Study of L.A. District Finds Widespread Weaknesses in Auditing

Auditors who monitor spending and search for fraud in the Los Angeles Unified School District lack independence from administrative meddling, spend too much time on minor inquiries and get insufficient training, a consultant told school board members Thursday.

The Internal Audit Branch is functioning at a “paper and pencil” level of sophistication with no standards for reports and no budgeting and tracking procedures to manage its own work, Tom Snow of KPMG Peat Marwick told the school board’s audit committee.

The preliminary report validated many of the charges made by the former director of the Internal Audit Branch, who was fired this summer over conflicts with his superiors and charges of racism made by the branch’s largely Filipino auditors.

Wajeeh Ersheid, a seasoned corporate auditor who was hired to upgrade the poorly performing branch, said that the lack of adequate checks and balances is costing the district hundreds of millions of dollars in waste and fraud.

Ersheid had recommended raising the qualifications for auditors, increasing the staff and directing more attention to fraud investigations, especially electronic eavesdropping on the district’s massive payroll and procurement computer databases.

Chief Administrative Officer David Koch retained the Marwick firm to evaluate Ersheid’s criticisms.

Although Ersheid had yet to be interviewed in the inquiry, Snow echoed many of his comments, such as the call for more electronic investigations.

“That’s the first thing that jumps off the page at you,” Snow said.

Only one of the branch’s staff of 35 is equipped and trained as an electronic data processing auditor when there should be five or six, Snow said.

Another problem, Snow said, is that audits are not routinely done to clear up the books at schools after an administrator leaves.

Such “change-of-the-guard audits” are considered essential controls in business, he said.

Snow presented the audit committee with a proposed new management chart that he said would give the audit branch independence from administrators whose operations it must investigate.

Following a model in use at the Metropolitan Water District and UCLA, the branch would report directly to the audit committee, which is made up of three board members and three private sector financial officers who are volunteers. It would also maintain day-to-day contact with Koch.

The new structure also would dramatically expand the resources dedicated to payroll investigations and special audits occasioned by reports of fraud.

The recommendations prompted a confused discussion among the three board members as they tried to mesh the proposed management chart with a recently created position, director of special investigations.

The board has interviewed five candidates for the position and is ready to hire, board President Victoria Castro said.

At first, board members thought this new position would fall under the new director of internal audits, who will eventually be hired to replace Ersheid.

But later they concluded the two positions should be consolidated into a director of internal audits and special investigations.

That still leaves the question of whether the board will create a position of inspector general with broad police powers such as the ability to issue subpoenas.

Snow said that some agencies have both an independent audit branch and an inspector general. His final report would examine the advantages and disadvantages, he said.