Washington State Auditor Troy Kelley

June 18, 2013

Board of Directors Seattle School District Seattle, Washington

Management Letter This letter includes a summary of specific matters that we identified in planning and performing our accountability audit of the Seattle School District from September 1, 2011 through August 31, 2012. We believe our recommendations will assist you in improving the Districts internal controls in these areas. We will review the status of these matters during our next audit. We have already discussed our comments with and made suggestions for improvements to District officials and personnel. If you have any further questions, please contact me at (206) 615-0557. This letter is intended for the information and use of management and the governing body. However, this letter is a matter of public record and its distribution is not limited. We would also like to take this opportunity to extend our appreciation to your staff for the cooperation and assistance given during the course of the audit. Sincerely,

Carol Ehlinger, Audit Manager Attachment

Management Letter Seattle School District September 1, 2011 through August 31, 2012 1. The District charged salaries to the incorrect fund resulting in ineligible capital expenditures. The District charged approximately $8.2 million in salaries and benefits to the Capital Projects fund during the audit period. The District can charge employee salaries and direct expenditures to that fund if the employees are hired or assigned to planning or construction management of capital projects. The District may split salaries of employees between the General Fund and the Capital Projects fund based on percentage of time worked in each category. In nine of the last ten audits, we reported internal control weaknesses in the Districts accounting for payroll expenditures. During the current audit, we found the District continues to account for payroll expenditures inaccurately. Before the start of the school year, the District estimated employees workload to calculate the full-time equivalent percentage to charge to the Capital Projects fund. However, the District did not document this calculation and there is no reconciliation at year-end to determine if the estimated workload was accurate. Without a reconciliation, the District is at risk of overcharging the Capital Fund. We also found salaries for several staff positions charged to the fund that do not appear to benefit capital projects. For example, the District charged the following ineligible costs to the Capital Projects fund: managing the technology line and website, tracking student laptops, assisting with computer problems, and processing claims for employees who were over/under paid. However, we note that the District has made improvements since the previous audits, and is committed to improve accounting for capital expenditures in accordance with the Schools Accounting Manual. We recommend the District: Maintain documentation for employees that split their salaries between funds. Perform a year-end reconciliation of estimated versus actual costs charged, or use a different, documented method, such as time sheets, to determine the amounts to charge the Capital Projects fund. Ensure salaries charged to the Capital Projects fund are only for eligible purposes.

2. The District lacks adequate controls to ensure only authorized and appropriate
changes are made to employee information in the HR Master Data system. The District employs approximately 9,700 full-time and part-time employees. The Human Resources department (HR) is responsible for making changes to employee information

in the HR Master Data System, with the exception of employees that work for the Nutrition and Facilities Operations Departments. The District began using this system in 2008. Our 2008 and 2009 audits reported inadequate internal controls over manual data entries into the system. During our audit we found a Program Manager received a salary override which increased his pay by $20,000. The District could not provide us documentation to demonstrate the pay increase was justified or warranted, and there was no evidence of authorization for the increase. Our inquiry led the District to determine the pay increase was an overpayment, and the employee agreed to repay the District. We obtained a listing of 85 employees who received salary overrides as of January 2013 and found three additional employees received undocumented pay increases. An override is a manual entry in the HR Master Data System. We expanded our review of other manual adjustments made to employee information in the HR Master Data System. We noted the following concerns during our review:

The District has no written policies or procedures for authorizing, documenting, and making manual adjustments in the HR Master Data System. The District has no formal process for reviewing changes made to employee information in the HR Master Data System. For internal promotions, the District was unable to demonstrate who authorized the promotion to 10 positions we reviewed. In addition, there were no approvals from the Budget Office evidencing they checked to see if there were enough funds to cover the additional payroll expenditures for all 10 positions. Some Collective Bargaining Agreements (CBAs) allow salary upgrades for working swing shifts, performing additional duties or increased responsibilities. Because these upgrades are manually entered each month, there is potential risk of human error or the entry of inappropriate salary upgrades. There is no review of these changes. An internal audit reported in December 2012 that all Payroll Department and Human Resource Department employees had the ability to change employee information in the HR Master Data System, regardless of their respective Payroll or HR function. The District responded in the latter part of 2012 by restricting access to this function to six employees in the Human Resource Department. However, the District did not evaluate whether any unauthorized or inappropriate adjustments were made in the preceding periods. The Nutrition and Facilities Operations Departments perform adjustments for employees within their departments. Selected administrators within the departments have access to perform HR functions. Currently, both the Nutrition and Facilities Administrators have the ability to change the information for all District employees in the HR Master Data System. A Human Resource Manager performed a market analysis of HR positions in February 2010 for all HR managers. This resulted in the managers receiving a

pay increase from pay grade 30 to pay grade 32. There is no evidence the market analysis was reviewed or that the increases were authorized. To ensure manual changes made to employee information in the HR Master Data System are accurate and authorized, we recommend the District:

Develop written policies and procedures authorizing changes to employee information in the HR Master Data System. Develop procedures for an independent review of changes made to employee information in the HR system to decrease the risk of inaccurate or improper entries. This review should be performed by an employee that does not have the ability to change information in the HR Master Data System. Procedures should include reviewing the adjustments supporting documentation. Maintain documentation supporting the authorization for employee promotions, employee movement into a new position, and approval of temporary salary

upgrades for employees.

Perform a review of adjustments made to HR Master Data System information when all Payroll and HR personnel had complete access to the system to determine if unauthorized entries were made. Limit the HR Master Data System access of Nutrition and Facilities Operations administrators to only the employees within their departments.

3. Teacher education and experience (staff mix) Washington state school districts are funded, in part, based on the education and number of years experience of their certificated instructional staff. Each district calculates its instructors education and years of experience to determine a numerical figure referred to as a Legislative Evaluation and Accountability Program (LEAP) factor. School districts report this information to the Office of Superintendent of Public Instruction (OSPI), which uses LEAP factors to calculate districts apportionment funding. Seattle Public Schools received approximately $235 million in apportionment funding based in part on staff reporting for fiscal year 2012. During the year, the District reported approximately 2,940 certificated teachers for funding on the S275. While examining the Districts controls over reporting, we noted the following weaknesses: There is no monitoring or subsequent review of the work performed by the two employees responsible for tracking ongoing credits and years of experience for the Districts certificated staff. The electronic monitoring system used for tracking and reporting credits and years of experience did not include credits and/or experience received and entered after September 30, 2011. This impacted staff newly hired by the district resulting in LEAP placement errors.

Some employee files lacked supporting documentation and official transcripts to support credits reported. Some employee files lacked supporting documentation to support the years of experience reported.

During our audit, we examined 37 certificated instructors credits and years of experience. We found errors in 28 of 37 files. The errors caused a change in the reported LEAP factor in 15 files. We noted the following errors: Years of experience were incorrectly reported in 18 files. Academic credits were incorrectly reported in nine files. In-service credits were incorrectly reported in 15 files. Excess credits were incorrectly reported in nine files.

Additionally, the District did not have adequate controls to ensure credits for staff newly hired for the 2011-12 school year were properly entered and reported for LEAP placement, causing six of the 15 LEAP errors. We recommend the District establish procedures, including independent review and monitoring, to ensure it accurately reports teacher education and experience in compliance with state regulations (WAC 392-121-255(2) and WAC 392-121-257(2)). We further recommend that the District correct the errors identified in the employee files audited and work with OSPI during audit resolution to determine any funding adjustments.