Comptroller Provides Records of Sham Audit of New Rochelle Schools, Fails to Answer Central Question "What did you know and when did you know it?"

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NEW ROCHELLE, NY -- The New York State Comptroller ("OSC") has provided nine pages of documents as a partial fill of a Freedom of Information Request filed on May 1, 2014. The OSC claims the records "explain the school district reporting error".

Actually, the don't.

The central question has been, from the beginning, when did Assistant Superintendent for Business & Administration John Quinn "discover" the "error" that has been asserted by the OSC but never actually claimed by the District.

The terms "discover" and "error" are in quotation marks because neither Quinn nor Board President David Lacher has ever offered any explanation of the findings in the New York State Local Accountability Audit published on April 23, 2014.

The only mention of this audit by the District was the day before it was published, at the April 22nd Board Meeting when Lacher said:

"We are paying attention to fund balance. In fact, New Rochelle, within the last few weeks has been relieved of its designation as a school district under moderate fiscal stress and we're very please about that and there will be more information about that."

Well, we never did hear any more about that.

I contacted Mark Johnson, Deputy Press Secretary for Comptroller Thomas DiNapoli the next day.

Mr. Johnson,

At last night’s school board meeting, the Board President stated that the New Rochelle School District’s status as "Moderately Stressed” was changing. He did not say to what but suggested that the District would no longer be on the Moderately Stressed list.

Can you please address this and provide any records that pertain to this?

Thank you.

Robert Cox

Managing Editor
New Rochelle's Talk of the Sound

Johnson responded:

Maybe they have a plan that will assist in changing their score in future years. We are not changing the current scores for any school district's at this point.

Mark Johnson
Deputy Press Secretary
State Comptroller DiNapoli's Office

In fact, the OSC did change the scores for the school district as the records obtained this week indicate.

In the Local Accountability Audit published on April 23rd, there is a letter dated March 27, 2014. This is the only mention of any "upgrade" in the stress test anywhere, ever, and there is no mention of the basis for the upgrade, the putative "error" asserted by the OSC but never claimed by Quinn, Lacher or anyone else in New Rochelle.

If you want to understand the nuts and bolts of the issue, read our two previous articles:

New York State Comptroller Finds New Rochelle School District in "Moderate Financial Stress" (lowest grade in Westchester)

NYS Comptroller Fiscal Stress Test and Local Accountability Audits a Sham in New Rochelle Schools

Whether you read the two previous articles or not, the next step was a Freedom of Information requests to the Comptroller's office and the school district.

On Friday, June 6th I received an email from the OSC stating that they would not provide records until September.

I immediately called the OSC Records Access Officer and expressed my displeasure in clear terms. She transferred my call to Jennifer Freeman, DiNapoli's Press Secretary. I explained that I was seeking to obtain a particular record, an email, which had been read to me over the telephone by her deputy and that the OSC knew exactly what document I wanted, where it was and that there was no justification for whatever for a request made on May 1 to be kicked down the road until September. She said she would seek to obtain the record I was seeking.

On Thursday, June 12th I received an email from Jeff Kehl, the attorney for the District, denying my request for records of communications between OSC and CSDNR regarding this supposed "error" on the grounds that the records were "inter-agency communications" and thus exempt from FOIL. This is utter nonsense.

On June 13, I filed a formal appeal with Interim Superintendent Dr. Jeffrey Korostoff.

First, as a general matter, the Freedom of Information Law is based upon a presumption of access. Stated differently, all records of an agency are available, except to the extent that records or portions thereof fall within one or more grounds for denial appearing in §87(2)(a) through (j) of the Law.

Second, one of the exceptions to rights of access, §87(2)(g), often requires disclosure, and I believe that to be so in this instance. That provision permits an agency, such as a school district, to withhold records that:

"are inter-agency or intra-agency materials which are not:

i. statistical or factual tabulations or data;

ii. instructions to staff that affect the public;

iii. final agency policy or determinations; or

iv. external audits, including but not limited to audits performed by the comptroller and the federal government..."

It is noted that the language quoted above contains what in effect is a double negative. While inter-agency or intra-agency materials may be withheld, portions of such materials consisting of statistical or factual information, instructions to staff that affect the public, final agency policy or determinations or external audits must be made available, unless a different ground for denial could appropriately be asserted.

In the context of the denial of my request, two of the provisions requiring disclosure are pertinent. Pursuant to subparagraph (i), those portions of the record or records at issue that consist of statistical or factual information, i.e., the figures to which you referred, are accessible, and based on subparagraph (iv), external audits must also be made available.

The particular records I seek are related to communications described to me by the New York State Office of the Comptroller (“OSC”) in which a person working for the City School District of New Rochelle or someone working on behalf of the City School District of New Rochelle represented to auditors working at the OSC that there was an “error” in the 2013 Audited Financials for the the City School District of New Rochelle and that $1.6 mm reported in the designated fund balance for workers compensation should have been reported in the undesignated fund balance.

Not knowing the precise nature of these communications, I cannot be certain as to exactly how the communications were structured but on information and belief, understand that the communications contain some “statistical or factual information” as well as a request to use that “statistical or factual information” to restate portions of the fund balance information contained in the ST-3 reports (District audited financials) used by OSC to conduct audits of school districts. There may be some acknowledgement from OSC that this has been done (because the OSC has confirmed it was done).

So, in so far as the records contains “statistical or factual information”, they are not exempt from FOIL. The District does not appear to dispute this point.

By its nature, an audit consists of statistics and facts, as well as opinions and recommendations.

A communication by a school district to the OSC asserting a belief that there was an “error” in a school district’s audited financials would be an opinion not a fact unless the school district’s audited financials were formally re-stated, re-approved by the school board and submitted to the New York State Education Department in an updated ST-3 form. None of that was done.

A request to change the figures in a school district’s audited financials when no such right to a change exists would merely be a recommendation to the OSC that this be done and would be entirely subject to the discretion of the OSC.

So, in so far as the records relate to an audit, they contain statistics, facts, opinions and recommendations they are not except from FOIL because they relate to an external audit. And not just any external audit but an external audit performed by the OSC when subparagraph (iv) of §87(2)(g) specifically states that "audits performed by the comptroller" may not be withheld.

To suggest that opinions and recommendations within an external audit may be withheld would render subparagraph (iv) of §87(2)(g) meaningless, and the State Legislature could not have intended that to be so.

I note, too, that §87(2)(g)(iv) was enacted initially as part of the "Governmental Accountability, audit and Internal Control Act of 1987. This act highlighted the need for agency management to promote good internal controls and accountability in government. The Legislature, recognizing the importance of internal control, updated and made the Act permanent effective January 1, 1999 in Chapter 510 of the Laws of 1999 to ensure, in part, that external audits remain accessible to the public. (see http://www.osc.state.ny.us/agencies/ictf/docs/internal_control_act.pdf)

The Committee on Open Government issued Advisory Opinion FOIL-AO-17865 on October 28, 2009 (http://docs.dos.ny.gov/coog/ftext/f17865.html) in which Executive Director Robert J. Freeman states:

“it is clear that an audit and related materials cannot be characterized as the work product of an attorney or otherwise considered privileged.”

For these and other reasons, it is clear, in my view, that the Legislature has passed laws specifically to ensure that the public has access to precisely the documents I seek.

I asked that you overturn the decision of the District Clerk.

I still have no reply to that appeal. He has 10 days to reply.

On June 18th I received an email from the OSC. Attached were records that I did not request, a narrative explaining what the OSC says is how the auditors came to understand to be the "error" and the actions they took as a result but no email or other records explanation how the OSC was informed of the "error".

In the letter the OSC states:

Our audit staff reviewed this reporting error, and our final audit report is based on the corrected information. The handwritten notes on these pages indicate the incorrectly reported information which was revised prior to the final report. When viewed in contrast with the final audit document, we trust this reporting error of the school district will be
apparent.

A description of the contents of the pages is as follows:

• Page 1 is our audit staffs description of the events that explain how we became aware of the reporting error and how we handled it.

• Page 2 is from our draft report and shows how the fund balance would have been reported prior to identification of the error.

• Page 3 is data reported on the ST-3 by the school district prior to the identification and correction of their error.

• Page 4 is data reported on the ST-3 after the error was corrected.

• Page 5 is the FSMS scoring based on the originally submitted ST-3.

• Page 6 is what the FSMS score would have looked like using the corrected school district data.

• Pages 7-9 are the Independent Audit Financial statements showing the incorrect amounts, and our handwritten changes showing what the corrected amounts would be.

Page 1, the audit staff's description of the events that explain how they became aware of the reporting error and how they handled it reads:

New Rochelle CSD AUD Error Explanation

History of Events

• Entrance Conference 5/22/13
• Fiscal Stress Report, data as of 12/13/13
• Exit Conference 3/13/14

Description of Events Leading to Change in Designation

• We performed our analysis based on information the school district reported to SED using a form called ST-3 (it is now electronic). OSC receives the same data to be used in our Annual Update Document (AUD).
• The fiscal stress scores are calculated based on this data.
• We were engaged in the audit prior to the report.
• Before the exit conference key officials including the board of education received a draft copy of the report.
• Prior to the exit we were notified that "Total Unrestricted Unappropriated Fund Balance" figure for 2012-13 was incorrect. It was originally reported as $3,768,167 as it was in the AUD.
• We then gained a complete understanding of the issue and validated the description.
• Based on our analysis we came to the same conclusion that the figure was not correct and should have been $5,370,372.
• We then updated our worksheets with this new figure and it decreased the score from "moderate" to "susceptible".

Internal Service Fund for Workers Compensation

• The District uses an internal service fund to account for all activity relating to workers compensation.
• To report to SED and OSC this fund needs to be rolled into the general fund, as these are considered general fund activity. All expenditures are accounted for under A9040.8.
• Each year they add a portion from their "Unrestricted Net Position" to general fund "Unassigned Fund Balance".
• The District's accountants determine this amount but generally quantified it as the difference in net position and a pre-determined reserve of $323,485.
• This was consistently done for fiscal years 2009- 2012.
• This was not properly adjusted in 2013, as noted with an usually large reserve balance.

In fact, Page 1 absolutely does not explain how the OSC audit staff became aware of the reporting error only that they became aware of the "error".

There are many questions about all of this, some of them quite technical, but the central question is still not answered, the old "What ddid you know and when did you know it?" question.

That the OSC has been asked this question repeatedly, and has fobbed off one answer after another without addressing it, suggests that this is all part of a deliberate attempt at a cover up.

Attached are the two documents sent by the OSC on June 18, 2014.

s2dF8B4AC5480824218AB85363776BE8681_1.pdf

New Rochelle_Accounting Error_BW_Redacted.pdf

You will see that Page 1 does not explain how the OSC audit staff became aware of the reporting error.

You will see on Pages 4-5, that the OSC did change the current scores for the New Rochelle school district despite the OSC's claim to the contrary.

OSC Stress Test Do Over

You will see the page from the Local Accountability Audit as originally written with the "moderate stress" grade towards the bottom.

Screen Shot 2014 06 20 at 7 51 14 PM

And perhaps most significantly, you will see pages marked "3" and "4". I wrote to the OSC today and asked for an explanation for the following:

If you look at the pages marked 3 and 4 (in pencil) in s2dF8B4AC5480824218AB85363776BE8681_1.pdf you will see these are some form of financial statements for CSDNR (perhaps a print out of the OSC AUD?)

Page 3 is the “before” version. It indicates a “Not in Spendable Form (2013)” of $1, 751,462, “Workers Comp Reserve” of $1,925,689 and “Unassigned Fund Balance” of $3,768,167.

Page 4 is the “after” version. It indicates a “Not in Spendable Form (2013)” of $1, 751,462, “Workers Comp Reserve” of $3,323,485 and “Unassigned Fund Balance” of $5,370,371.

Both have a snapshot date of 11/12/13.

Why?

Does this not indicate that as of 11/12/13, the OSC has made the changes described in the narrative provided on page 1 of s2dF8B4AC5480824218AB85363776BE8681_1.pdf?

In fact, does it not suggest that the change was made on 11/12/13?

Stay tuned...

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