PSS: External audit findings addressed

The Public School System said yesterday that it has already adequately responded to and initiated corrective actions on the recent independent external audit commissioned by the school district.

Ernst & Young (CNMI), Inc. conducted the audit and completed the report on Aug. 17, 2022.

Most of the findings are administrative in nature and have already been addressed and completed. There are remaining findings/recommendations that PSS said will be addressed by Sept. 30, 2022—end of the current fiscal year, the Office of the Commissioner of Education said in a release yesterday.

“The independent audit report was for the fiscal year ending 2020. It was a re-audit that we have requested. For most part the findings are administrative in nature and they have been addressed and are reflected in the same report that was released by the auditors,” the Office of the Commissioner of Education said.

As part of PSS transparency and accountability reporting, it has provided the audit report to the Federal Audit Clearinghouse for all of its grantors

The Office of the Public Auditor released it to the public on Monday afternoon. The Executive Branch and both chambers of the Legislature were provided with the independent audit report.

“These findings were for Fiscal Year 2020 that have already been resolved but the report was just released lately,” PSS said. 

Responses to findings

The external auditor found two areas: 1) financial statement, and 2) federal awards findings and questioned cost.

Under the financial statement, EY said in its recommendation that “management (PSS) should consider improving processes to ensure transactions, including non-cash transactions, are recorded in the proper accounting period.”

PSS said it “Agree(s) with the finding. The Finance department’s lack of adequate staffing and management personnel contributed to the findings. Finance director and comptroller position was filled and have implemented a financial statement close process including cutoff procedures, account reconciliations and in-depth review of transactions related to payroll, purchases and federal award income and cash receipts.”

The external auditor cited the “general ledger and schedule of expenditures of federal award” of the Schedule of Expenditures of Federal Awards (SEFA). 

PSS said it will “complete and meet the recommendation by Sept. 30.”

“(We) agree with the finding. The Federal Programs Office has hired a director of Internal Control & Evaluation to oversee and ensure that SEFA is prepared accurately and completely while working closely with the Federal Programs Officer and Financial Budget Analyst. Future preparations of the SEFA will follow the accrual basis, so activities and receipt of goods that occurred during the fiscal year will be reflected in both SEFA and in the books. The Federal Programs Office process of recording grant revenues and reporting will be revisited. Future training with the Finance Office will be scheduled,” PSS said.

In the second area identified by Ernst & Young, it cited seven questioned costs on federal grants.

PSS clarified that all seven questioned costs were actually “allowable cost” by the federal grantors.

Ernst & Young cited “reporting” and “should improve controls to help ensure SEFA is prepared accurately and completely.”

There were four questioned costs that were identified as “allowable cost/cost principles”.  

PSS agrees with the findings on said four questioned costs and findings: “All these costs were paid for needed education related expenses due to budgetary shortfalls that challenged PSS’ ability to pay all of its salaries, wages, insurance, utilities and taxes. According to the U.S. Department of Education, use of the ESF funds for these purposes is allowable. Correct accounting entries were made and local funds will fully reimburse these charges and then use the ESF reimbursement to offset payroll costs towards the end of the fiscal year.”

Ernst & Young also found out that there was one (1) questioned allowable cost that PSS gave $1,000 retention incentive to an “ineligible party.”

PSS “had already adopted a standard operating procedure for the recent retention incentive payout made to employees. Any and all future incentive payouts will be accompanied with Standard Operating Procedures to ensure that employees receiving payment meet the eligibility requirements.”

In the sixth and seventh findings, EY said that PSS “failed to exclude capital expenditures from the modified total direct cost pool and failed to use the negotiated indirect cost rate in computing for indirect costs for reimbursement.”

The amount involved is $84,926.

PSS said this has been addressed and completed. It said, “(it) used the Admin cost rate of 5% which was used to pay staff for assessing damages to school caused by Super Typhoon Yutu.” 

“PSS will use the negotiated indirect cost rate in computing and will exclude capital expenditures from the modified total direct cost pool.”

Indirect cost is a set percentage, 5%, of a federal grant that allows the grantee (PSS in this case) to cover overhead cost and grant management expenses/cost, PSS explained.

PSS said all these findings have been addressed.

The eight finding was in the area of “procurement, suspension and debarment.” The external auditor said “PSS failed to effectively implement its procurement regulations” involving change orders on one vendor contract. 

This vendor contract was for a photocopier “contract change order that totaled $912,072 of which $666,325 was recorded in FY2020 and had exceeded $250,000 simplified acquisition threshold.” This is a single contract for all 20 public elementary, middle and high schools for all islands, and all of PSS programs.

PSS in its response said it had “performed a price analysis of the cost of the service on a price per copy basis. A three-year lease was awarded for the provision of copiers for all schools both

public and private including toner, paper and service within twenty-four hours. There is written documentation to support the use of competitive sealed proposals upon initial procurement, in accordance with PSS Procurement Regulations § 60-40-225.”

PSS added, “The cause of the price increase was due to the standards-based system that PSS adopted. No textbook publisher has shown interest in developing this standards-based system for a school system with only 10,000 students. Accordingly, PSS teachers developed their own standards-based lessons for presentation, practice and assessments that involved use of copier printed lessons for practice sheets and weekly assessments.”

Since this is a re-audit for the 2020 fiscal year, PSS said it will be completed by September 30, the end of the current fiscal year.

“In moving forward, we are cognizant of these recommendations and plan to initiate three improvement plans: 1) cross-training of personnel, 2) building capacity, and 3) improving and strengthening standard operating procedures,” PSS said.