Publisher's note: The author of this post is Dan Way, who is an associate editor for the Carolina Journal, John Hood Publisher.
Incomplete financial reporting increased the risk of fraud, audit stated
RALEIGH Martin Community College was at increased risk of fraud and its true financial picture was clouded because it lacked proper controls over financial reporting that resulted in a series of accounting errors, based on an audit of the 2014-15 school year by the Office of State Auditor.
According to the findings, issued by state Auditor Beth Wood, Martin Community College, located in Williamston and enrolling 410 students in Martin and Bertie counties, submitted financial statements and related notes that "contained significant misstatements that were identified and corrected as a result of our audit."
At least seven accounts either were overstated or understated by 100 percent or more, with one being off by 416 percent.
"Without these error corrections, users of the financial statements could be misinformed about the college's financial condition, including sufficiency and flexibility of resources, asset performance, and operating results,"
the audit said.
The problems included:
- Incorrect preparation, or no preparation at all, of numerous year-end entries necessary to classify cash, and net position, which is a combination of assets, liabilities, and deferred resources that flow in and out of the college.
- Incorrect preparation of entries to record decreases in accumulated depreciation for machinery and equipment disposals.
- Overstating operating revenue due to improper reporting of noncapital grants.
The college "did not ensure that controls over financial reporting were designed and implemented to prevent significant misstatements from occurring," according to the audit. Because of those ineffective controls, various accounts were overstated or understated. Those errors, along with the percentage of understatement or overstatement were:
- Noncurrent restricted cash, $103,562, 21.28 percent.
- Restricted nonexpendable "other", $61,248, 100 percent.
- Restricted expendable "other", $301,713, 416.22 percent.
- Unrestricted, $31,603, 2.28 percent.
- Accumulated depreciation for machinery and equipment, $51,181, 4.5 percent.
- Supplies and materials, $55,776, 2.8 percent.
- Federal grants and contracts revenue, operating, $29,292, 100 percent.
- State and local grants and contracts revenue, operating, $92,587, 100 percent.
- Current restricted cash, $103,562, 12.57 percent.
- Restricted nonexpendable, scholarships and fellowships, $61,248, 100 percent.
- Restricted expendable, scholarships and fellowships, $68,317, 90.27 percent.
- Restricted expendable, specific programs, $265,000, 100 percent.
- Other nonoperating expenses, $4,594, 100 percent.
- Noncapital grants, federal student financial aid revenue, $29,292, 2.35 percent.
- Noncapital grants revenue, $92,587, 16.32 percent.
The college said the errors occurred or went undetected because of unprecedented employee turnover and inadequate staffing due to health-related absences, preventing the completion of year-end reports or day-to-day accounting operations, along with the absence of a year-end plan to complete and review financial statements.
The audit recommended fixing those problems. It made clear "the college's management is responsible"
for accurate financial reports, and senior management should "regularly review" performance of one period against prior periods, and against planned or expected results.
The college said more staff training is needed, and a year-end plan will be developed and implemented.
The audit further found the college "did not ensure that controls over cash management were being implemented as designed,"
causing its cash balance to be overstated by 5.16 percent, or $97,775.
"Failure to implement effective processes over cash management could increase the risks of fraud, mismanagement of funds, and misstatements in the financial statements,"
the audit said.
The college did not detect the errors because it did not review daily bank deposits or monthly bank reconciliations, and did not prepare monthly bank reconciliations over a number of months. The problems were linked to the employee turnover.
The college said it would develop a plan or strategy to manage cash properly, would hire a consultant to assist in reconciling bank statements by July 31, and was training business staff.