Legislative Joint Auditing-Educational Institutions
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Speaker 1
0:00
eighth meeting. Can I get a motion to adopt the minutes? Second. All right. All in favor, say aye. All opposed, nay. All right. Thank you. We've adopted the minutes. All right. Senator Clark's going to come up here for us. Thank you, Senator Clark. Senator Sullivan can't be here today. We've got a fairly short agenda, so it shouldn't take us too long today. Thank you all for coming. I think I'll kind of turn it over to
Speaker 2
0:26
Mr. Fink, and he can kind of tell us what's on the agenda today. Okay.
Speaker 5
0:32
Thank you, Mr. Chair, and good afternoon. Today we have
11 educational reports to review. Eight of these reports were for the fiscal year ended June 30, 2022, and three reports were for fiscal year ended June 30, 2023. One report that will be reviewed today, Lee County School District, is currently classified as fiscal distress, and there were two reports with findings and we will begin with national park college with excuse me actually we're going to try and change that up we're actually going to begin with northwest arkansas community college because they have someone present to answer any
questions from the committee so if you will turn to northwest arkansas community college in your synopsis. They had two findings. The first finding was a repeat finding. The college's internal control system did not detect or prevent material misstatements in the financial statements. The financial statements were subsequently corrected by college personnel during audit field work. Some of the key errors included on the statement of net position, cash and cash
equivalents was overstated by approximately $128,000. Accounts receivable was understated by approximately $1 million. Capital assets was overstated by $399,000. Prepaid expenses was understated by $56,000. Accounts payable was understated by $704,000. There were errors related to the implementation of GASB 87, which was a new GASB pronouncement implemented in FY22
regarding leases. There was a misclassification of net position, which resulted in unrestricted net position being overstated by $5 million. And then there were several line items that offset that, that were either understated, or that were all understated, that offset that $5.1 million. On the statement of revenues, expenses, and changes in net position, as you can see in
the bullets, there were various errors resulting in understatements and overstatements. And then on the statement of cash flows, there was an error related to direct lending loan receipts and direct lending loan payments that were not recorded, and that was in the amount of $3.5 million and $4.7 million, respectively. A similar finding was noted in the previous two audits. On finding two, there were 22 unauthorized withdrawals totaling $79,000 made
from the college's bank account from August of 2022 through November of 2022. The college personnel discovered the unauthorized withdrawals upon review of the bank account, and the funds were recovered from the bank. Because those funds were recovered from the bank and because it was not an employee of the institution, that matter did not get referred to the processing attorney or the Attorney General. I would point out that charges were filed
and an arrest was made, just so
Speaker 6
4:02
y'all have that information. And that concludes the findings for Northwest Arkansas Community College. Okay.
Al Masri
Unverified
4:21
Who do we have here from Northwest Arkansas? Hi. My name is
Speaker 12
4:26
Al Masri. I'm the Vice President of Finance Administration.
Al Masri
Unverified
4:30
Okay. So what was your name again? Al Masri. Al Mossery. So we have Mr. Mossery here to answer
Speaker 14
4:43
any questions, questions from the committee. Senator Chesterfield. Thank you, Mr.
Senator Linda Chesterfield
Unverified
4:46
Chair. Just a quick question to staff. We have referred this to the prosecuting attorney. There was one part. We did not refer to the prosecuting. No, ma'am. Something you said was referred and something you said was not referred. I missed that.
Speaker 5
5:01
National Park College does have a funding that's referred, and I will read that.
Senator Linda Chesterfield
Unverified
5:05
Okay, but not this institution, which is, God, we've got a bunch of colleges. Jesus. But this is Northwest Arkansas Community College, and they were not referred. That's right. Gotcha. And
Speaker 5
5:18
the reason they were not referred is because somebody else stole
Senator Linda Chesterfield
Unverified
5:21
the money that was not on staff. And
Speaker 5
5:24
they actually recovered the funds, and the bank was out.
Senator Linda Chesterfield
Unverified
5:27
Okay, so I was semi-paying attention. Sorry about that. Thank you. Thank you, Mr. Chair. Thank you, Mr. Staff.
How are you, sir? Welcome to the committee. Could you tell me about the statement of revenue, news, expenses, and changes in net
Speaker 23
5:45
position, errors that were made? Sure. What happened here is we have, unfortunately, for the
Speaker 24
5:51
last three years, turned over of the controllers. We have, within the last three years, three controllers turned over. Also, we are going through a major implementation of a new ERP system. So the goal here for me is to focus on the day-to-day operation and protect the asset of the college.
And as you saw, we were finding especially a lot of fraudulent activity through not the college personnel. third party they are trying to hammer our account and we implemented something called positive pay to make sure we are protecting the asset of the college so this is what we focus so the financial statement is when we build a financial statement sometime we classified something in a wrong position because
of the controller change and unfortunately what happened the last two years and the same time in August we have the resigning of our resignation of our controller the same time as audit is happening so this is what happened with also implementation of the new ARB system which already we have some challenges with that to train our employee and make sure they have and on top of that we have the great resignation now it's going on within the finance department I have eight people seven of them has been turned over
and I have a new seven people on that so my goal was also to focus make sure is everything is going to service to our students service to our staff is going as scheduled and if you notice also in our financial I'm not sure if you have our financial position is getting stronger and that we are getting more funding and I'm trying to protect that also so sometime you I'm trying to make sure that the most important things is protected and trying to make sure that I'm
supporting my staff and training them to the new ERP system and unfortunately I inherited that and I'm working to fix that for the last two years on doing that so this is this is why all this finding but I'm based on the new hire and all that I was able as of yesterday to hire most of the positions The only position I'm looking for, if you know anybody in GL manager, so this is the only position I'm still struggling to find.
Also on top of that, unfortunately, we are struggling with competing with what I call high sharks in northwest Arkansas. When we pay our controller, when we pay $75,000, they go and get 150, 125, either, I don't want to mention company names, but you know the company over there. So this is becoming a very challenging situation for us to compete with this.
They come to us, they get training, they do, and then they resign and leave for a higher salary. I don't blame them because the cost of living in Northwest Arkansas is really high, the most higher in the state of Arkansas. So I don't blame them. We want them to get a better life, but it's impacting us in a bad way. So this is, I hope I answered the question. Thank you so much. And thank
Senator Linda Chesterfield
Unverified
9:19
you, Mr. Chair. I appreciate it. Senator Petty.
Senator Jim Petty
Unverified
9:26
Thank you, Mr. Chair. I've mentioned this before in this committee because while we really can't do any more than they're attempting to do on the criminal side, the accounting misstatements and errors resulting from that, I feel like we can. The auditor, legislative audit, they can't prepare the financial statements for independence reasons, but I would think that all of these college of businesses and accounting departments and other resources around the state could come up with an area where they could, you know,
staff a person or two that is a CPA that they could pay $150,000 that could answer their questions, and that would resolve a lot of the issues that they are seeing in the area of turnover and accounting errors that are preventable if you've got the, you know, the
lack of turnover or the consistency in the individual. So not necessarily a solution. I'm not
telling you how to do your business, but we continue to see these all over cities and counties and school districts and higher education.
And I would think that there would be, you know, in a capitalist firm, I mean, a capitalist state, there would be an opportunity for somebody to step up and say, I'll be the expert. And that way, when they say, I'm thinking about classifying it this way, they could call this resource and get an answer before it goes on the financial statement that legislative audit just says, hey, it's wrong. Now, I want to defer to staff because you guys always have more in-depth knowledge than I do. But am I off base with what we're talking about here?
Speaker 5
11:11
I don't think so. You mentioned our independence on the audits, and certainly we have to maintain that in accordance with standards. But we do try to extend help as much as
Speaker 40
11:25
we can. And I think Mr. Masary will agree with that. May
Speaker 24
11:33
I say something? I totally agree with you. Some of the colleges where I work in other states, they use independent CPA firm to look into that before the state legislator come. But that will cost, and that
will cost some big buck for the college. What we are doing here, and I appreciate, and I say that in the beginning to Mr. Feng, that we appreciate the partnership with the state legislator. Yes, we are having findings, but we are correcting this finding based on their notes, and we are working with them to be more efficient on a daily or yearly basis to correct that, that is saving some money. Because if I go out and hire a third-party CPA firm, I have to pay them a big
buck to come and review what we do and all that. As long as I have a control in place, and we are making sure we are not losing assets for the college, which is most important, and this is what I'm focusing on and monitoring on daily basis and this is how we discover the issue happened and we prosecuted before it goes even to the internal audit and we were able to make an arrest and recover the money. This is the most important. Instead of paying $150, $200 to the
CPA firm, we are working in conjunction with the state legislator to audit us and make sure they are finding this so i see this is an opportunity for us to work with the state legislator legislative auditors they are helping us in that aspect do we need more help sometimes especially this is a unique situation after pandemic and after the great resignation and coming on top of that the new uh implementation of erp system all that combined cost all that hopefully now
I'm seeing a little bit of stability that will help hopefully for the upcoming years to settle down a little bit and have a little bit of better position with all this notes and with training of our staff that will be a little bit help but yes I 100% agree with you more resources will be more helpful I hope that
Senator Jim Petty
Unverified
13:49
answer yes very very helpful the only the only additional comment that I would add was that generally speaking, and I come from a CPA background myself, so I'm not advocating for
my friends necessarily. I am advocating for the competence. But coming from that background, from an audit background, it's not the easiest thing to do to say, I'm going to call my auditor for some advice. I mean, I'm going to call my CPA for advice, or I'm going to call my tax man for advice, but I'm going to call my auditor for advice. So there may be some, sounds like there's not for you, but there's some hesitation to call for real expertise when it comes to these things. But I appreciate what you said, and I'll go ahead and make in my notes here that this is
the last comment that we'll have. No, I'm kidding. I'm kidding. I'm kidding.
Speaker 23
14:38
No, I totally agree with you, and I see that. And I come from a different approach, and I say this is,
Speaker 24
14:45
I see a partnership more than an audit things. So this is what makes it successful and
Speaker 23
14:52
I hope I continue that with my team, with training, and make sure they see that as resources, not as audit. Senator
Senator Alan Clark
Unverified
15:02
Petty, thank you for that idea
but how dare you offer a solution to
Al Masri
Unverified
15:07
a continual problem. Anyone else? Senator English? so i was
Senator Jane English
Unverified
15:15
wondering you mentioned something in there that you about third party people how much do you use third party people and were they responsible for a lot of this we don't use it but i'm saying if we
Speaker 24
15:26
need to have a cba firm that will call we need to use a third party people well i think when you
Senator Jane English
Unverified
15:32
were going over some of these things you were talking about
i thought i heard you say about third parties that were
maybe um helping with these problems but What I said, if we
Speaker 23
15:43
need to, based on the question, if we need to use, that will cost some extra $150, $200 to hire a CPA to
Speaker 24
15:50
be our advisor. That's what I was referring to. I'm sorry if I was not clear. Anyone else? Not just yet.
Al Masri
Unverified
16:05
I'll take that motion in a moment. Uh, in the errors totaling $5.7 million in operating revenues being, uh, understated and operate, but then operating expenses were also understated by $6.6 million, was this just completely accidental? What happened here is
Speaker 24
16:31
this is, uh, with regard to the, uh, Care Act's fund.
When we received the CARE Act fund from the federal government, this is for the student portion. The student portion was supposed to go to the income. What we did here, we did it as a scholarship. So it was not calculated as income. So this is what makes that is not so. Because we consider this money, and this is a new thing. We never deal with that before. We consider this not an income to the college. We consider this directly to the student. So when the auditors came in, they said, no, this is income to the college, then transfer to the student as for the student.
So this is where this is happening. We underestimated the
Speaker 50
17:17
income, and then we underestimated the expense. So this is what makes
Senator Alan Clark
Unverified
17:22
it offset each other. Okay. I was just curious if it had anything to do
Al Masri
Unverified
17:27
with the other problems. Senator Petty would be horrified, but I had a problem last year after 50 years in business that I knew that our operating revenue was showing, well, the revenue wasn't showing higher, but the gross profit was showing higher than what I thought it should be.
And kept looking and kept looking, and it wasn't until we took it to our tax accountant that they came back and said, tell me about this account. And we had set up a credit account as should have been a debit or vice versa, I don't know which. And it was completely accidental, but it certainly turned the picture around a great deal. And I know how easily you look at that and say, well, that's terrible. And you find out how easily it can happen and in big amounts of money, and you understand it a little bit more.
Motion, Senator Chesterfield? Yes, sir. Move reviewed. Move reviewed. Second. All for the motion signified by saying aye. Aye. All opposed? then
Speaker 5
18:38
we'll consider it reviewed moving on the next audit for review is national park college and this they did have one finding that was referred to the pa and attorney general the first finding the college's internal control system did not detect or prevent
material misstatements in the financial statements the financial statements were subsequently corrected by college personnel during audit field work. The key errors included on the statement of net position, accounts payable, and accrued liabilities. That line item was overstated by $53,000. The college failed to implement GASB 87 leases, and that resulted in an understatement of right to use assets and leases payable in the amounts of $248,000
and $197,000 respectively. Due to a miscalculation, the college's net position for investment in capital assets, net of related debt was overstated and the unrestricted net position was understated by $145,000. There was a misclassification of a lawsuit settlement resulting in non-operating revenues being overstated and special items being understated by $500,000. And on the statement of cash flows, there were misstatements totaling $2.3 million,
and those related to various accounts due to errors and misclassifications, and those are detailed in the bullets of the finding on the synopsis. On the notes of the financial statements, there was an error in how the total deposits carrying amount and bank balance were recorded and that was actually understated by $1.5 million and $471,000, respectively. Finding two is what was referred to the prosecuting attorney and to the attorney general.
In June of 2022, the college discovered and ALA confirmed six unauthorized payments from the college's payroll account due to six employees' direct deposit data being compromised and routed to an unknown bank account. Gross and net wage amounts of these payments totaled $10,678 and $7,317, respectively. An investigation into these matters is ongoing, and the college has not recovered these funds. And that concludes the findings for National Park College.
Speaker 6
21:18
Thank you, Mr. Fink. Did we ask National Park to come today?
Speaker 65
21:26
That's correct. They did not have a repeat finding, so they did not have to come. Okay. Does the committee have any questions about this report? Okay. Seeing none, I'll take a motion
Speaker 1
21:43
to review. Any seconds? Second? All right. All in favor, say aye. All opposed? All right. This report has been reviewed.
Senator Linda Chesterfield
Unverified
21:50
Yeah, Senator Chesterfield. Thank you so much, of staff. We continue to see people playing havoc with stealing money from employees and other places. Is information technology, who is working with our colleges
and our schools to help preclude this from happening? so
Speaker 5
22:15
earlier this year when we presented i think one of our first meetings maybe
this committee sent a letter to ade trying to tell school districts basically hey you need to make sure if you're going to process direct deposit information changes from your employees that it doesn't just happen through an email because it's it's too easy to hack at the situation at national park i think they had a self-service module that the employees
were using and it got hacked and so they've now changed that process to try to make it more face-to-face you know type changes if there's going to be any changes made but i know that ADE sent something out. And then there's also, in this past legislative session, the cybersecurity team as well. So it is an ongoing problem. We do see it repeatedly.
And when we're out there, we're trying to make recommendations to try to help. Some of it, you know, it's going to happen even if you're basically doing everything right. And the other question is, is Lee
Senator Linda Chesterfield
Unverified
23:34
County still under state control? It is. I was just about to mention that. And I guess the thing that troubles me is I've watched over the years these districts go under state control, and then they still have findings, which makes no sense, because Lee County has been under state control five or six years,
and you still have them in fiscal distress. What is the state doing if it's taking over districts? Because I know it took over Little Rock. Little Rock was not in fiscal distress when it was taken over, but when it came out it was from state control. So can you find for me how many of these districts under state control are in academic, fiscal, or facilities distress? Because the state going in is supposed to make things better, and I have not seen that happen.
Speaker 5
24:26
I would point out that Lee County School District did not have any findings. This time? This time.
Senator Linda Chesterfield
Unverified
24:34
Yes, thank you. That's a good thing. I saw something in red, so I didn't know. That worried
Speaker 5
24:40
me. That comment in red is just noting that it's in fiscal distress. But if it has no findings now. No findings this
Senator Linda Chesterfield
Unverified
24:49
year. When does it come out of fiscal distress, in
Speaker 5
24:52
five more years? As audit, I can't answer that. That's probably a question better served for ADE.
Senator Alan Clark
Unverified
24:57
Okay. Thank you. Is there anyone here from ADE? Yes, come forward.
Speaker 79
25:23
Will you just state your name and position? Eric Saunders, Associate Deputy Commissioner at the Department of Education.
Senator Linda Chesterfield
Unverified
25:27
May I go? Please, yeah. All right. How long has Lee
Speaker 85
25:37
County been under state control? Let me refer to the notes on that. They have been under state control. From my understanding, they were first under the state authority in March of 2019 for standards violations. And then in May of 21, the superintendent requested the level five support, which began.
So they're under the state control under the level five support right now. Are they out of fiscal distress? They are not at this time. The five-year time runs at the end of this year. in may of 2024 would be that are they in academic distress still i don't i do not know if they're classified in academic distress i can try to look into that i certainly hope so and get that because they've been there for quite a while
Senator Linda Chesterfield
Unverified
26:25
yes ma'am most superintendents don't get but three years
Speaker 85
26:31
you guys have had how many about five four or five since 2019 yeah that's
Speaker 91
26:39
four years okay i look forward to hearing from you in the next
Senator Jim Petty
Unverified
26:48
meeting. Thank you, Mr. Chair. Thank you, Senator Chesterfield. Senator Petty. Just a follow-up. You said that it was a superintendent request. Can you clarify, does
that mean that the superintendent of the school district requested that the state step
in as opposed to the state acknowledging or seeing something and then they step in? Can you distinguish between the two just for my education? Yeah, so
Speaker 85
27:10
there's a classification system. I guess you would say the levels of support that the districts get, and the acting superintendent at the time is the one that requested to be placed in that level five support at that time. But were they not under state control? They were under, I believe they were still under state control for
Senator Jim Petty
Unverified
27:35
the standards violations previously so so it wasn't the local community decided
they needed help through the superintendent or the state was in control the state assigned superintendent said i needed level five support that is my understanding okay
Al Masri
Unverified
27:57
thank you yes Senator Clark Pretend that we're all freshmen and don't know
Senator Alan Clark
Unverified
28:02
much about this what is level 5 support how do you request it and then what happens
Speaker 85
28:09
Honestly Senator that gets out of my wheelhouse I can find that information and get that to you Okay that would be helpful
Senator Alan Clark
Unverified
28:17
to me I'm told the superintendent is here. Do you have any information on how all that works? Is that okay? Sure. Yeah, I don't want to get
Speaker 1
28:32
too far afield and out of the scope of the Audit Committee here, but since we do have the superintendent
Speaker 78
28:37
here, we'll take a few minutes and allow him. If
Speaker 100
28:40
you would, just state your name and position.
Al Masri
Unverified
28:46
Michael Stone, Superintendent of Lee County School District. Mr. Chair, I just thought for educational purposes so that
Speaker 1
28:55
I and others would understand what we're reviewing
Speaker 65
28:57
for this and future. Would you introduce yourself in your position, sorry if I missed that, and then just
Speaker 100
29:04
first address Senator Clark's question about Level 5 and support? So Level 5 support includes where the OCSS team and officers coordinate support comes
in, and they offer support in all facets of the school district, whether it be financial, academic, just the controls of the district, they come in and offer support. My team and their team works as one to address any issue that comes up. That's the level five. Level four, they back off on some of that support. It's more of the district rather than that partnership of the OCSS.
The partnership is still there in Level 4. It's just not as hands-on as it is with the Level 5
Speaker 68
29:58
support. Senator Chesterfield. Thank you. Are you board appointed or are you
Senator Linda Chesterfield
Unverified
30:05
state appointed? State appointed. So, as the superintendent representing the state of Arkansas, you asked for level five.
Speaker 100
30:15
No, it was a... Are you a part of level five? No, I'm appointed superintendent. I know you are, but you said you wanted level five support. Okay, I did not ask
Senator Linda Chesterfield
Unverified
30:36
for level five support. So, where did that come from? That was a previous superintendent. Was he under state control as well? Yes. I'm not going to beat it to death. It's a conversation for the Education Committee, but I think it's instructive that this committee understands that these folks have been there for a while.
We're still having findings. Fortunately, not this time, but they're still under state control. And when you're under state control, it would be my thought that after a couple of years with the expertise that exists in the Department of Ed, that these school districts would be returned to the folks who pay the taxes. Thank you so
Speaker 1
31:07
much. Thank you, Senator Chesterfield. I agree. I'll say, having been on Education Committee, all of my terms, I don't think we've spent enough time kind of digging into this issue of state takeover and the criteria, how and
what is the exit from that process as well. So I agree, Education Committee is probably a good setting to talk about that, but good for all of us to get some more information on that today. So I appreciate you coming down, Superintendent. Thank you for your time. And from the committee, congrats and well done on having no findings this year. Thank you,
Speaker 106
31:37
sir. And we've not had findings in the last three years. Excellent. Yeah.
Speaker 1
31:42
Yeah. We'll look forward to it again next year. Thank
Speaker 78
31:47
you. Yeah. Mr. Saunders, thank you as well for speaking to us today.
Al Masri
Unverified
31:51
So we do have – do you have something else, Senator Clark? Yes. And it won't hurt my feelings if we don't. But some of us are no longer members of the Education Committee, and these are matters that affect audit, I would request that the chairs have ADE come back and fill us in more on this subject for this, because we are the audit education here, and I think it would be helpful to me. I think it would be helpful to others, even maybe more so than myself,
and I don't think it will take long, but I would like to request that at some point
Speaker 1
32:30
in the future. Okay. Noted to that. i'll talk with senator sullivan and mr fink we'll see what we can do on that um so we got into that discussion from our reports with no findings um that's that's perfectly fine that is fine i appreciate the discussion um we do have reports of no findings lee county was just one of those so mr fink do you want to cover just that we have a list of these on your last page
is our reports with no findings so okay we have a motion to accept those reports any seconds Senator Petty second all in favor say aye any opposed all right those reports are reviewed any other questions comments from the committee today all right thank you committee for your time and attention today I appreciate it Mr. Fink thank you we'll see you all at the next meeting have a very good Christmas holiday season we'll see you back next year we're adjourned
Agenda
A. Call to order by Co-Chairman.
B. Adoption of Minutes of the November 8, 2023 meeting.
C. Review of Reports. Refer to the Synopsis
D. New Business.
E. Adjournment.
Documents
| Title | Type | Pages | Source |
|---|---|---|---|
| Agenda — LEGISLATIVE JOINT AUDITING - EDUCATIONAL INSTITUTIONS, Dec 7, 2023 | Agenda | 1 | Official source ↗ |
Speakers
Speaker 1
Speaker 2
Speaker 5
Speaker 6
Al Masri
Unverified
Speaker 12
Speaker 14
Senator Linda Chesterfield
Unverified
Speaker 23
Speaker 24
Senator Jim Petty
Unverified
Speaker 40
Senator Alan Clark
Unverified
Senator Jane English
Unverified
Speaker 50
Speaker 65
Speaker 79
Speaker 85
Speaker 91
Speaker 78
Speaker 100
Speaker 68
Speaker 106