AIM for ACCOUNTABILITY!

"Criminal practices" plague DPS
By Diane Bukowski
The Michigan Citizen

DETROIT - According to a recently disclosed audit, questionable and possibly criminal financial practices by Detroit Public Schools administrators may involve more than the highly publicized wire transfers of $12.1 million to Long Insurance Services by former Chief Financial Officer Dori Freelain.

The transfers, involving risk management funds, took place from 2005 to 2007. They were allegedly made without evidence of contracts, purchase orders, or scope of services. Former DPS Superintendent William Coleman suspended and then terminated Freelain and a co-worker, cash manager Delores Brown.

Current DPS Superintendent Connie Calloway announced July 20 that a closed school board meeting will be held the week of July 23 "or as soon as possible" to discuss an internal "Detroit Public Schools Risk Management Investigation Report" related to the allegations. She said DPS General Counsel Jean Vierre-Adams had already met with board president Jimmy Womack to review the report.

"The Federal Bureau of Investigation continues to request information from the district without any indication of its intent for further prosecution in this matter," said Calloway in an earlier letter to the Board.

BUSINESS AS USUAL

Auditors KPMG issued a "Single Audit Report" for fiscal year 2006, and recently posted on the DPS website information indicating Freelain's alleged activities may have been nothing but "business as usual" for the Detroit Public Schools.

The report, in which KPMG reviews the district�s handling of federal funds, cites numerous irregularities. Chief among them are improper procurement practices.

"The School District's internal controls and system configuration are not designed adequately to verify that all purchases have a requisition and a valid purchase order prior to placing an order," said KPMG.

"Internal control procedures and the system configuration allow for a purchase order to be generated without a valid requisition being created first. [This] causes orders to take place without going through the proper procurement policies and exposes the School District to a greater risk of error and fraud."

DPS officials acknowledged the findings in the audit, saying, "The Department of Finance will work with the Department of Contracting and Procurement on eliminating this option from the departments that are able to do this function."

KPMG also noted, �There are various ways end users at the schools can override certain internal controls to expedite the procurement of goods and services.� It said those internal controls include "budget checks, proper approvals, and other edit checks to ensure that all information is complete and accurate."

NO CONTRACTS

The district replied, "The School District acknowledges this finding. The situation occurs when departments contract with vendors outside of the government process by discussing services with vendors directly or signing an agreement provided by the vendor without going through the proper procurement process. The school district will continue to communicate the procurement policies and procedures to internal departments as well as vendors to ensure compliance with policy."

In published remarks, Larry Long, CEO of Long Insurance, said he has not always had a signed contract because it was not the district's practice.

"Once you were the successful bidder, there was no contract," he told the Detroit News.

School board vice-president Joyce Hayes-Giles, who chairs the Finance Committee, and member Paula Johnson, who chairs the Procurement and Contracting Committee, had not responded to calls for comment before press time on what their committees have done to correct the practices noted in the audit.

CPA Greg Frazier is now in court demanding access to all DPS contracting and procurement documents for fiscal year 2006 under the Freedom of Information Act. He said his community-based audit would be a forensic audit, going beyond the scope of the KPMG financial audit. Both the Call -em Out Coalition and the Michigan Welfare Rights Organization are backing his lawsuit.

"We want to show what percentages of purchases were improperly approved and documented, and see who signed those checks," said Frazier.

NO FUNDS FOR SCHOOLS

He said it is ironic that KPMG issued its findings at a time when there is increased community concern about DPS financial practices, as 42 schools are slated to close to save only $16.8 million a year beginning in 2008. He noted that auditors are usually under "tremendous pressure" from the employer, banks and Wall Street rating agencies, to issue clean reports.

In other matters, the audit gave an "adverse rating" to the handling of funds for the Title I-A program. That program oversees parent participation and has generated numerous complaints from parents who say they are not allowed input into individual principals� handling of the funds. A federal government audit of that program is currently taking place.

KPMG gave a "qualified," or questionable rating to the district's handling of federal funds for Vocational Education, the 21st Century Community Learning Centers, the Reading First Program, the Special Education Cluster, and the Head Start program.

It also noted that the school district does not currently have an internal audit department, or a process for preventing, detecting and deterring frauds.

The internal audit department was abolished during the five-year state takeover of DPS, when Dr. Kenneth Burnley was CEO and had exclusive control over contracts. Burnley is reportedly the subject of a current federal grand jury investigation in Detroit.

Board member Ida Short has led the drive to re-establish the audit department under the office of an Inspector General, which the district says is expected to take place by the end of 2007. The district says in the audit that the internal audit department will establish a fraud monitoring process.

The audit also noted numerous other irregularities in handling workers compensation claims, expenditures of federal awards, bond covenants and proceeds, capital asset disposals and impairments, and cash receipts and reconciliations, among other matters.

The entire Single Audit can be viewed on the DPS website at:

http://www.detroitk12.org/data/finance/2006_Single_Audit_Report.pdf

Other financial documents including the complete 2006 Comprehensive Annual Financial Report (CAFR) are also available on the site.