A second Comptroller's audit of the work by the CPA Firm Miller, Lilly and Pearce found a continued pattern of substandard work and numerous violations of professional standards, New York State Comptroller Alan G. Hevesi said. A report of the CPA firm's service to the Roslyn School District released by Hevesi in January contained similar findings of sub par work and extensive impropriety by the firm.

The audit released last week is part of the review of the Manhasset Union Free School District's finances, specifically the district's audit procurement procedures. A separate audit of the finances of the Manhasset School District will be completed in the coming months. Findings of the audit have been referred to the State Board for Public Accountancy for further investigation and disciplinary action; however, Miller, Lilly and Pearce recently announced to clients that it was closing.

"Miller, Lilly and Pearce failed to take even the basic steps to ensure that district funds were properly accounted for and safeguarded. The firm let the Manhasset taxpayers down," Hevesi said.

In a written response to the audit, President of the Manhasset Board of Education Thomas J. Maimone said "Your examination disclosed the poor quality of services, known only to them, that the district received from its external audits. We consider the district fortunate that your examination did not reveal a pattern of ongoing fraud which the external auditors failed to detect. We attribute that to the integrity and underlying honesty of our staff."

"We now are aware of two school districts where this firm did not do its job. It is disconcerting that this firm was supposed to be the fiscal watchdog at 53 school districts, but it is unclear whether these remaining districts were similarly ill-served," Hevesi said. "At this point, the best course of action for the boards of these districts is to work closely with their new auditor and carefully scrutinize the results of their new 2004-05 fiscal year audit. Unless there is an indication of financial irregularities, it should not be necessary to re-audit the work of Miller, Lilly and Pearce."

Hevesi also offered the following recommendations to school districts that previously used Miller, Lilly and Pearce for auditing services:

• Utilize a competitive RFP process to ensure a high quality independent audit of the 2004-05 school year. A model RFP is available at www.osc.state.ny.us.

• Require the CPA to present audit results directly to school boards (i.e., not just to staff), and ask a series of questions on what sort of internal controls testing will be done in the course of the audit.

• Create an internal audit function by hiring an individual or audit firm - not the same entity that performs the annual audit - or through a shared services arrangement. An internal audit process involves reviews of financial policies and procedures, tests of internal controls, and creation of risk assessments for fiscal operations, and recommendations for improvement.

• Establish an audit committee to oversee internal and external audit work, selection of auditors, review financial statements and monitor any corrective action plans.

• Comparable to the Roslyn findings, state auditors discovered work performed on the audits was flawed and did not meet professional requirements for such an audit and was significantly deficient in planning and execution. Among the findings are:

• Miller, Lilly and Pearce failed to meet numerous mandatory professional standards for conducting audits. The firm did not meet 10 of the 22 standards for the 2002-03 audit and nine of 22 for the 2003-04 audit. Non-compliance with any one standard is grounds for referral to the State Board for Public Accountancy.

• The CPA partners sold financial software to the district - transactions which create a conflict of interest and violate professional standards requiring auditors to be independent.

• The firm further violated professional standards for independence when it posted transactions to the district's accounting records and then audited those same records. In fact, the firm made 37 entries totaling nearly $130 million and 68 adjusting entries totaling more than $7.4 million in a two-year fiscal period.

• The CPA firm's planning efforts were substantially below professional standards. For instance, the firm did not address the possibility of fraud or illegal acts and plan tests accordingly. Nor did the firm take into account that the district used a computerized accounting system, which the firm sold to the district, to ensure that the controls built into the software were operating as intended. In fact, the controls had not even been activated and a range of employees could have manipulated the district's financial system.

• In its testing of district spending, the CPA firm did not look at cancelled checks, which is a standard practice for audits. In addition, while the firm's work papers identified potential instances of weak internal controls over assets that warranted further investigation, such as the lack of supporting documentation for purchases, there is no evidence that the firm ever investigated these weaknesses.

• Even though the district exceeded budgeted amounts and executed some year-end adjustments, the firm never looked at these transactions.

• When auditors reviewed a sample of 25 disbursements that the CPA supposedly tested in the 2003-04 fiscal year, six of the claims had inadequate information to determine if the purchases were subjected to competitive bidding requirements or the district's purchasing policy. In addition, when auditors attempted to find six other claims listed in the firm's work papers they found that those claims and at least 43 others did not match the vendor name, amount paid or the date of the actual claim.

While state auditors found that the district's written policies and procedures to procure audit services were adequate, the district did not follow these policies. They did not seek competitive offers from other firms and, in fact, used Miller, Lilly and Pearce for 10 years.

Auditors recommended that the district implement a competitive process to hire a new auditor and require that the new CPA firm to communicate directly with the board. Auditors encouraged the district to clearly define the responsibilities of the district's new audit sub-committee and ensure that members have sufficient financial expertise necessary for reviewing the audit report and underlying audit work. Auditors also suggested that district officials and board members be more knowledgeable of the annual audit process so they can better identify irregularities and monitor overall financial matters.

The district agreed with the audit findings and indicated that all the recommendations would be implemented. The full response from Board President Maimone is included in the audit.