News Story

State Oversight Fails As Auditors Scorch Detroit Schools’ Accounting

Lawmakers said oversight provisions of 2016 state bailout would prevent such failures

Editor's note: A Detroit Public Schools Community District spokeswoman responded after this story was published. Here's the comment from DPSCD:

"These findings are related to legacy of emergency management under the former Detroit Public Schools , not the DPSCD. District auditors, Plante Moran, completed and submitted the DPSCD audit by the November 1st deadline. District staff are responsible for the completion of the audits for both districts now. Upon completion of the DPSCD audit staff began working on the DPS audit which was completed and submitted in January, 2019. Detroit Public Schools Community District reduced the number of audit findings from six to two during the 2018 audit. The District has continued to implement financial processes to eliminate the final two audit findings."

Within three years of state lawmakers approving a $617 million bailout for Detroit’s public school district, it was rebuked by the accounting firm that audits its books for failing to have basic accounting controls and processes in place.

The auditor cited shortcomings that include, among other things, improperly recorded transactions, misclassified balances and unrecorded transactions. Audit notes stated that general account ledger balances were inaccurate throughout the year and that some reports submitted to management and the Board of Education “may have been misstated.”

In one instance, Plante & Moran discovered that the school district overpaid a contractor by $94,640.

“The School District does not have proper controls in place to ensure that the cost of services being charged to grants is supported by proper documentation substantiating that services are performed and bill in accordance with the terms and conditions of approved contracts,” the auditing firm stated.

The auditors said they believe the problems arose because the district did not put adequate resources into key accounting functions.

As part of the 2016 bailout, the school district was split into two separate entities, a Detroit Public Schools Community District (DPSCD) to run the schools, and a Detroit Public Schools (DPS) that exists only to collect current property tax levies and pay off debt accumulated in the past.

Auditors cited both entities for numerous failures and shortcomings in their accounting procedures.

“The School District did not have the necessary resources to properly record transaction entries throughout the year or during the year-end closing process,” the audit stated. “As a result, various account reconciliations of the School District’s financial records were not performed timely during the year, which led to significant adjustments during the audit process. Adjustments were also required during the audit to correctly record various transition between the two entities continued.”

The Detroit Public Schools did not meet the Nov. 1 deadline to submit its financial audit. The Detroit Public Schools Community District also did meet the deadline for its financial audit.

The accounting issues come to light at a time when a locally elected school board has been operating the schools under a Financial Review Commission chaired by the director of the state Department of Treasury.

The state created the commission in 2014 to oversee the city of Detroit’s finances as part of its own bailout. Its oversight was extended to the Detroit school district’s finances when the state authorized its bailout in 2016. When state lawmakers created the commission in 2014, they said it would prevent problems like those described by the school district auditors.

Republican John Walsh, who sponsored the bill creating the oversight commission, was quoted by the Gongwer Michigan Report at the time saying, “It all has to do with oversight. ...” Then-House Minority Leader Tim Greimel said about the provision, “It puts in place appropriate safeguards and oversight to try to make sure that Detroit doesn't end up in the difficult financial conditions that they have been in.”

The auditing firm’s criticism of the school district’s accounting systems and processes comes just two years after the U.S. Department of Justice filed criminal charges against 12 current and former Detroit Public Schools principals and an assistant superintendent in an illegal bribery and kickback scheme. The Department of Justice reported the kickback scheme went on from 2002 to 2015 and the school employees made $908,518 off it.

Preventing and minimizing such abuses is one function of an accounting system. “Government officials can’t steal thousands unless they first mismanage millions,” said James Hohman, director of fiscal policy at the Mackinac Center for Public Policy.

Plante & Moran issued its findings in January, and its notes on the accounting system shortcomings were published in the audited financial reports of Detroit Public Schools and the Detroit Public Schools Community District. The audit stated that the seven-member Detroit school board and the Department of Treasury’s Financial Review Commission both provide oversight over the districts finances.

The Plante & Moran audit stated that the school district agreed with the criticism and worked to improve its procedures. That included hiring more people to work in the accounting and accounts payable departments.

The state Department of Treasury deferred to the school district on questions about the audit and auditors’ notes. The Detroit school district’s board did not respond to an email seeking comment. The Detroit Public School Community District also didn't reply to an email seeking comment.

The current members of the state Financial Review Commission given the task of overseeing the post-bailout finances of both the city of Detroit and Detroit schools are as follows:

Rachael Eubanks, state treasurer,

Mike Duggan, mayor of Detroit,

Nikolai Vitti, superintendent of Detroit Public Schools Community District,

Stacy Fox, founder and principal of the Roxbury Group investment firm,

Chris Kolb, state budget director,

Brenda Jones, president of the Detroit City Council,

Iris Taylor, president of the Detroit Public Schools Community District Board of Education,

David Nicholson, CEO of PVS Chemical Manufacturing Group,

Ike McKinnon, associate professor of education at the University of Detroit Mercy,

Ron Rose, retired partner at the Dykema Gossett law firm,

John Walsh, former state budget director.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.