DLA Inappropriately Used $23,294 in School Funds to Directly Benefit Employees, Including Its Former Executive Director.

Audit calls on the school's management to cease providing salary advances to staff.

Overview

DLA authorized the use of school funds to provide cash to certain employees even though the school did not have a policy that permitted it to do so. The table below details the cash provided to employees during our audit period.

Cash Benefits Provided to Employees

Date	Transaction Number	Employee Position	Amount
July 7, 2014	3565	Principal	$3,100
July 16, 2014	3614	Teacher	2,575
September 23, 2014	3746	Executive Director	4,500
February 3, 2015	1252	Teacher	1,000
August 28, 2015	1592	Executive Director	2,500
August 28, 2015	1591	Executive Director	2,500
November 4, 2015	1749	Executive Director	3,000
January 8, 2016	1889	Teacher	2,500
November 7, 2016	Electronic Fund Transfer	Executive Director	1,619
Total			$23,294

                                 

According to the school’s accounting records, eight of these payments, totaling $21,675, were recorded as “advances to employees,” and the other transaction, for $1,619, was recorded as an “uncategorized asset.”

We questioned DLA management about the nature of these transactions and were told that the advances to employees were loans to staff members and the uncategorized asset was an error made by the former executive director when she paid her November 2016 mortgage payment from the school’s operating cash account. The school was not reimbursed for this payment until June 2017.

According to the former executive director, staff members occasionally requested payroll advances because of personal hardships. By allowing employees to use public/school funds for their personal benefit, DLA’s board risked losing the money if those employees ended their employment with DLA before the school could recoup it.

Authoritative Guidance

According to Section 202 of DLA’s Fiscal Policies and Procedures Guide,

The Charter School may not operate for the benefit of an affiliated or unaffiliated organization or an individual in his or her own private capacity or individuals related to the Charter School or members of its management, unless the private benefit is considered merely incidental. . . .

The private benefit preclusion will extend to, but not be limited by, the following . . .

B. Lending of money or other extension or credit between the Charter School and an affiliated organization (excluding component units) or unaffiliated organization or a private or related individual. . . .

Related party transactions shall include transactions between the Charter School and members of the Board, management, contracted management organization, employees, related individuals and affiliated companies.

Reasons for Issues

The board chair told us that he was not aware that the salary advances were prohibited under the school’s fiscal policies and procedures. The former executive director stated that the mortgage payment error occurred because she maintained her personal checking account at the same bank as the school and mistakenly transferred school funds instead of personal funds.

Recommendations

1. The board should ensure that it is aware of school policies.
2. DLA management should cease providing salary advances to its staff and should take the measures necessary to ensure that it does not use school/public funds in any manner that is contrary to school policy.

Auditee’s Response

At the exit interview, [OSA] noted that notwithstanding the irregularities referenced, no funds were missing from DLA bank accounts as a result of the practice. No current DLA management was questioned about the nature of transactions or involved as such. To the extent the practice of providing salary advances existed, it has been permanently discontinued. DLA will comply with DESE regulations.

Auditor’s Reply

The use of school funds to make salary advances to employees is prohibited by DLA’s policies and, in OSA’s opinion, presents a higher-than-acceptable risk of abuse of school funds. This is of particular concern given that one individual, the former executive director, was able to provide advances to herself without independent review or approval. In fact, as noted above, four of the eight advances (totaling $12,500) were issued to the former executive director, and a fifth transaction involved her use of school funds to make a personal mortgage payment in November 2016 that was not repaid until June 2017. Although DLA did not incur financial losses as a result of the advances, internal controls surrounding the transactions were deficient and need to be strengthened to protect the school from potential fraud, waste, and abuse. Therefore, we again urge DLA to implement our recommendations on this matter.

Further, this problem indicates to OSA that DLA’s management needs to ensure that all school personnel who are involved in processing financial transactions are familiar with the requirements of DLA’s Fiscal Policies and Procedures Guide and adhere to those requirements.

Date published:	November 19, 2018