Michigan Office of the
Auditor General
Thomas H. McTavish, C.P.A.
Auditor General
 OAG Seal

[Up] [Left] [Next]

EXECUTIVE DIGEST #3140094

Membership Reporting and Auditing Process

INTRODUCTION This report contains the results of our performance audit of the Membership Reporting and Auditing Process, Department of Education, for the period October 1, 1993 through September 30, 1995.
AUDIT PURPOSE This performance audit was conducted as part of the constitutional responsibility of the Office of the Auditor General. Performance audits are conducted on a priority basis related to the potential for improving effectiveness and efficiency. Also, this performance audit was conducted in accordance with Section 717, Act 288, P.A. 1994. In addition, we will conduct a follow-up audit of the membership reporting and auditing process in accordance with Section 603, Act 158, P.A. 1995.
BACKGROUND The Department of Education distributes State school aid to school districts (see glossary on page 28 for definition) based on membership (see glossary on page 28 for definition) counts as reported by the school districts and audited by the intermediate school districts (ISD's). The Department is responsible for developing and implementing policies and procedures pertaining to the reporting and auditing of memberships, and it conducts a limited number of membership audits.

In accordance with Section 18(2) of the State School Aid Act (see glossary on page 28 for definition), the Department has designated ISD superintendents to conduct annual membership audits and public accounting firms to conduct annual financial audits of the school districts. The Act also requires the annual financial audit to include an analysis of the financial and membership accounting data used as the basis for the distribution of State school aid.

As a result of school finance reform, school districts receive a substantial amount of their operating revenue from the State through the School Aid Fund (see glossary on page 28 for definition). For fiscal year 1994-95, the Department distributed approximately $7.2 billion for pupil (see glossary on page 28 for definition) and $185 million for participant (see glossary on page 28 for definition) memberships as prescribed by the Act. State officials have estimated that State school aid payments for fiscal year 1994-95, excluding federal funds and local capital projects, provided approximately 83% of local school districts' operating revenues.
OVERALL AUDIT OBJECTIVE, CONCLUSION, AND NOTEWORTHY ACCOMPLISHMENTS Overall Audit Objective: To assess the internal control structure (see glossary on page 28 for definition) for the State's pupil and participant membership reporting and auditing process and to make recommendations to improve the internal control structure.

Conclusion: Our review disclosed two material internal control structure weaknesses (see glossary on page 28 for definition) and one reportable condition (see glossary on page 28 for definition) related to the State's pupil and participant membership reporting and auditing process. The Department needs to provide a comprehensive oversight of the membership reporting and auditing process. Also, the Department needs to provide relevant guidance and procedures for reporting and auditing State school aid memberships.

Noteworthy Accomplishments: Our initial review of the State's membership reporting and auditing internal control structure disclosed the immediate need to provide school districts with relevant membership reporting and auditing procedures. As a result, the Department, in conjunction with our office and our contract consultant and a Department-appointed stakeholder referent group (see glossary on page 28 for definition), developed a revised Membership Accounting and Auditing Manual and provided Statewide training seminars on the use of the manual. Based on the Act and pertinent administrative rules, this manual provides relevant guidance and procedures for reporting and auditing K-12 memberships.
INDIVIDUAL AUDIT OBJECTIVES, CONCLUSIONS, AND NOTEWORTHY ACCOMPLISHMENTS Audit Objective: To assess the effectiveness and efficiency of the Department's policies and procedures pertaining to school districts' membership reporting and intermediate school districts' membership audits and membership audits conducted by the Department.

Conclusion: The Department's policies and procedures did not provide a comprehensive oversight of the membership reporting and auditing process. As a result, the Department's resources were not used in the most effective and efficient manner.

Our assessment disclosed two material internal control structure weaknesses:
  • The Department did not provide comprehensive oversight of the membership reporting and auditing process (Finding 1).


    • The Department agrees with the finding as it relates to Department activities and will implement quality assurance reviews of ISD audits as resources permit.

  • The Department did not provide relevant guidance and procedures for reporting and auditing State school aid memberships (Finding 2).

    The Department agrees with the finding and will maintain relevant guidance and procedures in conjunction with Finding 1 as resources permit.
Our assessment also disclosed one reportable condition involving the Department's procedures for conducting quality assurance reviews.

Audit Objective: To assess the effectiveness and efficiency of ISD's policies and procedures for conducting membership audits.

Conclusion: Our review of ISD policies and procedures for conducting membership audits disclosed various deficiencies (Finding 1) that often reduced the effectiveness and efficiency of ISD audits. However, the Department's issuance of the revised Membership Accounting and Auditing Manual, initiation of a comprehensive oversight function (Finding 1), and providing of relevant membership reporting guidance and auditing procedures (Finding 2) should improve the effectiveness and efficiency of the ISD audit function.

Noteworthy Accomplishments: Some ISD's had developed or were using audit programs, checklists, and reporting forms provided through the Michigan Pupil Accounting and Attendance Association. The Association, in conjunction with its local and ISD members, had developed and made available to interested users several membership audit programs, checklists, and reporting forms. This guidance, and other materials obtained from the ISD's, was beneficial and provided a foundation for revising the Membership Accounting and Auditing Manual.

Audit Objective: To assess the effectiveness of and compliance with laws and regulations of school districts' policies and procedures pertaining to membership recording and reporting.

Conclusion: As described in Finding 1, school districts' policies and procedures often were not effective as memberships were not consistently reported in accordance with the Act and administrative rules. Also, districts did not consistently maintain attendance records and other compliance documentation in accordance with the Act, administrative rules, and Department policy.

Audit Objective: To assess the public accounting firms' reviews of the membership reporting and auditing process in relation to school districts' annual financial audits, and to determine how much reliance the firms place on the school districts' membership recording and reporting and the audits conducted by the ISD's.

Conclusion: Public accounting firms placed substantial reliance on the local school districts' membership recording and reporting internal control structures and on the ISD's membership audits. However, public accounting firms generally prepared limited documentation and performed limited testing of the membership recording, reporting, and auditing processes.
AUDIT SCOPE AND METHODOLOGY Our audit scope was to examine the program and other records of the Department of Education, school districts, and public accounting firms for the period October 1, 1993 through September 30, 1995. Our audit was conducted in accordance with Government Auditing Standards issued by the Comptroller General of the United States and, accordingly, included such tests of the records and such other auditing procedures as we considered necessary in the circumstances.

To accomplish our objectives, we reviewed State statutes, administrative rules, and Department policies and procedures. We also surveyed all 57 ISD's to identify the type and scope of membership audits performed. We visited 20 ISD's to review their membership auditing policies and procedures and the supporting documentation for their February 1994 and October 1994 count day (see glossary on page 28 for definition) membership audits. In addition, we visited nine local school districts to review their membership recording and reporting policies and procedures and their supporting documentation for the October 1994 membership count. We compared each district's reporting errors that we identified with the ISD's previously reported audit adjustments and referred unduplicated errors to the Department for disposition. We also visited the nine public accounting firms that conducted the local school districts' financial audits, for the school year ended June 30, 1995, to review pertinent audit working papers.
AGENCY RESPONSES Our audit includes three findings and recommendations. The agency's preliminary response stated that it agreed with the recommendations.

[Up] [Left] [Next]

This page was created on 3-19-97.