Late Tax Payments Cost School District Nearly $1 Million : Accounting: Outside auditor blames system rather than individuals for costly errors.

The Compton school district has paid close to $1 million in penalties and interest on taxes that the district failed to pay or paid late during a two-year period. The tax liabilities came to light after the school board ordered an outside audit after rumors of district tax difficulties.

“We didn’t pay taxes we were supposed to pay,” school board President Kelvin Filer said. “It was an accounting mix-up that we are trying to rectify.”

The problems involved taxes that the Compton Unified School District withheld from employee paychecks in 1990 and 1991. Auditors said the district apparently withheld the proper amounts from employee paychecks, but then either failed to send the full amount to the federal and state governments or failed to pay on time.

The district paid taxes late to both the state and federal government for every quarter of 1990 and 1991 except the last. Six times the payments to either the state or federal government were more than 100 days late. Three times they were more than 200 days late, according to the accounting firm of Coopers & Lybrand, which performed the audit.

Last week, the school board authorized a payment of $731,428 to settle the balance of the debt, which includes back taxes. The district had already paid $494,512. The back taxes made up about $300,000 of the $1.2 million total.

Some district officials downplayed the seriousness of the problem, but board member John Steward disagreed.

“You had people sitting here saying everything was OK when you’re bleeding out hundreds of thousands of dollars in penalties and interest,” Steward said.

The audit only examined the years 1990 and 1991, but Steward said he presumed that similar costly tax errors could probably have been uncovered from previous years. The scope of this audit was to determine how much the district owed tax collectors, he said.

IRS officials would not comment on the school district’s tax difficulties, citing confidentiality laws.

Steward said he first questioned district administrators about tax liabilities late last year when tipped off by a friend who works for the Internal Revenue Service. Until then, he said, the board had not been told of any tax penalties.

In a November, 1991, memo to the school board, then-Supt. J. L. Handy reported that the problem was an IRS error, that the agency had failed to give the district credit for deposited money.

Then early this year, Steward said, some employees contacted him anonymously, saying that the problem was more serious. Steward asked the district’s audit committee, chaired by board member Lynn Dymally, to investigate. The committee called in the outside auditors.

The auditors found that the problem was extensive and stemmed from district shortcomings in accounting and bookkeeping. Administrators had kept the board and the public in the dark by secretly deducting the tax penalties for 1990 from various accounts, Steward said. The audit does not specify which accounts were used.

If that amount of money can be secretly budgeted, he added, then the system may be subject to other financial abuses as well.

Steward said he did not believe Handy tried to deceive the school board, but he did fault Handy for not pursuing an internal investigation more vigorously. Trustees removed Handy from office Tuesday. Handy had been on official probation since mid-October for alleged mismanagement of the budget and other district problems.

Handy could not be reached for comment.

A previous audit by Coopers & Lybrand had shown that the district squandered millions of dollars in recent years on construction projects and food services.

“We have been hemorrhaging millions of dollars,” Steward said. “The auditors have been showing us where to put the tourniquets.”

The beleaguered business department has had other troubles this year as well. This fall, the county rejected the district’s budget on the grounds that Compton Unified had about $4 million less to spend than it claimed. After district officials approved $4.9 million in cuts and dozens of employee layoffs, the county finally accepted the budget.

Officials said the tax payments would not necessitate more cuts. Administrators have known for several months that the district would have a tax debt and reserved funds to pay it.

Employee union leaders said, however, that the money would have been better used to preserve lost nursing jobs or keep open middle school libraries.

“This is a very big deal,” said Joyce Brooks, executive director of the teachers association. “There is no excuse for taxes not being deposited on time. No wonder there was a budget shortfall. Employees lost their jobs because of horrendous practices such as this.”

Auditors did not lay specific blame for the tax mistakes, but they did note numerous flaws in the district’s record-keeping and tax preparation.

District workers, for example, apparently did not know how to update or correct employee tax information by using a computer link with the county.

The auditors recommended various remedies, including retraining school district accountants and administrators, creating a manual of procedures and revising Compton Unified’s accounting system to provide more checks and balances.

The recommendations were reviewed Tuesday by a district audit committee that includes three board members and senior staff.

Board member Dymally said that reorganizing and retraining the accounting department would prevent similar problems in the future.

“It’s really not a lack of due diligence on the part of any individuals as much as it is that there has been a lack of proper training . . . over a long period of time,” Dymally said.

Associate Supt. Elisa Sanchez said some of the needed changes were put into place even before auditors completed their report.

The tax problems were “very costly to the district,” Sanchez said. “We must never allow it to happen again.”