Queen Liliuokalani Building
1390 Miller Street, Room 404
Honolulu, Hawaii 96813
Tuesday, May 3, 2016

Lance Mizumoto, Chairperson
Don Horner, Vice Chairperson
Brian De Lima
Margaret Cox
Jim Williams


Denise Yoshida, Director, Internal Audit Office
Lawrence Chew, Audit Principal
Carol Lee, Auditor
Alison Kunishige, Board Executive Director
Kenyon Tam, Board Analyst
Summer Jenkins

I. Call to Order

The Audit Committee (“Committee”) meeting was called to order by Committee Chairperson Lance Mizumoto at 9:01 a.m.

II. Public Testimony on Committee of Education (“Committee”) Agenda Items

Committee Chairperson Mizumoto called for public testimony. There was no public testimony at this time.

III. Approval of Meeting Minutes of February 2, 2016

ACTION: Motion to approve the Audit Committee Meeting minutes of February 2, 2016 (Williams/Horner). The motion carried unanimously with all members present voting aye.

IV. Discussion Items

Denise Yoshida, Director, Internal Audit Office (“IA”), stated that N&K CPAs, Inc. (“N&K”) was contracted by the State’s Office of the Auditor to perform the Annual Financial and Single Audit for the Fiscal Year (“FY”) ended June 30, 2015. Lawrence Chew, Audit Principal, N&K, and Carol Lee, Senior Manager, N&K, presented the findings. The Committee was provided with a copy of the Annual Financial and Single Audit. Lawrence stated that page 59 displayed an overview and section one showed a summary of the auditor’s report.

The auditor issued an unmodified opinion regarding financial statements. There were no material weaknesses. However, there were several significant deficiencies identified. Chew explained that significant deficiencies are deficiencies in the internal control structure, which must be disclosed to those charged with governance. Chew directed the attention of Committee Members to page seven for the auditor’s report on the financial statements in the Single Audit report. The financial statements were from management, who is responsible for its preparation and presentation in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Chew stated that page eight revealed N&K’s opinion.

Lee presented the findings of the audit that begins on page 60. There were two significant deficiencies in internal controls. The first deficiency was 2015-001 regarding preparing a financial statement on the student activity funds accounted for in the Department’s web-based accounting system. In preparing the statement of fiduciary net position, total assets should have been accounted for with adjustment for investments that were displayed twice. The total assets were misread and cash was overstated by $1.6 million. The second finding, 2015-002, was regarding the procedures of accounting for completed construction. If construction projects in progress are completed, they must be moved to completed fixed assets. Lee stated that during the audit, a project to update school electronic systems was completed in 2012-2015, but not all assets were recorded as completed until FY 2015. The error resulted in an understatement of accumulated depreciation of $18.8 million and an understatement of fixed assets of $74 million. Fixed assets were adjusted.

Committee Member Jim Williams stated that the report referred to several projects with errors; however, the explanation only spoke of one project with appropriate adjustments made. Lee explained that there were a few projects with errors on a much smaller scale that was below the materiality threshold. Adjustments were unnecessary for those projects.

Committee Chairperson Mizumoto asked Lee to elaborate on the overstatement of the 2015-001 deficiency. Lee stated that there was an overstatement of $1.6 million. Primarily, two columns are used to separately report total investments with cash in the “cash and cash equivalents” column and another column for investments that schools have noted in the system for display. Because not all investments were stated, the Department in the investment column, the Department had an understatement of $0.6 million in investments.

Committee Chairperson Mizumoto asked for a further explanation on the threshold. Chew stated that when discussing materiality, each statement has a materiality threshold. In government-wide financial statements, the materiality is $12 million, which is lowered to $9 million. A difference of $450,000 or less would be considered trivial and would pass, but anything more could warrant adjustments. Chew pointed to page 25 of the report displaying the agency fund and net position reflecting the adjusted amount.

Lee continued on to significant deficiencies on page 62. The Title I program had a compliance requirement identified in the U.S. Office of Management and Budget compliance supplement regarding graduation rate reporting. Any students removed from the graduation rate calculation must still be supported. They looked at 25 students classified as transfers and removed from the rate. Out of this group, one student did not have written documentation to support the transfer. Lee spoke about an additional case where a student transfer was documented, but the database used to calculate the rate was not updated to reflect the student’s new status. Lee stated that these errors could affect the Department’s ability to support all student transfers and could change the graduation rate and priority status of Title I schools.

Committee Chairperson Mizumoto asked if the same deficiencies had been found last year. Lee responded that this was the first year they had found this deficiency. Committee Chairperson Mizumoto asked if a response is expected when recommendations are given. Lawrence stated that page 63 showed a corrective action plan for each of the findings.

Lee stated that management could further explain status of the corrective action plan in detail at a later time. Lee explained that the prior audit findings were on page 69 of the report and shared that there were two deficiencies found last year that had since been corrected. In addition to the findings, there was also the management advisory report.

Committee Member Williams shared his interest in the concept presented in the third bullet on the financial highlights found on page 10. Committee Member Williams stated the bullet states that 94% of funds were expended on school-related activities and asked to what that specifically referred and how it was determined. Lee responded that the Department has its own coding that includes things like school instruction. The auditors rely on the Department’s code but apply their own judgment in ascertaining the reasonableness of the classification.

Committee Vice Chairperson Don Horner pointed out the other 6% of funds included the complex areas as part of administration and not school-related activities and also included technology as a centralized service, as well as utilities. Committee Vice Chairperson Horner asked about the cost of utilities. Lee stated that the cost of utilities is allocated between both percentages depending on if the utilities are used for the schools or for administration. Committee Vice Chairperson Horner stated that the 6% needed to be better understood. Committee Vice Chairperson Horner then asked about the cash position. Lee stated that the Financial Management System (“FMS”) was a Department system, and the Financial Accounting Management Information System (“FAMIS”) was a State system. The two systems had timing differences in recording transactions. Committee Vice Chairperson Horner mentioned the $730 million in cash and $507 million in encumbrances on page 19. Committee Vice Chairperson Horner stated that there is normally a comparison of the numbers provided for the current and previous year and asked what the comparative cash position was. Chew responded that governmental finance statements are more concerned with funds and that he did not have the beginning balance because it was not required to be reflected. Committee Vice Chairperson Horner state that state law allows schools to carry over 5% of funds, but he could not tell how much was carried over and it gives the appearance that schools are hoarding funds.

Committee Member Brian De Lima stated that the remaining balance was not encumbered and the report did not reflect whether those monies belonged to the Weighted Student Formula (“WSF”). Lee stated that report contained financial statements and the audit was not organized to report that information. Committee Member De Lima asked what portion of the unassigned amounts belonged to WSF or other carryovers such as state administration or other EDNs. Lee stated that page 15 had a management discussion and analysis showing that the general funds carryover was $44.9 million at the end of the year. Committee Member De Lima asked if there was an analysis of software that could be done to assist with assurance of monitoring and compliance. Chew stated that implementation of a double check procedure will prevent oversight in the future. Committee Member De Lima asked if there was a way to flag missed statements. Chew stated that the Chief Financial Officer had discussed additional training, and schools were notified that they could be reviewed at any time. Committee Member De Lima stated that an independent audit confirmed the Department’s skilled employees.

Chew stated that the management advisory report was additional information for management to consider.

Committee Chairperson Mizumoto reviewed the findings and comments and asked if findings from the management advisory report would be found in the next year’s report for follow up. Chew confirmed this.

Committee Vice Chairperson Horner referred to the lack of reconciliation of amounts in FMS and FAMIS and asked for elaboration on the difference. Lee stated that the Department is different because it has its own financial management system. The difference ranged from $20,000 to $1.5 million for the eight appropriations shown. Committee Vice Chairperson Horner asked if there was any cash missing. Chew stated that when cash irregularities are discovered, the auditors pause; however, the response from management was timely.

Committee Member Williams clarified that the net was $1.065 million and that items could go either way. Committee Member Williams stated he was concerned that the Department is controlled by FAMIS and will receive fewer funds if the system is showing fewer funds. Lee stated that it would be to the Department’s advantage to reconcile properly to receive full funding.

Chew provided a letter addressed to the Board of Education (“Board”) that summarized the items discussed. State implementation of the new Governmental Accounting Standards Board (“GASB”) standards did not affect the Department. Significant accounting estimates were reviewed. Workers’ compensation was also discussed. Chew stated that there was no difficulty dealing with management in performing the audit. Management decided against recording some information that auditors agreed was not material. The Department did not consult with any other accounting firm for the audit.

Committee Vice Chairperson Horner stated that the P-card gets audited more than anything else and asked how that is put into scope. Lee replied that the P-card was considered a risk area. Chew explained that it was the auditor’s judgment to include it in the scope. N&K also selected the schools for testing school activity funds.

Committee Member Williams asked the Committee if any action was to be taken on the audit report. Committee Vice Chairperson Horner replied that the Board does not take action and just accepts the reports given. Committee Member Williams had been under the impression that there was action to acknowledge the audit reports.

Committee Chairperson Mizumoto stated that if the Committee would like to propose a general recommendation for the Board to accept the report that was a possibility.

Committee Member Williams proposed to amend the agenda to make the action first to include the recommendation for the Board to accept the report. Committee Member De Lima stated that the Board Chairperson could put an action item on the May 17, 2016 General Business Meeting agenda to accept the audit report without a recommendation from the Audit Committee. Committee Member Williams withdrew his original proposed action.

Yoshida reviewed highlights of the IA Quarterly Update report to the Committee. Yoshida informed the Committee that the Information Security Management Review was moved from FY 2016 to FY 2017, and two other projects were moved up to take place its place. Yoshida went over the summary of completed projects and projects currently in progress. She also noted the summary of systemic issues that were found over the past five years in performing the various audits/reviews of the Department. Yoshida continued through to pages 20 through 65, which displayed the reviews with outstanding corrective action plans to the recommendations from past audits/reviews. These are monitored by IA until the corrective action plans are completed, at which time they are no longer included in the report. Yoshida stated that IA follows up with the auditee to obtain the current status of the corrective action plans each quarter to monitor the progress, and this is noted in the quarterly report. If the auditee of the corrective action plan requests three or more extensions, the individual responsible must attend the Audit Committee meeting to explain the reason for the multiple extensions to the Committee.

Committee Chairperson Mizumoto stated that a fourth request for extension is too far down the road and recommended having those requesting a third extension attend the Committee meeting. Committee Chairperson Mizumoto had previously spoken with Yoshida and decided to have groups already in the second extension attend the meeting. Committee Chairperson Mizumoto called on Sandra Goya, Director, Office of Curriculum, Instruction, and Student Support (“OCISS”), and Karl Yoshida, Director, School Process and Analysis Branch, for an explanation to the Committee. Goya and K. Yoshida were working on the corrective action plans for the findings from the Data Integrity Review of student enrollment, a project found on page 56 of the report.

K. Yoshida explained that the enrollment withdraw process and procedures manual had been completed and distributed to schools and made available on the Intranet by April 2015. However, in August 2015, a compliance issue regarding the English language learners (“ELL”) section of the manual was brought to the Department’s attention. After speaking with the Office of the Superintendent, it was concluded that the entire manual would be retracted and reviewed for other compliance issues. The electronic manual was eliminated and the printed manuals were destroyed. K. Yoshida stated that there had been consultation in November 2015 with OCISS regarding a manual review process. He stated that the manual involved review from many different program managers throughout OCISS and coordination takes time.

Goya stated that the issue was originally an inquiry from the district level ELL specialists that triggered a review of that specific section, which was reported and expanded to other programs. Goya stated that many of OCISS programs have provided feedback, and some are crosschecking due to crossover in programs. Goya stated that the Department is committed to finishing the task with necessary updates.

K. Yoshida stated that once the review was concluded, he planned to send the manual to the Deputy Superintendent’s Office, and that if it passes the Deputy’s review, it would go to the Department of the Attorney General (“AG”).

Committee Member De Lima expressed his frustration at the amount of time taken to complete a task that needs to be done. Committee Member De Lima stated that the task was important and therefore should be completely in a timely manner. Committee Member De Lima believed that the project would need another extension to await response from the AG.

Committee Chairperson Mizumoto stated that there would not be enough time to hear from everyone invited to the meeting. However, Chairperson Mizumoto stated that audit findings will be taken seriously, and the Committee will hear from the remainder of the groups at the next Audit Committee Meeting.

V. Adjournment

Committee Chairperson Mizumoto adjourned the meeting at 10:10 a.m.