budgets, contracts, and audits of state government, state agencies, 1,600 towns, villages, and counties, 701 school districts, and over 700 authorities and for the retirement savings of more than 964,000 individuals in the state retirement system. I am hoping that number soon increases by 89 newly hired auditors!

CPAJ: When we were discussing auditor selection and rotation you seemed to have another thought on your mind. Was there something else you wanted to add about independent auditors?
Hevesi: I was thinking of the settlement that the state pension fund has just won in the case of the Raytheon Corporation. Raytheon paid a settlement of $410 million and its auditors paid a settlement of $50 million. Raytheon filed a false report with the SEC, which the audit firm signed off on three days before signing a consulting contract with Raytheon. Raytheon paid the audit firm $4 million for the audit, and the consulting contract was for $103 million. I cannot help but draw a connection between the two events. In Enron, Andersen received $25 million for the audit and $26 million for consulting. Of course, Andersen is now out of business. I was thinking about the loss to America when CPA firms fail to constrain themselves ethically. Rotation of auditors is one way for the public to intervene to remove the temptation to trade good, professional audits for the money from consulting business.