Financial Management Practices Performance Audit Report

Montgomery County Public Schools

January 2009

OFFICE OF LEGISLATIVE AUDITS

DEPARTMENT OF LEGISLATIVE SERVICES
MARYLAND GENERAL ASSEMBLY
• This report and any related follow-up correspondence are available to the public through
the Office of Legislative Audits at 301 West Preston Street, Room 1202, Baltimore,
Maryland 21201. The Office may be contacted by telephone at 410-946-5900, 301-970-
5900, or 1-877-486-9964.

• Electronic copies of our audit reports can be viewed or downloaded from our website at
http://www.ola.state.md.us.

• Alternate formats may be requested through the Maryland Relay Service at 1-800-735-
2258.

• The Department of Legislative Services – Office of the Executive Director, 90 State Circle,
Annapolis, Maryland 21401 can also assist you in obtaining copies of our reports and
related correspondence. The Department may be contacted by telephone at 410-946-
5400 or 301-970-5400.
 January 15, 2009

Delegate Steven J. DeBoy, Sr., Co-Chair, Joint Audit Committee

Senator Verna L. Jones, Co-Chair, Joint Audit Committee
Members of Joint Audit Committee
Annapolis, Maryland

Ladies and Gentlemen:

We conducted an audit of the financial management practices of the Montgomery

County Public Schools (MCPS) in accordance with the requirements of the State
Government Article, Section 2-1220(e) of the Annotated Code of Maryland. MCPS is
the largest public school system in Maryland based on the number of students
enrolled. The educational services are delivered in 199 schools, with fiscal year
2007 expenditures of $2.19 billion. The objectives of this audit were to evaluate
whether MCPS procedures and controls were effective in accounting for and
safeguarding its assets and whether its policies provided for the efficient use of
financial resources.

Our audit disclosed that, in many cases, MCPS had procedures and controls in place
to ensure the safeguarding of assets and the efficient use of financial resources.
Nevertheless, our report contains 19 recommendations to MCPS to enhance controls
in its existing financial management systems and processes in such areas as payroll,
accounts receivable, and credit cards. For example, management should ensure that
access to human resources and payroll information is adequately restricted and any
related changes are reviewed for propriety, and that all purchasing card transactions
are properly recorded, reviewed, and approved. MCPS also needs to ensure that
certain industry best practices are used when implementing new IT applications,
automated bus routing software is fully used, equipment records are accurate and
complete, and health care costs are verified.

An Executive Summary of our findings can be found on page i, immediately following

this cover letter, and our audit scope, objectives, and methodology are explained on
page 65. We wish to acknowledge the cooperation extended to us during our audit
by MCPS.

Respectfully submitted,

Bruce A. Myers, CPA

Legislative Auditor
Executive Summary
The Office of Legislative Audits has conducted an audit to
evaluate the effectiveness and efficiency of the financial
management practices of the Montgomery County Public
Schools (MCPS) in accordance with the State Government
Article, Section 2-1220(e) of the Annotated Code of Maryland.
State law requires the Office to conduct such an audit of each of
the 24 public school systems in Maryland and provides that the
related audit process be approved by the Joint Audit Committee.
Since the Committee approved the audit process in September
2004, we have issued audit reports related to 13 school
systems; MCPS represents the fourteenth to date. The approved
process included 11 areas to be audited at each system. The
following are summaries of the findings in these areas at MCPS.

Revenue and Billing Cycle (see pages 9 through 13)

According to the audited MCPS financial statements, $2.17
billion in revenue was received from all sources during fiscal
year 2007, the vast majority of which was received via electronic
fund transfers from other governmental entities. Procedures
and controls for these revenue sources and accounts receivable
were found to be adequate. However, based on our audit,
controls over certain other revenues received could be
improved. These revenues totaled $8.8 million during fiscal year
2007. In addition, controls over accounts receivable, which had
a balance of $9 million as of June 30, 2007, and related
collections should be improved.

Federal Funds (see pages 15 through 17)

Annually, MCPS is subject to an audit of its federally-funded
programs (often referred to as the Single Audit, and required by
Circular A-133, which is issued by the U.S. Office of Management
and Budget). Due to parallels between that work and the scope
of our audit, we placed significant reliance on the results of the
independent audit of the fiscal year 2007 grant activity, for
which reported expenditures totaled $89 million. The related
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 report stated that MCPS complied, in all material respects, with
the requirements applicable to its major federal programs. In
addition, with respect to internal controls over compliance with
and the operation of major federal programs, the auditors noted
no significant deficiencies and no matters considered to be
material weaknesses.

Although MCPS has an adequate process for the identification of

children eligible for Medicaid-subsidized services, additional
measures could be taken to ensure that MCPS recovers all such
costs and that payments to the third party administrator, which
processes the claims, are accurate.

Procurement and Disbursement Cycle (see pages 19

through 23)

According to MCPS records, non-payroll disbursements totaled

$938 million during fiscal year 2007. MCPS used a number of
contract procurement best practices and had established
adequate controls over its automated purchasing and invoice
processing systems. However, MCPS needs to improve controls
and policies governing the use of credit cards and travel. For
example, new MCPS credit cards were sent directly to the
employee who placed the card order with the bank rather than
to an independent employee. Also, certain credit cards
purchases were not logged nor subject to supervisory review.

Human Resources and Payroll (see pages 25 through

28)

MCPS employed about 20,350 employees as of October 2007

and payroll costs during fiscal year 2007 totaled $1.25 billion
(not including benefits). MCPS had implemented a
comprehensive workforce planning process to address its
staffing needs. MCPS should address certain deficiencies within
payroll processing. Specifically, certain MCPS personnel had
unnecessary and excessive access capabilities on the MCPS
human resources and payroll system, and certain transactions
processed on the system were not subject to supervisory review.

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Inventory Control and Accountability (see pages 29
through 31)

MCPS has formal policies governing the control and

accountability of materials and supplies and property. However,
MCPS did not utilize just-in-time ordering for materials and
supplies. In addition, record keeping for equipment was not
adequate. According to MCPS records, as of June 30, 2007, the
book value of its capital totaled $64 million.

Information Technology Services (see pages 33

through 38)

MCPS maintains and administers a computer network, computer

operations, and a number of significant financial and academic
information system applications. MCPS developed and
periodically updated written technology plans. However, we
identified several areas in need of improvement, including the
strengthening of policies over passwords and accounts. In
addition, MCPS should ensure that it uses best practices when
implementing new IT applications and determine if it would be
more beneficial to use in-house resources for certain support
services (such as ongoing maintenance) that it currently
outsources.

Facilities Construction, Renovation, and

Maintenance (see pages 39 through 44)
MCPS maintains 199 schools and a number of other
administrative and support facilities with a staff of approximately
1,650 custodial and maintenance personnel. MCPS had
implemented a number of best practices to help reduce
construction and maintenance costs for its facilities, such as a
comprehensive process to plan for construction and renovations
and an energy management program.

While long-term planning included factors such as student

population and age of facilities, it did not include periodic
assessments of school facilities and major mechanical systems
(such as HVAC). In addition, while MCPS used an automated
work order system to track maintenance and repairs performed,

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 it did not use the system to compare actual costs to
predetermined estimates or to analyze employee productivity.
Furthermore, preventive maintenance tasks performed were not
adequately documented.

Transportation Services (see pages 45 through 49)

MCPS is responsible for the safe transportation of approximately
96,000 eligible students, of which five percent are disabled.
MCPS used a number of recognized best practices to increase
student transportation efficiency, such as staggering school
arrival and dismissal times to enable certain buses to perform
multiple runs. Nevertheless, MCPS should address all
appropriate factors to properly plan and develop bus routes (for
example, student ride times and bus capacities) and fully use its
automated bus routing software. Furthermore, MCPS should
implement adequate controls over billings and collections of
fees charged for transportation services provided to non-MCPS
entities, such as county recreational programs.

Food Services Operations (see pages 51 through 54)

MCPS had implemented a number of best practices to help
reduce food service costs, such as preparing meals for all
schools at a central location and using performance measures
to gauge operational efficiency. MCPS also has adequate
procedures in place to identify students eligible for free and
reduced-price meals under the federal national school meals
programs. However, MCPS needs to improve the controls over
processing of cash receipts in the cafeterias.

School Board Operations and Oversight (see pages

55 through 59)

Oversight of MCPS operations included the seven-member

Board receiving financial updates, such as monthly budget
variances to assist it in monitoring the efficient use of funds.
The Board is also extensively involved in a comprehensive
budgeting process and has adopted a detailed ethics policy.
Furthermore, MCPS has an active audit committee and an
internal audit unit, engaged primarily in conducting audits of
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 student activity funds. However, several opportunities exist for
the Board to improve oversight and effectiveness of MCPS
operations. For example, the Board should consider focusing
the work performed by its internal auditor on auditing significant
MCPS operations and establishing a confidential hotline and
whistleblower policy.

Other Financial Controls (see pages 61 through 63)

While MCPS had procedures in place to govern its risk and
certain cash management practices, it did not have written
policies governing its use of long-term liabilities, such as capital
lease agreements, or cash management policies for investing
excess funds from routine operations. In addition, MCPS should
take additional steps to ensure it controls health care costs,
such as by verifying the eligibility of program participants and
conducting audits of paid claims.

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Table of Contents
Executive Summary i

Background Information 7

Oversight 7

Statistical Overview 7

External Audits of Fiscal Year 2007 Activity 8

Chapter 1: Revenue and Billing Cycle 9

Background 10

Revenue and Billing Cycle Activity Was Generally Adequate 11

Controls Over Funds Received at Various Locations Need to Be 11

Improved

Controls Over Certain Accounts Receivable and Related Collections 12

Should Be Improved

Recommendations 13

Chapter 2: Federal Funds 15

Background 16

MCPS Established Adequate Internal Controls Over Federal Grants 16

and Complied with Federal Grant Requirements

Improvements Should Be Made to Ensure All Costs for 16

Medicaid-Subsidized Services Are Recovered

Available Funding Was Obtained from the Federal E-Rate Program 17

Recommendation 17

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 Table of Contents
Chapter 3: Procurement and Disbursement Cycle 19

Background 19

MCPS Used Several Best Practices to Address Its Procurement 20

Needs

MCPS Had Established Adequate Controls Over Its Automated 20

Purchasing and Invoice Processing Applications

Documentation and Processes Related to Credit Cards Need 21

Improvement

MCPS Should Ensure that All Employees Comply with Existing Travel 23
Policies

Recommendations 23

Chapter 4: Human Resources and Payroll 25

Background 25

Workforce Planning Addressed Future Critical Needs 26

Human Resources and Payroll Internal Controls Need to Be 27

Strengthened

Recommendation 28

Chapter 5: Inventory Control and Accountability 29

Background 29

Formal Textbook Procedures Have Been Established 30

Modifications to the Current Inventory Ordering Process 30

Could Improve Operating Efficiency

Existing Controls Over Equipment and the Related Record- 30

keeping Should Be Improved

Recommendations 31

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Table of Contents
Chapter 6: Information Technology Services 33

Background 33

Technology Plans Were Developed to Address Current and Future 34

Needs of MCPS

Data Processing Functions Should Be Better Safeguarded 34

MCPS Should Use Additional Recognized Best Practices for System 35

Development

Costs and Benefits of Outsourcing IT Maintenance and Implementation 37

Need to Be Evaluated

Recommendations 38

Chapter 7: Facilities Construction, Renovation, and Maintenance 39

Background 40

A Number of Best Practices Were in Place to Enhance the Effectiveness 41

of the MCPS Facility Construction and Maintenance Department

Long-Term Planning Processes Could Be Improved 41

The Work Order System Should Be Fully Used 43

Recommendations 44

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Table of Contents
Chapter 8: Transportation Services 45

Background 45

Several Best Practices Were in Place to Enhance Bus Route 46

Efficiency and to Control Related Costs

Policies and Practices for Planning and Revising Bus Routes 47

Should Be Enhanced

Controls Over Transportation-Related Accounts Receivable Should 48

Be Improved

Recommendations 49

Chapter 9: Food Services Operations 51

Background 51

Certain Best Practices Were in Place 53

Controls Over Food Service Cash Operations Need Improvement 54

Recommendation 54

Chapter 10: School Board Operations and Oversight 55

Background 55

Certain Oversight Had Been Put in Place Regarding MCPS Operations 56

The Board Should Consider Additional Steps to Assist It in Governing MCPS 57

Recommendation 59

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Table of Contents
Chapter 11: Other Financial Controls 61

Risk Management Best Practices Were in Place 61

Capital Lease and Cash Management Policies Need to Be 62

Established

MCPS Should Take Additional Steps to Control Health Care Costs 62

Recommendations 63

Audit Scope, Objectives, and Methodology 65

Response of Montgomery County Public Schools Appendix

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6 Office of
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Background Information
Oversight
Montgomery County Public Schools (MCPS) is governed by a local
school board, consisting of seven elected voting members and a
student representative. The vast majority of MCPS funding is
provided by the Montgomery County and State governments. In
addition, the Maryland State Department of Education (MSDE)
exercises considerable oversight through the establishment and
monitoring of various financial and academic policies and
regulations, in accordance with certain provisions of the Annotated
Code of Maryland. MSDE also works with MCPS to comply with the
requirements and mandates of the federal No Child Left Behind Act
of 2001. Oversight by the Montgomery County government is
limited, although the MCPS annual operational and capital budgets
require County approval.

Statistical Overview
According to MSDE student enrollment records, MCPS has the
highest student enrollment among the 24 public school systems in
Maryland. From fiscal year 1998 to 2007, the average annual full-
time regular and special education pupil population has increased
15 percent from 119,843 to 137,727, with MSDE projecting further
increases to an enrollment of 145,340 in 2016. Presently, MCPS
has 199 schools and a number of other facilities (including
alternative schools and administrative facilities). A review of the
budget history for fiscal year 1998 to 2007 disclosed an increase in
the MCPS total operating expenditures from $1.15 billion in fiscal
year 1998 to $2.19 billion in fiscal year 2007. Salaries and wages,
excluding benefits, accounted for 58 percent of the fiscal year 2007
expenditures, which supported 20,346 full-time positions (13,548
instructional and 6,798 non-instructional).1

1
The primary source for this background data is MSDE statistical data, including
the annual Fact Book.

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 Certain statistical information contained in this report was taken
from unaudited reports distributed by MSDE and represents the
most current comparable information available at the time of our
audit. These MSDE reports are based on self-reported data from
the 24 Maryland public school systems, and MSDE does not warrant
the comparability or completeness of the data.

External Audit of Fiscal Year 2007 Activity

Annually, MCPS engages a certified public accounting firm to
independently audit its fiscal year end financial statements.
Additionally, the auditor conducts what is referred to as a Single
Audit of MCPS federal grant programs (as required by federal
regulations). The two resulting audit reports for the 2007 fiscal year
were issued in September 2007. Neither report disclosed any
material weaknesses or significant deficiencies on MCPS record
keeping, processes, and controls.

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 Chapter 1

Revenue and Billing Cycle

According to the MCPS audited financial statements for the fiscal
year ended June 30, 2007, $2.17 billion of revenue was received by
MCPS during fiscal year 2007. Due to similarities between the work
of the independent certified public accounting firm that audited
MCPS financial statements and the scope of our audit in this area,
we place significant reliance on the results of the external audit of
revenues and certain accounts receivable (for example, amounts
due from other governments). The firm’s procedural review and
testing disclosed that collection activity for the most significant
revenue types, the majority of which was received via electronic
fund transfers from other government entities, and related accounts
receivable was adequate.

However, MCPS should improve controls over certain revenues

received by the central accounting office. MCPS should also
improve controls over the billing and related collections of certain
accounts receivable.

For school activity funds2, we placed significant reliance on audits of

these funds by MCPS’ Internal Audit Unit. The MCPS internal
auditor conducts audits of school activity funds. The internal
auditor’s review and testing of the school activity funds at MCPS
schools identified some control weaknesses at certain schools.
However, the control weaknesses identified did not appear to be
prevalent and were appropriately addressed by school
management. In addition, MCPS’ external auditor performed
procedural reviews and testing of student activity funds in
2
The Board has a fiduciary responsibility to ensure that the school activity fund is
used only for intended purposes by those to whom the assets belong. Receipts
for the school activity fund, which totaled $38.2 million during fiscal year 2007,
are not included in the $2.17 billion revenue total because the Board cannot use
these assets to finance its operations.

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 conjunction with its fiscal year 2007 audit. The audit disclosed no
material control weaknesses or accounting errors related to these
funds.

Background
MCPS revenues consist primarily of funds received from
Montgomery County, the State, and the federal government, the
vast majority of which were received via electronic funds transfer.
Other sources include federal grant funds, receipts from the sale of
food, facility use reimbursement fees, and interest income. Chart 1
(below) shows MCPS fiscal year 2007 revenues of $2.17 billion by
major source.

Chart 1
Sources of Fiscal Year 2007 Revenue
(2.17 Billion)
Federal
$92,958,913 
4%
State of 
Maryland
$475,968,336
22%

Other
$38,064,050 
2%

Montgomery 
County
$1,558,647,046 
72%

Source: MCPS fiscal year 2007 audited financial statements

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 In addition to the revenues in Chart 1, schools also collected funds
for various purposes, such as for student activity groups including
yearbook and band. These school activity funds are accounted for
separately by each school and are reported, in summary, in the
audited financial statements. According to the audited financial
statements, fiscal year 2007 school activity fund revenues totaled
$38.2 million, and the June 30, 2007 balance was $16.3 million.

Revenue and Billing Cycle Activity Was Generally

Adequate
Due to similarities between the work of the accounting firm that
audited the MCPS financial statements and the scope of our audit
in this area, we placed reliance on the results of the independent
audit. The auditor’s procedural review and testing disclosed that
collection activity for significant revenue types (local, State, and
federal aid, plus other sources, such as food service operations),
the majority of which was received via electronic fund transfers, and
related accounts receivable was adequate.

In addition, MCPS’ external auditor performed procedural reviews

and testing of student activity funds in conjunction with its fiscal
year 2007 audit. The audit disclosed no material control
weaknesses or accounting errors related to these funds. Finally,
school activity funds were also subject to periodic audit by MCPS
internal auditors. The internal auditor’s review and testing of the
school activity funds at MCPS schools identified some control
weaknesses at certain schools. However, the control weaknesses
identified did not appear to be prevalent and were appropriately
addressed by school management.

Controls Over Funds Received at Various Locations

Need to Be Improved
Controls over certain receipts received by other departments, and
subsequently processed and deposited by the Controller’s Office,
were not adequate. Cash and check receipts received by other
units and deposited in this manner totaled $8.8 million during fiscal
year 2008. While MCPS had established cash receipts procedures,
those procedures did not include how funds received by other
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 locations should be handled (such as recording receipts and
forwarding them for deposit in a timely manner to the Controller’s
Office). Consequently, we noted the following:

• Cash receipts were not recorded when initially received by other

locations to establish immediate accountability over receipts. As
a result, MCPS lacked assurance that all receipts received by
these locations were subsequently deposited.

• The transfer of funds from the receiving department to the

Controller’s Office was not consistently documented to establish
accountability for the funds, and neither the departments nor
the Office had assurance that all amounts received were
deposited.

• Checks received by other locations were not restrictively

endorsed ‘for deposit only’ until they were received by the
Controller’s Office.

Controls Over Certain Accounts Receivable and

Related Collections Should Be Improved
Controls over accounts receivable (such as for nonresident tuition,
facilities rentals, and field trips) and the related collections
processed by the central accounting office need to be improved.
According to MCPS records, this accounts receivable balance
totaled approximately $9 million as of June 30, 2007, of which $1.7
million was more than 90 days old. We noted that MCPS did not
have written policies and procedures governing this activity. In
addition, the following was noted:

• The employee who maintained the accounts receivable records

also had access to the related cash receipts.

• Non-cash credits, which totaled approximately $2.8 million

during fiscal year 2007, were not reviewed and approved by
independent supervisory personnel. Although we were advised
that most adjustments to accounts receivable were reviewed
and approved, the employee who approved the adjustments

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 also had the ability to process such adjustments. In addition,
approvals were not documented.

• MCPS did not have a formal debt collection policy. Specifically,

while the department that authorized the invoice contacted the
debtor, MCPS had not established procedures that provided for
follow-up notices on unpaid accounts to be sent at
predetermined intervals. In addition, although MCPS used a
collection agency to collect past due accounts, MCPS had not
established procedures to determine when an account should
be considered delinquent and forwarded to the collection
agency. In this regard, as of January 2008, no accounts had
been forwarded to the agency since November 2006. Our test
of 10 accounts totaling $89,000, outstanding at least 120 days
as of January 2008, disclosed that, for 4 accounts totaling
$43,500, MCPS could not provide any documentation of
collection efforts (such as late notices or referral to the
collection agency). For four other accounts, although MCPS had
forwarded the account to the collection agency, there was no
documentation that MCPS had attempted to collect the amount
due prior to referring the account.

Recommendations
1. MCPS should establish procedures for collections received at
locations other than the Controller’s Office to ensure that these
funds are accounted for. Such procedures should include
initially recording collections and restrictively endorsing checks
immediately upon receipt, and documenting transfers from the
receiving departments.

2. MCPS should develop policies and procedures governing

accounts receivable, including a formal debt collection policy.
The policies and procedures should address the proper
separation of duties and progressive collections steps to be
performed to pursue outstanding accounts. In addition, non-
cash credit adjustments should be approved by independent
supervisory personnel.

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Chapter 2

Federal Funds
Annually, MCPS is subject to an audit of its federally-funded grant
programs (often referred to as the Single Audit, and required by
Circular A-133, which is issued by the U.S. Office of Management
and Budget). The report on the audit of fiscal year 2007 federal
grant activity was issued by an independent certified public
accounting firm on September 26, 2007.

In that report, the auditor stated that MCPS complied, in all material
respects, with the requirements applicable to its major federal grant
programs. In addition, with respect to internal controls over
compliance with and the operation of major federal programs, the
auditors noted no significant deficiencies3 and no matters
considered to be material weaknesses4.

MCPS has a process in place to identify children eligible for

Medicaid-subsidized5 services and to recover the related costs.
However, MCPS did not monitor the third party claims administrator
to ensure that the vendor properly submitted for reimbursement all
claims for services provided and that the vendor’s billings for its
services were accurate.

MCPS applied for and obtained available funding under the federal
E-Rate program.

3
Significant deficiencies are control deficiencies that adversely affect the entity’s
ability to initiate, authorize, record, process, or report financial data reliably in
accordance with generally accepted accounting principles such that there is
more than a remote likelihood that a misstatement of the entity’s financial
statements that is more than inconsequential will not be prevented or detected.
4
Material weaknesses are significant deficiencies that result in more than a
remote likelihood that a material misstatement of the financial statements will
not be prevented or detected.
5
The Federal Medical Assistance Program, or Medicaid, is not a grant program
under Circular A-133 and is not included in the Single Audit.

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Background
MCPS receives funds primarily from Montgomery County, the State,
and the federal government. Most funds received from Montgomery
County and the State are unrestricted; however, federal funds are
generally restricted for use for a specified program (such as the
School Lunch Program or Special Education). According to the
audited Schedule of Federal Awards, fiscal year 2007 expenditures
of federal award funds totaled $89 million.

MCPS Established Adequate Internal Controls Over

Federal Grants and Complied with Federal Grant
Requirements
Because of the accounting firm’s work on MCPS federal fund
expenditures, we relied on the auditor’s results. Besides expressing
an opinion on MCPS compliance with the terms of several grant
programs, the auditor also considered the existing internal control
structure’s impact on compliance and audited the fiscal year 2007
required Schedule of Federal Awards (which includes claimed and
reported grant-related expenditures). In its report, the firm stated
that MCPS complied, in all material respects, with the requirements
applicable to its major federal grant programs. In addition, with
respect to internal controls over compliance with and the operation
of major federal programs, the auditors noted no significant
deficiencies and no matters considered to be material weaknesses.

Improvements Should Be Made to Ensure All Costs

for Medicaid-Subsidized Services Are Recovered
Although MCPS had adequate processes in place to identify
students eligible for Medicaid-subsidized services (for example, it
made use of listings of all children whose families are participating
in Medicaid as determined by the Department of Human Resources
and conducted outreach to families using the MCPS website), our
review disclosed certain deficiencies. Specifically, MCPS did not
ensure that its third party administrator was remitting claims
information for all eligible services to the State Department of

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 Health and Mental Hygiene (DHMH) for Medicaid reimbursement,
and that fees paid to this administrator were accurate.

While the third party administrator compiled individual claim forms

prepared by MCPS schools and submitted this data in an approved
format so that MCPS could be reimbursed, MCPS did not verify that
claim information submitted to DHMH was accurate and complete.
As a result, MCPS may not be recovering the maximum amount of
costs associated with provided Medicaid-subsidized services. In
addition, while the third party administrator was paid based on the
number of claims submitted, MCPS did not ensure that invoices
received from this administrator for its services accurately reflected
the number of claims actually submitted to DHMH.

According to MCPS records, as of June 30, 2007, approximately

2,800 students were eligible and receiving these services. Those
records also indicate that, in fiscal year 2007, MCPS received
approximately $4.4 million in recovered costs for Medicaid claims
and paid the third party administrator approximately $160,000 for
its services.

Available Funding Was Obtained from the Federal E-

Rate Program
MCPS has a process in place to request and receive reimbursement
for technology expenditures from the federal School and Libraries
Universal Service Program (E-Rate). The E-Rate program provides
funding to schools for telecommunications expenses (such as
Internet access). The funding is based on the level of poverty and
the rural status of the school district. MCPS received approximately
$1.7 million of E-Rate funds for fiscal year 2007.

Recommendation
3. MCPS should ensure that all costs associated with providing
Medicaid-subsidized services are recovered by verifying, at least
on a test basis, the accuracy and completeness of claims
submitted by the third party administrator. MCPS should also
verify that billings received from the third party administrator are
accurate.

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 Chapter 3

Procurement and Disbursement Cycle

MCPS followed certain procurement best practices such as
purchasing items through contracts already procured by the State
and other local governments (referred to as “piggybacking”) when it
is beneficial to do so. In addition, MCPS had established adequate
controls over its automated purchasing and invoice processing
systems. However, we found that processes over credit cards need
to be strengthened. Specifically, our review disclosed significant
weaknesses in internal controls over the procurement card
program. These weaknesses included (1) a lack of monitoring over
card usage and credit limits, (2) the employee who requested the
procurement cards also initially received the cards from the vendor
and (3) employees did not always complete card transaction logs,
and other logs were not reviewed and approved. We also noted
certain potentially questionable credit card purchases. Finally, for
certain employees, travel was not approved in advance, as required
by MCPS policy.

Background
MCPS uses an automated system for procurements and
disbursements. Requisitions are prepared electronically by
departments and are forwarded to the purchasing department.
Requisitions must be approved by supervisory personnel within the
requesting department. Based on the requisition, the centralized
purchasing office will solicit bids and award the contracts. Purchase
orders are created in the automated system based on the vendor
selected in the bid process. Purchases anticipated to cost more
than $7,500 require bids from multiple vendors. Board policy
requires that all contracts over $25,000 are to be approved by the
Board.

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 The receipt of goods and services are recorded in the automated
system or on hardcopy documentation by the receiving school or
department and payments are processed by the finance office using
the automated system after appropriate matching of original
invoices to purchase orders and receiving documents. According to
MCPS records, non-payroll disbursements totaled $938 million in
fiscal year 2007.

During fiscal year 2007, MCPS records indicated that its employees
used credit cards to make a total of $5.6 million in purchases
(including textbook purchases). According to MCPS records, during
fiscal year 2007, 1,209 employees used credit cards with the
monthly charges being paid directly by the school system to the
credit card bank.

MCPS Used Several Best Practices to Address Its

Procurement Needs
MCPS had instituted certain best practices that should enhance the
cost effectiveness of its procurements. These include
“piggybacking” onto contracts already procured by the State and
other local governments, and participating in cooperative
purchasing organizations. These practices save MCPS certain costs
associated with the procurement of the contracts and may provide
larger discounts as a result of the combined purchasing power of
multiple entities.

MCPS Had Established Adequate Controls Over its

Automated Purchasing and Invoice Processing
Systems
MCPS had established adequate controls over its automated
purchasing and invoice processing systems. Specifically, electronic
approvals were established over purchase requisitions and invoice
payments to prevent one individual from creating and approving
purchases or approving the payment of invoices. In addition, MCPS
had written policies and procedures for the procurement of goods
and services and the disbursement of funds. Also, our tests

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 disclosed that bids were obtained when necessary, the lowest
acceptable bid was selected and awards were properly
documented.

Documentation and Processes Related to Credit

Cards Need Improvement
MCPS should improve controls and monitoring over credit
cards – Although MCPS had developed policies and procedures to
help ensure the proper usage of its credit cards, our review
disclosed certain deficiencies. Specifically, our tests of controls
disclosed the following conditions:

• The duties over the ordering and initial receipt of credit cards
from the bank were not adequately segregated. The individual
responsible for ordering new credit cards also initially received
these cards from the issuing bank prior to their distribution to
MCPS personnel named on the cards. This condition could allow
unauthorized purchases to be made on improperly obtained
cards. Although this individual had been issued two credit cards
and made purchases totaling $9,800 in calendar year 2007, our
review indicated that the purchases appeared to be for
appropriate school business.

• Although MCPS periodically determined the continued need for

cards (based on surveying cardholder supervisors), MCPS did
not evaluate the need for cards based on actual usage or the
adequacy of card spending limits to reduce exposure and risk of
inappropriate charges. For example, our test of usage disclosed
that, for 15 cards with monthly credit limits of $20,000 or
greater, total transactions for 6 cards never exceeded 10
percent of the assigned credit limit in any month of calendar
year 2007, and 2 cards were never used. In addition, nine of
these cards had single transaction limits exceeding $7,500,
MCPS’ threshold for obtaining competitive bids.

• MCPS did not ensure that credit card documentation was

maintained that adequately supports all purchases and
establishes proper supervisory review of every transaction. Our
review of 161 calendar year 2007 transactions totaling $55,000
disclosed that 50 transactions totaling $22,800, applicable to 9

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 cardholders, were not included on transaction logs for
subsequent review.

Of the remaining 111 transactions, there was no documented

approval on the logs pertaining to 41 transactions (applicable to
6 cardholders) to indicate a supervisory review and approval of
the related charges. MCPS policy requires that cardholders
record all purchasing card transactions on a monthly transaction
log and that supervisors review and approve the logs and related
documentation in a timely manner.

Credit card activity should be more closely monitored to

verify appropriate use – Certain controls were not in place to
ensure that MCPS employees used procurement cards to make
appropriate purchases. Specifically, we noted the following
conditions:

• MCPS policy over procurement card use did not specifically

address the permissibility of certain categories of transactions.
For example, our review of fiscal year 2007 credit card
purchases identified 512 purchases totaling $39,400 from
vendors that did not appear to have an obvious relationship with
the mission of MCPS. Based on documentation available, we
could not determine the propriety of these transactions, nor did
the credit card manual provide any guidance as to the validity of
such purchases. For example, we noted 119 purchases totaling
$8,290 from department stores and 121 purchases totaling
$5,571 from party supply stores.

• Our review disclosed that, during calendar year 2007, 10

different schools made purchases of food for meetings in excess
of approved limits without obtaining the required approval of the
Chief Operating Officer. For example, one school spent a total of
$21,000 on food (using credit cards) without obtaining such
approval. The MCPS Independent Activity Fund Manual sets
dollar limits on food transactions (such as $4,200 per year for a
high school) that can be purchased by schools-based personnel
without the prior approval of the Chief Operating Officer.

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MCPS Should Ensure that All Employees Comply with
Existing Travel Policies
MCPS has established adequate policies and procedures designed
to control travel expenditures. These policies define the conditions
under which employees may be reimbursed for travel, including the
requirement that all travel be approved in advance by appropriate
supervisory personnel. However, the policies and procedures did
not establish adequate controls over travel expenditures charged on
credit cards. Approximately 26 individuals (that is, upper
management employees and Board members) had been issued
credit cards that did not have travel-related restrictions, such as for
air fare and hotel accommodations. Use of credit cards for travel
expenditures may allow cardholders to incur such expenditures
without obtaining advance approval, as required by MCPS
regulations. Our tests of 32 calendar year 2007 travel expenditures
charged to credit cards totaling $19,028 disclosed 30 expenditures
totaling $17,930 that were not recorded on monthly activity logs
and, therefore, were never approved. In addition, no documentation
could be located to support 10 meal expenditures totaling $2,172
that were recorded on credit card statements. According to MCPS
records, during fiscal year 2007, travel expenditures totaled $2.5
million, including $80,465 charged on credit cards.

Recommendations
4. MCPS should enhance its policies and controls over its credit
cards and transactions. Specifically, MCPS should segregate the
responsibilities for ordering and receiving the cards, ensure that
adequate documentation and approvals exists for all credit card
purchases, and conduct periodic spending and credit limit
reviews. MCPS should also ensure that the credit card manual
includes clarification regarding the appropriate uses of credit
cards. Furthermore, MCPS should review past credit card
charges, such as those we identified, for propriety and recover
any inappropriate charges.

5. MCPS should ensure that all travel is approved in advance, in

accordance with existing policy.

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24 Office of
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Chapter 4

Human Resources and Payroll

MCPS had implemented comprehensive workforce planning, which
adequately addressed long-term trends in all critical operational
areas. However, MCPS should address certain procedural
deficiencies with respect to payroll processing. These deficiencies
include unnecessary and excessive access capabilities given to
certain personnel on the MCPS human resources and payroll
system and a lack of supervisory review of certain human resources
and payroll transactions.

Background
Payroll costs are the largest single expense in the MCPS budget,
with fiscal year 2007 salary and wage costs totaling $1.25 billion
(not including benefits). MCPS uses an automated system to
maintain human resources information, process payroll, and track
leave usage. Manual time records, including leave taken, are
entered onto the system every two weeks by designated employees
at each MCPS site. Leave accumulation is automatically calculated
by the system which is also used to process and record all payroll
transactions.

Payroll information is downloaded from the automated system into

a separate check writing program to produce payroll checks and
direct deposit advices. Payroll checks and deposit advices are
delivered to employees independent of the timekeepers at each
MCPS site for distribution.

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 As of October 2007, MCPS had approximately 20,350 employees.
The 6.8 to 1 ratio of MCPS students to full-time equivalent
employees is reasonable when compared with similarly-sized school
systems (see Table 1 below).

Table 1
Comparison of Student to Employee Ratios – Fall 2007
Unaudited

Number of Number of Full- Student to

School System Students Time Equivalent Employee
(as of September 30, Employees Ratio
2007) (as of October 1,
2007)
Montgomery Co. 137,727 20,346 6.8 to 1
Anne Arundel Co. 73,400 9,310 7.9 to 1
Baltimore Co. 104,283 14,221 7.3 to 1
Prince George’s Co. 129,752 18,689 6.9 to 1
Baltimore City 81,284 12,021 6.8 to 1

Source: MSDE Student/Staff Publications

Workforce Planning Addressed Future Critical Needs

MCPS monitors data related to portions of the workforce
approaching retirement, and forecasts the number of retirements in
order to determine their impact on hiring decisions. The MCPS
Master Plan sets the strategic direction of the school system and
provides coordination and focus for initiatives to address challenges
faced by MCPS. The Plan includes a number of objectives and
strategies to address human resource needs—which is evidence of
workforce planning. It addresses the recruitment and retention of
highly qualified instructional staff (that is, teachers and certain
instructional aides). MCPS implements alternative methods to
address non-instructional personnel employed by MCPS, such as
central office and critical support staff. Staff prepared an annual
analysis, which identified all employees eligible or likely to retire
during the next five fiscal years. This allowed MCPS to tailor its
recruitment and retention efforts.

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Human Resources and Payroll Internal Controls Need
to Be Strengthened
MCPS did not adequately restrict access to its automated personnel
and payroll system. Specifically, numerous employees had access
to personnel and payroll menus in the automated system, including
menus that provided the ability to make changes to critical data or
generate checks. While some of these employees needed access to
certain components of the menus to perform their jobs, MCPS had
not developed a process to restrict employees’ access to only those
components necessary for them to perform their specific job duties.
Specifically, we noted the following conditions:

• Of the 116 employees that could modify employee salary and

benefits information in the human resources system, only 7 of
these individuals required such access for their job duties.

• Of the 35 employees that could add new employees and/or

update employee information such as name, address, and social
security number in the human resources system, only the
aforementioned 7 employees required such access.

• Twenty-one employees could process manual payroll check

transactions (used for non-regular payments such as leave
balance payoffs, tax shelter program refunds, and retroactive
pay adjustments); however, only three of these employees
needed such access to perform their job duties. In addition,
these three employees could individually generate the actual
manual checks and submit the related information to the bank
confirming the checks’ validity without any oversight. According
to MCPS records, manual checks processed in fiscal year 2007
totaled $21.2 million.

In addition, MCPS had not instituted any compensating controls,

such as an independent review of transaction or exception reports.
Although we found no evidence of unauthorized additions to the
payroll or unauthorized payments for the items tested, the improper
separation of duties and access to the system could be used to
process unauthorized payroll payments.

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Recommendation
6. MCPS should take the necessary corrective actions to ensure
that adequate internal controls are in place over its automated
human resources and payroll system. Specifically, employees
should be provided only the system access capabilities needed
to perform their job duties. In addition, MCPS should segregate
duties related to processing manual payroll checks. Finally,
MCPS should establish an independent review and approval
process to ensure, at least on a test basis, the propriety of
payroll-related changes recorded in the automated system.

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 Chapter 5

Inventory Control and Accountability

MCPS has formal policies and procedures governing the control and
accountability of materials and supplies and property, including
textbooks; however, MCPS could reduce the costs of maintaining
the on-hand materials and supplies inventory by revising its ordering
system. Furthermore, MCPS should improve its control over
equipment and the related recordkeeping.

Background
MCPS maintained one warehouse for non-food service materials
and supplies. Inventory records were maintained using an
automated system. According to the MCPS audited financial
statements, as of June 30, 2007, the book value of its non-food
service materials and supplies inventory was $6.6 million. In
addition, according to MCPS records, fiscal year 2007 expenditures
for materials and supplies (excluding those for food services)
totaled $58.9 million.

MCPS uses an automated fixed asset system to track property and

equipment. According to the MCPS audited financial statements,
as of June 30, 2007, the book value of its capital equipment
(including furniture and fixtures) was $64 million and, per MCPS
records, fiscal year 2007 expenditures for capital equipment totaled
$16.8 million. For financial statement reporting purposes,
equipment items with a cost of $5,000 or more are capitalized and
depreciated. Furthermore, in addition to the aforementioned
equipment items, certain items defined in MCPS policy with a lesser
value (such as computers, copiers, and cameras), are included in

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 the centralized fixed asset system. Equipment items that do not
meet these criteria are recorded on each individual school’s
equipment records.

Formal Textbook Procedures Had Been Established

MCPS had established formal procedures for selecting, purchasing,
distributing, and disposing of textbooks. All potential textbooks are
screened by a selection committee and approved by the Board.
Textbooks are inventoried and accounted for by individual schools.
Textbooks are sold or disposed of centrally as provided for by MCPS
policy.

Modifications to the Current Inventory Ordering

Process Could Improve Operating Efficiency
MCPS did not use just-in-time ordering to procure materials and
supplies. Just-in-time ordering for supplies allows an entity to order
supplies only when needed and can reduce the amount of storage
needed and inefficiencies due to excess ordering and related record
keeping. Currently, the majority of materials and supplies (such as
office supplies) are ordered in bulk during the summer from various
vendors based on the annual needs of the schools. The current
process results in inefficient cash flow as it requires large cash
outlays at one time, rather than several smaller outlays if materials
and supplies were ordered throughout the year. In addition, this
process increases the chance that supplies could be spoiled and
requires more storage space than may otherwise be needed.
Although schools have the option to schedule orders throughout the
school year, we were advised that this option is rarely employed.

Existing Controls Over Equipment and the Related

Recordkeeping Should Be Improved
MCPS centralized inventory records did not accurately reflect all
equipment that it owned. Our testing of the detail records for
equipment disclosed the following discrepancies:

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 • The detailed equipment records included 306 items with no tag
or serial number recorded (which are required by MCPS policy);
as a result, accountability over these items is reduced. In
addition, the value of some of these 306 items appeared to be
misstated. For example, according to MCPS records, one utility
truck purchased in 2005 had been assigned a purchase cost of
$640,000. This could have been due either to an individual
record reflecting the cost of multiple items included on a single
invoice or to errors that existed in the old equipment records
that were transferred to the new automated inventory system
when it was implemented on July 1, 2007.

• The detail equipment records often did not agree with what was
on hand. Our test of 54 capital equipment items totaling
$144,769, listed in the detail records, disclosed that 28
sensitive items (such as laptop computers and digital cameras)
with a total value of $49,700 could not be located. In addition,
our test of 37 equipment items physically sighted at five
locations disclosed that 4 items were not included in the detail
equipment records.

• Our test of 9 purchases of 6,960 items at a total cost of $6.5

million (primarily computers) made during fiscal years 2007 and
2008, disclosed that 48 items totaling $43,600, were not
included in the detailed equipment records.

Recommendations
7. MCPS should use just-in-time ordering for routine materials and
supplies to reduce the amount of on-hand materials and
supplies.

8. MCPS should improve controls over equipment and the related

recordkeeping. Specifically, MCPS should ensure that the detail
equipment records are complete and accurate.

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32 Office of
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Chapter 6

Information Technology Services

The MCPS Department of Technology maintains and administers the
MCPS’s computer network, computer operations and instructional
information system applications. MCPS developed and updated a
written technology plan that was linked to the MCPS master plan.

Nevertheless, we did identify deficiencies in a number of areas,

including user security, critical program change controls, and
computer room access. For example, over 13,000 accounts had
passwords that were set to never expire and access to the computer
room was not terminated for certain former employees. In addition,
MCPS did not use certain best practices when it implemented a new
IT application, and did not determine if it would be more beneficial
to hire additional in-house IT support staff for functions now
performed routinely by IT vendors.

Background
MCPS operates a wide area network, with Internet connectivity,
which connects the individual schools’ local networks to the
computer resources located at the MCPS headquarters. The
Department of Technology maintains a computer room at the

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 headquarters location in which numerous computer servers operate
to support MCPS Information System applications.

Several significant administrative and academic related information

system applications exist. For example, MCPS operates the
Financial Management System (FMS) application and the Online
Administrative Student Information System application. The FMS
application includes modules for budgeting, accounts payable, fixed
assets, and purchasing.

Technology Plans Were Developed to Address Current

and Future Needs of MCPS
MCPS had developed a written technology plan, which includes a
comprehensive assessment of the technical needs of the schools.
The plan identifies their IT needs and the actions to be taken to
address those needs. The plan also includes measurable goals and
objectives. Other areas that are addressed in the plan include
professional development and IT related budgets. Finally, the plan
is periodically updated and monitored for implementation status of
identified actions.

Data Processing Functions Should Be Better

Safeguarded
Steps Should Be Taken to Ensure that Access to IT Software
Applications Is Appropriate and Controlled – Certain
computer security vulnerabilities existed with respect to various
MCPS automated systems, programs, and data. For example, when
compared to industry standards, automatic password expirations
were set for excessive periods (such as 999 days). Also, for over
13,000 accounts, including high privilege users such as database
and network administrators, passwords were set to never expire. In
addition, there was no standard as to the complexity of passwords
(to make them more difficult to hack). Furthermore, significant
system security-related activities (such as account logons and failed
access attempts) for one critical system were not always logged for
review and, as a result, unauthorized or inappropriate activities
affecting the integrity of critical production application program and
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 data files could occur and remain undetected. We also found that,
as of December 2007, one critical system had not been updated for
security related software updates since March 2007, leaving this
system vulnerable to security exploits addressed by these updates.
Finally, production program changes to critical MCPS applications
were not adequately documented. For example, requests for
changes were often not documented and, for two critical
applications, there was no formal process to acknowledge user
approval of program changes.

Physical security over the computer room should be

improved – Physical access to the computer room was not
adequately controlled. Specifically, 20 users, including 11 former
employees, had unnecessary access to the computer room, via
identification cards.

MCPS Should Use Additional Recognized Best

Practices for System Development
In July 2007, MCPS began implementing a new financial
management system (FMS) for financial operations and reporting,
including general ledger, accounts payable and accounts receivable.
FMS implementation began in July 2006 with an original contract
cost of $6.7 million for programming and implementation and $2.4
million for purchasing hardware and commercial off-the-shelf
software. As of May 2008, these contracts had been amended to a
total of $10.6 million and actual contract expenditures per agency
records totaled $10.5 million.

Although MCPS initiated the use of the system on time, it did not
use certain system development best practices6 to ensure
successful project implementation. Although these best practices
will not necessarily guarantee a successful implementation (a
project completed on time, on budget, and with the intended
functionality), the more those best practices are used, the likelihood

6 The most widely accepted best practices in IT application development have

been disseminated by the Standish Group International, Inc., a private industry
leader in collecting and analyzing data on IT projects. These best practices are
referred to as the Chaos 10. These best practices have resulted from a study of
over 40,000 projects as well as interviews with executives, project managers, IT
providers, and users.

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of a successful outcome increases. Our review of the
implementation process disclosed that MCPS followed certain of
these best practices (such as having the support of executive
personnel with the authority to obtain needed funding and
resources and having an experienced project manager). However,
other practices were not followed.

• Best practices specify that the upfront and continual

involvement of the end users of any system is the most critical
aspect for any application development project. Users must be
involved from concept to final implementation and the
application must be implemented on par with real users’
capabilities and desires. Proper user involvement throughout a
project typically significantly reduces the amount and extent of
training needed when new systems are actually put into use.

While MCPS provided documentation of meetings between end

users and the implementation team, the documentation did not
substantiate sufficient end user involvement in designing
system requirements and ensuring project functionality. For
example, weekly progress reports prepared by the
implementation team (which included few actual end users)
were submitted only to the Chief Operation and Chief
Information Officers. Furthermore, pilot sessions between the
implementation vendor and end users only highlighted FMS
capabilities instead of reviewing end user needs and
expectations.

An external review of FMS implementation by a consultant that

MCPS hired in May 2008, at a cost of $22,700, noted that
MCPS needed to “… evaluate how end users were actually using
the application. For example: are end users looking for data in
the right fields and forms, comparing related data, entering data
properly – correct value …” The review also indicated a need
for additional staff training and noted that end users were often
unaware of reporting capabilities and available reports. MCPS
project staff also noted in April 2008 (10 months after
implementation) that, while the vendor conducted “train-the-
trainer” sessions, MCPS primary users received limited system
training, resulting in users in various areas, such as grant
accounting and public sector budgeting, not being comfortable

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 that they were using the new system properly and to its fullest
capabilities.

• When MCPS determined that the functionality specified in the

original contract would not be achieved, it modified the scope of
the project without assessing the costs and benefits.
Specifically, although FMS was to be used for budgeting
purposes, MCPS determined during the implementation phase
that the budget module would not interface with its existing
human resources and payroll system. MCPS then eliminated
this requirement from the contract deliverables; however, it did
not reduce the contract costs for the deliverables that were
eliminated. Instead, MCPS amended the contract, at an
additional cost of $1.2 million, to obtain several applications not
specified in the original contract that MCPS believed would
extend project functionality. This action was taken without
formally evaluating the costs and benefits associated with the
eliminated deliverables and the additional applications to
determine whether MCPS received appropriate value.

Best practices state that project scope should be kept as

focused as possible (known as “minimizing scope” within the
Chaos 10 best practices) while still yielding a very useful end
product.

In addition, MCPS did not ensure it received certain functionality

specified in the amended contract. According to a report of system
defects prepared by MCPS in April 2008, 95 implementation issues
were identified that had not yet been corrected. Of these 95 issues,
MCPS classified 15 of them as critical. For example, MCPS staff
noted a number of significant reporting deficiencies. Subsequent to
our audit, we were advised that functionality continues to be an
issue and, to help address the problems, MCPS hired the
aforementioned consultant at a contract cost of $190,500.

Costs and Benefits of Outsourcing IT Maintenance

and Implementation Need to Be Evaluated
The majority of ongoing IT maintenance and system implementation
services are currently outsourced by MCPS. MCPS performs various
IT functions with in-house resources, including training and

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 equipment replacement services. Although MCPS uses a
competitive procurement process when contracting for IT services, it
has not formally assessed the costs and benefits of continuing to
contract for these services, rather than perform more IT functions
internally. According to MCPS records, IT contract services
requested for fiscal year 2009 totaled $8.4 million, or 28 percent of
the IT budget.

Recommendations
9. MCPS should implement appropriate security measures to
safeguard its applications and data systems, including
enhancing its IT security by establishing and enforcing stricter
password requirements, logging all significant security-related
events, and conducting documented reviews of logged system
activity. MCPS should also improve controls over physical access
to its computer room.

10. MCPS should use industry-recommended best practices for

future IT development projects. Specifically, MCPS should
ensure that users of new IT applications are sufficiently involved,
that the cost benefits of contract modifications are formally
assessed, and that full system functionality is achieved during
the implementation phase.

11. MCPS should formally evaluate the extent of its outsourcing of

ongoing IT services to ensure it is cost beneficial.

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 Chapter 7

Facilities Construction, Renovation, and

Maintenance
MCPS has the a number of best practices to help reduce
construction and maintenance costs for its facilities, including: (1)
the use of a six-year Capital Improvement Plan (CIP) based on a
comprehensive and public process to plan for construction and
renovation of school facilities, (2) extensive use of relocatable
classrooms to minimize new construction requirements, (3) a
comprehensive energy management program, and (4) an annual
survey process to solicit feedback from both customers and staff.

However, long-term planning could be improved because it did not

include a periodic comprehensive assessment of the condition of
school facilities and major mechanical systems. In addition,
although it maintains a detailed and comprehensive work order
system, MCPS did not make full use of it. For example, data from
the system was not accumulated and analyzed to determine overall
efficiencies or used as a tool for evaluating individual performance.
Furthermore, the performance of preventive maintenance was not
adequately documented.

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Background
MCPS maintains 199 schools and a number of other facilities (such
as administration and support offices) with a staff of approximately
1,650 custodial and maintenance personnel.

MCPS uses a six-year CIP to identify ongoing and projected needs

for new buildings and major renovations. The annual CIP was
developed using student demographic data and input from various
sources, including public meetings, and was approved by the Board.
In the fiscal year 2007 CIP, necessary major renovations, repairs,
and systemic improvements to existing schools over the next six
years were estimated to cost $1.5 billion.

Table 2 below compares MCPS fiscal year 2006 plant costs (that is,
maintenance and operational costs) with other similarly-sized school
systems in Maryland. The table presents two cost measures used
to assess plant costs—cost per student and cost per square foot.
These statistics show that MCPS facilities operation and
maintenance costs are in line with its peer group and its square
footage per student is in line with other similarly-sized school
systems.

Table 2
Plant Cost Comparison Per Student and Per Square Foot
Fiscal Year 2006 (Unaudited)
Plant Costs Square Total
Per Per Footage Gross
School System
Total Student Square Per Square
n Foot Student Footage
Montgomery Co. $125,854,615 $904.96 $6.15 147.2 20,466,878
Prince George’s Co. 124,425,153 942.55 7.12 132.3 17,466,878
Baltimore Co. 94,015,905 878.55 6.08 144.6 15,472,933
Anne Arundel Co. 59,188,511 811.18 5.07 159.9 11,666,226
Baltimore City 83,176,509 1,001.09 4.54 220.3 18,301,832
Average of
Comparable $90,201,520 $913.26 $5.74 159.2 15,726,967
Schools

Sources: MSDE Financial Data, MSDE Fact Book, Maryland Public School Construction Square Footage
Data
n - Based on Average Daily Enrollment 2005-2006

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A Number of Best Practices Were in Place to Enhance
the Effectiveness of the MCPS Facility Construction
and Maintenance Department
MCPS has instituted several best practices to enhance project
results and cost effectiveness in its facilities and maintenance
department, beyond the previously noted six-year CIP:

• Use of a construction consultant to review building design and

make appropriate cost savings suggestions prior to hiring
general contractors. The purpose of this process is to keep
change orders to a minimum.

• Use of various methods to reduce the need for additional

construction. The periodic evaluation of space utilization
included consideration of capacity, enrollment projections,
redistricting students among schools, and the use of relocatable
(portable) classrooms.

• Use of a comprehensive program for energy conservation and

management. MCPS has instituted two programs (one of which
dates back to 1991) to continually promote and reward a culture
of conservation in the schools. MCPS also works with
Montgomery County to identify measures to comply with
countywide practices for resource conservation. As part of this
process, MCPS has identified and implemented projects,
including increased use of energy management systems and
modifying lighting systems.

• Use of an annual survey of school based personnel for customer

satisfaction of maintenance and repair services provided.
Results are compared to previous years’ data and staff are
directed to provide feedback to both school based and
administrative personnel.

Long-Term Planning Processes Could Be Improved

Long-term planning did not include a periodic comprehensive
assessment of the condition of school facilities and major
mechanical systems. MCPS developed a schedule for modernizing
schools using a facility assessment tool, but has not used this
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process since 1999. The State of Maryland Public School
Construction Program (PSCP) performs annual inspections of
selected schools throughout the State, but these inspections are
not meant to be a substitute for periodic inspections by the school
system. During fiscal years 2006 and 2007, PSCP had inspected
51 of MCPS’ 199 schools. In a number of other school system
audits, we noted that either staff conducted periodic facility
assessments (such as bi-annually) or an outside vendor was
contracted to perform a comprehensive facility survey.

These inspections provide specific details on the unique needs of

facilities as they age and allow MCPS to incorporate preventive
maintenance into their long-term planning that could delay or avoid
the need for a large investment in new construction. The average
age of the MCPS’ 199 schools is 41 years, with 61 schools being
more than 50 years old. MCPS advised us that, based on high costs
of such assessments, annual facility assessments would not add
value to long-term planning that is included in the CIP. However, it
is significant to note that the applicable data in the CIP is based on
previous inspections by MCPS, which are generally over eight years
old.

Since the condition of all schools was not periodically assessed,

there was a lack of documentation on the current condition,
maintenance needs, and replacement backlog of HVAC systems, a
major system component. Although HVAC replacements have been
included in the most recent CIP, MCPS maintenance personnel
advised that projects are often addressed on an emergency basis.
MCPS was in the process of addressing the lack of centralized
records on HVAC systems and expected to automate the care and
replacement process for HVAC systems by the beginning of fiscal
year 2010. Although MCPS estimated that deferred maintenance
totaled $34.2 million, this amount did not include costs associated
with replacing HVAC systems.

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The Work Order System Should Be Fully Used
Certain capabilities of the automated work order system
were not used to control costs and assess performance –
MCPS did not fully use its automated work order system when
assigning significant maintenance work and tracking the completion
of assigned tasks to help it control costs and assess performance.
We noted that, although all work orders along with information
related to actual resources used to perform the task (that is, time
and materials) are logged, no information was entered indicating
resources expected to be used to perform the task, based on either
past history or industry guidebooks. As a result, completed work
orders could not be evaluated for efficiency or used to assess the
performance of both individual employees and the entire Facility
Construction and Maintenance Department. An effective work order
system can be used to generate a variety of statistical data
including employee productivity, cost reports, and facility
assessments, all of which are key pieces of a performance
measurement system. MCPS advised that they were in the process
of developing such measures using the existing data.

In addition, work orders were often not completed timely. According

to MCPS records, of 4,675 work orders open as of March 31, 2008,
3,257 (or 70 percent) were over 90 days old. For internal
performance measurement purposes, MCPS utilizes a 15-day
response time as the standard for routine (as opposed to shorter
time frames for emergency and urgent) work orders.

Comprehensive preventive maintenance was not

adequately documented – A comprehensive preventive
maintenance plan had been developed by MCPS, but the plan had
not been updated since 1997. As a result, many of the procedures
described were no longer relevant to current operations. For
example, this manual has not been updated to include the current
automated work order system. In addition, MCPS could not provide
us with documentation that all required preventive maintenance
had been completed since it did not use the current work order
system to track required and performed preventive maintenance.
Although periodic inspections of work are conducted by supervisors,
this documentation was inconsistent and did not provide a record
that all preventive maintenance required by the plan had been
performed. MCPS was in the process of compiling preventive

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 maintenance information in the automated work order system so
that work required and performed could be better tracked.

Recommendations
12. MCPS should establish a process to periodically assess the
physical condition of its facilities, including all major systems,
and use this information for planning purposes.

13. MCPS should maximize its use of the automated work order
system so that actual costs can be compared to estimated costs
for significant projects, and the productivity of staff can be
measured. In addition, MCPS should update its preventive
maintenance plan and use the work order system to track
maintenance required and performed.

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 Chapter 8

Transportation Services
MCPS used a number of recognized best practices to increase
student transportation efficiency, such as staggering school arrival
and dismissal times to enable certain buses to perform multiple
runs and assigning bus routes to drivers based on their proximity to
the route to limit the number of deadhead miles (miles traveled with
no students on the bus). Nevertheless, we noted areas where
improvements could be made, such as addressing all appropriate
factors for properly planning and developing bus routes (for
example, student ride times and bus capacities), fully using its
automated bus routing software, and implementing controls over
fees charged for transportation services provided to non-MCPS
entities.

Background
MCPS is the largest school system in Maryland and transports more
students than any other school system in the State. Approximately
96,000 students, of which 5 percent are disabled, are eligible to
ride each day on one of over 1,100 buses owned and operated by
MCPS. Fiscal year 2007 pupil transportation operating costs
totaled approximately $92.7 million. Forty-eight percent of the 18.4
million reported route miles for the 2006-2007 school year
represented mileage for transporting disabled students.
As seen in Table 3 below, the cost per rider is reasonable when
compared with similarly-sized school systems; however, the cost per
mile is higher than the average of similarly-sized school systems.
According to MSDE Factbooks, MCPS transportation costs have

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 increased 29.5 percent since fiscal year 2005, significantly more
than other similarly-sized systems. This increase is primarily
attributable to salary and wage costs.

Table 3
Comparison of Transportation Costs per Rider and per Mile
Fiscal Year 2007 (Unaudited)
Number of Eligible Miles Average Annual
Riders (in thousands) Expenditures Cost per
School System
Non- Non- (in
Disabled Disabled Rider Mile
Disabled Disabled thousands)
Montgomery Co. 90,560 5,151 9,604 8,798 $92,691 $968 $5.04
Prince George’s Co. 83,246 5,323 12,445 8,475 107,137 1,210 5.12
Anne Arundel Co. 53,512 1,597 6,042 3,535 36,231 657 3.78
Baltimore Co. 60,052 2,872 8,651 5,720 50,261 799 3.50
Average of
Comparable 65,603 3,264 9,046 5,910 $64,543 $937 $4.32
Schools

Sources: MSDE 2006-2007 Fact Book

Several Best Practices Were in Place to Enhance Bus

Route Efficiency and to Control Related Costs
The MCPS transportation department had numerous practices in
place to help reduce student transportation costs:

• Staggering school arrival and dismissal times to enable certain

buses to perform multiple runs on the same day, thereby
reducing the need for MCPS to obtain additional buses.
• Assigning bus routes to drivers based on their proximity to the
routes to reduce the amount of miles driven with no students on
the bus (deadhead miles).
• Using central collection locations and transfer stops for regional
programs and magnet schools to minimize the number of bus
trips and stops.
• Using smaller buses for special education routes, which
generally carry only a few students at a time. Smaller buses are
less costly to purchase and generally less costly to operate.
• Piggybacking with other governmental units to purchase fuel.

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Policies and Practices for Planning and Revising Bus
Routes Should Be Enhanced

Current bus route scheduling policies do not include all appropriate

factors necessary to properly plan bus routes. For example, current
policies do not address maximum student ride times or set bus
capacity limits.

Also, automated routing information was not correlated with actual

ridership counts and, as a result, did not provide assurance that
buses were being used in the most efficient manner. The
automated system showed that approximately 90,000 students
rode MCPS buses, but the load manifests of actual ridership
(completed by the bus drivers in the winter of 2007/2008) showed
that only 71,000 students actually rode MCPS buses on the day of
the count. In February 2008, the automated routing system showed
that, for many routes, the number of students eligible to ride a
specific bus significantly exceeded that route’s capacity. For
example, of MCPS’s 1,866 bus routes, the automated routing
system showed that 390 routes were each over capacity by more
than 20 students, which could indicate that the buses on those
routes, as planned, were overcrowded. Conversely, the load
manifests showed 119 routes each with less than 32 actual riders,
well below MCPS’ lowest desired capacity (a minimum of 40
students).

The full capabilities of MCPS’ system routing software, to establish

efficient routes on a system-wide basis, were not utilized. Instead,
MCPS relied on school administrators and bus drivers to notify the
Transportation Department of specific problems with existing bus
routes for which subsequent adjustments were made. Efforts to
improve overall route efficiency were limited to an annual planning
procedure which merely incorporated new students into already
established bus routes. MCPS used the routing software primarily
to visually show current bus routes as an aid to manually developing
new routes and changing existing routes. The system also was not
being updated for current student enrollment data, which would be
needed to effectively run the routing software. We were informed

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 that, as of February 2008, current student enrollment data,
including address changes, had not been uploaded since November
2007. During that period, 2,566 student records had been
modified.

The ability to fully use the automated routing software was hindered
by certain policy decisions. Since MCPS policies do not require
students to ride a specific bus route, the MCPS Transportation
Department has difficulty using the available data to accurately
estimate the actual ridership on a bus, to plan appropriately, and to
determine the cost impact. This policy forces personnel from the
Transportation Department to correct problems reactively without
necessarily ensuring the most efficient solution is found. Moreover,
not assigning a student to a specific bus route creates a safety
concern since MCPS may not readily be able to determine the
location of a particular student. In other school systems, we have
noted that students are assigned a specific bus route, which allows,
among other things, bus route planning to be more efficient.

Controls Over Transportation-Related Accounts

Receivable Should Be Improved
Controls over accounts receivable and the related collections
processed by the Transportation Department were not adequate.
Specifically, MCPS had no written procedures to control processing
and collection of amounts billed to non-school entities (such as
county recreation programs). Billings for these services totaled
$780,000 for the period from July 2006 to February 2008. We
noted the following conditions:

• The employee responsible for receiving cash receipts and

preparing the deposit also had access to the related accounts
receivable records. As a result, funds could be misappropriated
without detection.

• Receipts were not processed timely. Our test of 10 field trip

charges, totaling approximately $45,500, disclosed that the
collections applicable to 8 of these charges were not recorded
into the accounting records for periods ranging from 4 to 23
days following transfer to the central accounting office by the
Transportation Department. Based on available records, we
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 could not readily determine when receipts were first received by
the Transportation Department. These 10 field trips were
properly billed and recorded in the Transportation Department’s
automated accounts receivable records and the related
payments were deposited intact.

• Checks were not immediately restrictively endorsed ‘for deposit

only’ or recorded in a mail log.

• The Controller’s Office did not provide the Transportation

Department with any verification that receipts forwarded by that
Department were deposited. (See Chapter 1)

Recommendations
14. MCPS should enhance existing policies to address all
appropriate factors that impact bus routing, such as bus loads.
MCPS should also use the automated routing software in
conjunction with other relevant information to help improve the
efficiency of bus routes. In this regard, MCPS should consider
changing its policy by requiring students to ride a specific bus
route.

15. MCPS should develop specific procedures that establish

adequate controls over the Transportation Department’s
accounts receivable and the processing of related collections.

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50 Office of
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 Chapter 9

Food Services Operations

MCPS has implemented a number of best practices to help reduce
food service costs, such as preparing meals for all schools at a
central location, using performance measures, and participating in
the United States Department of Agriculture (USDA) commodity
program. MCPS also has adequate procedures in place to identify
students eligible for free and reduced-price meals under the federal
national school meals programs. However, MCPS needs to improve
internal controls over the processing of cash receipts.

Background
MCPS has one central location that prepares all meals for its 199
schools. Although the MCPS food service operation is intended to
be self sustaining, it operated at a loss in fiscal year 2007; MCPS
has taken certain actions in an attempt to correct this situation.
See Table 4 on the next page for information regarding fiscal year
2007 food services.

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 Table 4
Food Service Facts for Fiscal Year 2007

Average Cost per Meal $ 2.83

Number of Meals Served:

Breakfast Paid 625,268
Free 968,107
Reduced Price 288,339
1,881,714
Lunch Paid 4,911,112
Free 3,257,059
Reduced Price 1,274,324
9,442,495
Ala carte Sales 3,129,110
Snacks 21,303
Summer Meals 206,783
Non-School Meals 212,752
Total Meals Served 14,894,157

Schools 199
Kitchens 1
Full-time employees 602

Revenues:
Federal Cash payments $15,717,693
USDA Commodities 2,063,431
$17,781,124
Sales and other sources 22,895,402
State aid 1,017,320
Total Revenue (all sources) $41,693,846

Total Expenditures 42,145,103

Excess of Expenditures over Revenues $ (451,257)

Sources: MSDE 2007 Data and MCPS Fiscal Year 2007 Audited Financial
Statements.

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Certain Best Practices Were in Place
MCPS has implemented several practices to contain food
services costs – These measures helped to both increase
operational efficiency and reduce food supply and material costs.

• MCPS used a Central Production Facility to prepare the meals

for its 199 schools. On a daily basis, these prepared meals were
delivered to the schools, where they are reheated.
• MCPS used performance data, such as meals per labor hour,
inventory turnover, and satisfaction surveys to track and monitor
the operating efficiency at each of its school cafeterias. In
addition, MCPS periodically reviewed the financial results of its
food services operation and took appropriate actions (such as
increasing meal prices) after it incurred a loss for fiscal year
2007.
• MCPS participated in the USDA commodities free food program.
Per MCPS records, $2.1 million in USDA commodities were
received in fiscal year 2007.
• MCPS used standard serving sizes and recipes to economize on
food purchases, as well as monitoring waste and reheating
items where possible to reduce waste.

MCPS used several best practices to encourage

participation in the national school meals programs – Best
practices used by MCPS include the use of a family application
process—instead of individual student applications—to
simultaneously qualify more students for the programs, and the use
of a keypad system in cafeterias to eliminate the easy identification
(and any perceived stigma) of students in the free and reduced-
price meal programs. For fiscal year 2007, over 73 percent of MCPS
students eligible to receive free and reduced price lunches actually
participated in the program, which was commensurate with other
school systems audited.

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Controls Over Food Service Cash Operations Need
Improvement
The internal controls over certain transactions processed by
cafeterias were not adequate. Specifically, MCPS’ written cash
handling procedures allow cashiers to both deposit funds to a
student’s cafeteria account (that is, up to $10 for a secondary
school student and up to $5 for an elementary school student) and
record a meal purchase in the same transaction. In addition,
cashiers can void transactions. However, for voids involving these
combined transactions, the respective managers did not retain
supporting documentation or justification to explain these
adjustments. Without adequate supporting documentation, MCPS
is unable to determine which part of the transaction—the deposit or
the purchase—was incorrect, or whether the void transaction was
proper. According to MCPS staff, void transactions processed from
September 1, 2007 through March 31, 2008 totaled $251,800.

Recommendation
16. MCPS should improve controls over its cash receipts processing.
Specifically, MCPS should require that adequate documentation
be retained to support all voided transactions.

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 Chapter 10

School Board Operations and Oversight

Oversight of MCPS operations includes a comprehensive budget
process. The Board also receives financial updates, including
monthly budget variances, to assist it in monitoring the efficient use
of funds as well as performance indicators for financial and
academic operations. The Board has adopted a detailed ethics
policy. Annually, the Board meets with the MCPS certified public
accounting firm to review the results of the annual financial
statement and the federal Single Audits. Also, MCPS has an
internal audit department and the Board has an active audit
committee.

Several opportunities exist for the Board to improve operations and

oversight. For example, the Board should consider expanding the
work of its internal auditor into areas beyond student activity funds.
Also, consideration should be given to establishing a confidential
hotline to enable employees and others to report operational
concerns and suspected fraud, waste, and mismanagement.

Background
MCPS is governed by a seven-member board elected by the voters
of Montgomery County. The Board generally operates several
committees (such as Policy and Audit). To assist in oversight, the
Board contracts for independent audits of the MCPS financial
statements and federal programs, has an internal audit department,
and receives regular updates from MCPS management personnel
on a broad range of financial, administrative, and academic topics.
The Board is ultimately accountable for the success of MCPS in

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 providing the children of Montgomery County with a quality
education, while wisely spending local, State, and federal funds.
Following is the MCPS stated policy on educational philosophy:

Vision
A high-quality education is the fundamental right of every child. All
children will receive the respect, encouragement, and opportunities
they need to build the knowledge, skills, and attitudes to be
successful, contributing members of a global society.

Mission
To provide leadership and oversight for a high quality educational
system with community-supported goals, policies, and resources
committed to benefit our growing and diverse student population.

System Goals
• Ensure success for every student
• Provide an effective instructional program
• Strengthen productive partnerships for education
• Create a positive work environment in a self-renewing
organization

Source: www.MCPS.org

Certain Oversight Had Been Put in Place Regarding

MCPS Operations
The Board uses a number of methods to oversee the
operations of MCPS

• The Board is actively involved in the development of the

budget, including public work sessions. As part of the budget
process, the Board receives and reviews performance
measures for each MCPS department.

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 • The Board receives monthly expenditure data, including budget
variances, and is provided with financial updates, including
information such as projections of financial activity, by MCPS
personnel.

• The Board hires an independent certified public accounting

firm to perform audits of its financial statements and federally-
funded grant programs, and annually meets with that firm to
review the results.

A detailed ethics policy has been established – The MCPS

Board has adopted a detailed conflict of interest policy that covers
Board members as well as all MCPS employees, and specifically
identifies those supervisory employees (including certain employees
with procurement responsibility) required to file annual financial
disclosure statements. This policy also covers conflicts of interest
and conforms to State law. MCPS maintains an Ethics Panel
(composed of three persons not affiliated with MCPS and appointed
by the Board) to interpret ethics policies and provide advice on
policy implementation. The Panel also reviews and rules on any
reported complaints of ethics violations. We reviewed the related
statements for calendar year 2007. All persons required to file
disclosure statements did so, and our review did not disclose any
issues of potential audit significance.

The Board Should Consider Additional Steps to Assist

It in Governing MCPS
MCPS internal auditor’s work should be expanded to
include areas beyond student activity funds and that unit
should be made more independent – Although MCPS has an
internal audit unit and an active Board audit committee that
oversees the work of the auditor (both of which are deemed best
practices), the scope of the auditor’s work should be expanded to
include more significant areas within MCPS. Approximately 80
percent of the unit’s work plans for fiscal year 2007 and 2008 were
allocated to performing audits of student activity funds. Although
there are unique risks associated with student activity funds, which
are not always subject to review by other auditors, the dollar
amounts involved are not as significant as with other MCPS

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operations, such as payroll, procurements, and disbursements,
which should be regularly reviewed by the internal auditor. Student
activity fund expenditures totaled $37 million, while MCPS
expenditures totaled $2.19 billion for fiscal year 2007 per audited
financial statements.

In addition, the unit does not organizationally report directly to the

Board or its audit committee as a means to promote audit
independence. Instead, the unit reports to the Superintendent
through the Chief Operating Officer. We further found that the unit
only rarely presents its findings formally to the audit committee. Our
review of audit committee meeting minutes for the period from
November 2005 to July 2007 disclosed that the unit presented
findings at only one meeting. Subsequent to the audit, MCPS
provided us with documentation that the audit committee reviewed
and approved the fiscal year 2009 audit plan and indicated that it
would review future internal audit results, and include appropriate
comments in the minutes of its meetings.

The MCPS Board should consider establishing a

confidential hotline – MCPS had not established a process, such
as a confidential hotline, to enable employees and others to
confidentially report operational concerns and suspected fraud,
waste, and mismanagement. While the Montgomery County Office
of the Inspector General had a county-wide hotline, this Office has
no authority to investigate allegations involving MCPS. Current
Board policy requires employees to report suspected incidents,
preferably in writing, through existing supervisory channels.
However, routing such matters through intermediary parties could
result in allegations not being properly handled. Typically,
confidential mechanisms bring to light matters and issues
previously unknown and unsuspected by organizational managers.
If such a process was established, in conjunction with the
establishment of a whistleblower policy, the internal audit unit could
conduct the initial reviews of information received via the hotline or
direct the information to other appropriate officials, such as law
enforcement.

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Recommendation
17. The Board should consider expanding the scope of the internal
auditor unit’s work and should require the unit to
organizationally report directly to the Board’s audit committee.
In addition, the Board should consider the feasibility of
establishing a confidential hotline, with formal follow-up
procedures and an employee whistleblower protection policy.

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60 Office of
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 Chapter 11

Other Financial Controls

This chapter addresses the management of risk, cash, and debt (for
example, long-term lease-leaseback agreements) within MCPS.
While MCPS had procedures in place to govern its risk and cash
management for certain types of investments, it did not have
written policies governing its use of long-term liabilities, such as
lease agreements. In addition, MCPS had not taken certain actions
to verify the propriety of health care costs.

Risk Management Best Practices Were in Place

MCPS used a combination of commercial insurance and self-
insurance to manage its risks. MCPS insured its liability, property,
and workers’ compensation coverage through participation in the
Montgomery County Liability and Property Coverage Self Insurance
Program. The notes to the fiscal year 2007 audited financial
statements stated that settled claims had not exceeded coverage in
any of the past three fiscal years.

To reduce its workers’ compensation costs, MCPS contracted with a

loss prevention firm to analyze claims data. MCPS used this data to
develop accident investigation and safety training for departments
identified as having a history of high-dollar losses. MCPS also
established a Case Management Team that reviews individual
cases and employee return-to-work schedules. The Team has the
discretion to temporarily assign employees to light duty tasks to
speed up their return to the same pre-injury work schedule.

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Capital Lease and Cash Management Policies Need
to Be Established
MCPS had not adopted a policy to govern its use of long-term lease
obligations to finance operations. Long-term liability levels and their
related annual costs are important obligations that must be
managed within available resources. An effective policy should
provide guidelines to ensure MCPS manages its long-term liabilities
accordingly. By law, MCPS is not authorized to issue bonds or
similar debt instruments to finance capital or operational needs.
However, MCPS used a capital leases to purchase equipment such
as buses and computer hardware. According to MCPS audited
financial statements, capital lease payments through 2012 had a
present value of $45.9 million at June 30, 2007, with $19.5 million
due within one year.

Although MCPS had cash management policies for areas such as

the pension trust and student activity funds, it did not have a policy
for investing excess cash from routine operations. Cash and
investments from governmental activities totaled $50.2 million as
of June 30, 2007. The notes to the fiscal year 2007 audited
financial statements indicate that MCPS’ deposits had been
sufficiently collateralized so that the deposits were not subject to
custodial or credit risk.

Policies to govern the use of long-term obligations to finance

operations and manage cash and investments are recommended by
the Government Finance Officers Association.

MCPS Should Take Additional Steps to Control Health

Care Costs
Although MCPS had implemented certain practices designed to
control health care cost (such as procuring medical and prescription
services under cooperative arrangements), it had not taken certain
substantive actions to control costs. Specifically, MCPS did not
verify the eligibility of program participants and their listed
dependents or audit the propriety of claims paid by program
administrators. MCPS provides health benefit coverage to active
and retired employees through a program self-insured by the
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 Employee Benefit Plan Trust Fund (in conjunction with Montgomery
County and several other local government units). MCPS paid
approximately $175.8 million in claim payments for 57,000
employees, retirees, and their dependents during fiscal year 2007.

Recommendations

18. MCPS should adopt formal policies governing long-term

obligations and cash management.

19. MCPS should enhance its procedures to verify health care costs
by ensuring the eligibility of program participants and the
propriety of paid claims.

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64 Office of
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Audit Scope, Objectives,
and Methodology
Scope
We conducted a performance audit to evaluate the effectiveness
and efficiency of the financial management practices of the
Montgomery County Public Schools (MCPS). We conducted this
audit under the authority of the State Government Article, Section 2-
1220(e) of the Annotated Code of Maryland and performed it in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our
audit objectives.

Objectives
We had two broad audit objectives:

1. To evaluate whether the MCPS procedures and controls were

effective in accounting for and safeguarding its assets

2. To evaluate whether the MCPS policies provided for the

efficient use of financial resources

In planning and conducting our audit, we focused on the major

financial-related areas of operations based on assessments of
materiality and risk. Our audit approach, including the specific
objectives of our local school system audits, was approved on

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 September 14, 2004 by the Joint Audit Committee of the Maryland
General Assembly in accordance with the enabling legislation. As
approved, the audit objectives excluded reviewing and assessing
student achievement, curriculum, teacher performance, and other
academic-related areas and functions. We also did not review the
activities, financial or other, of any parent teacher association,
group, or funds not under the local board of education’s direct
control or management. Finally, we did not evaluate the MCPS
Comprehensive Education Master Plan or related updates.

Methodology
To accomplish our objectives, we reviewed applicable State laws
and regulations pertaining to public elementary and secondary
education, as well as policies and procedures issued and
established by MCPS. We also interviewed personnel at MCPS, the
Maryland State Department of Education (MSDE), and staff at other
local school systems in Maryland (as appropriate7). Our audit
procedures included inspections of documents and records, and
observations of MCPS operations. We also tested transactions and
performed other auditing procedures that we considered necessary
to achieve our objectives, generally for the period from July 1, 2006
through December 31, 2007. For our audit work on revenue and
federal grants, we primarily relied on the results of independent
audits of fiscal year 2006 and 2007 activity.

In addition, we contacted a number of other state auditors’ offices

and legislative program evaluation agencies that had a history of
conducting audits or reviews of local school systems. We
interviewed those officials and inspected their work programs and
resultant reports to identify specific audit techniques and
operational practices at schools that could be adapted for our
school system audits. We also used certain statistical data—
including financial and operational—compiled by MSDE from various
informational reports submitted by the Maryland local school
systems. This information was used in this audit report for
background or informational purposes, and was deemed
reasonable. For comparison purposes, information provided in this
report was generally limited to those Maryland school systems of
similar sizes, based on student enrollment and/or system budget.

7
During the course of the audit it was necessary to contact other systems to
identify policies or practices for comparative purposes and analysis.
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In many cases, this information was self-reported by the school
systems. The data were neither audited nor independently verified
by us. Finally, information provided in this report was obtained from
various reports readily available during our fieldwork.

Other Independent Auditors

When developing the approach for the audits of school system
financial management practices, a consideration was the reliance
on the work of other independent auditors to the extent practicable
to avoid unnecessary duplication of audit effort. With respect to
MCPS, the results of other auditors that we considered were
reported in two distinct audit reports: one related to the
administration of its federal grants and the other, the management
letter from the audit of its Comprehensive Annual Financial Report.

During the course of this audit, we relied on these results. We

performed certain steps to satisfy ourselves as to the reliability of
the reported results of the independent federal grants audits of the
MCPS federal financial assistance programs for the evaluation of
internal controls and for compliance with federal laws and
regulations and of the MCPS financial statement audits.
Accordingly, we significantly reduced the scope of our work in
Chapter 1 “Revenue and Billing Cycle,” and in Chapter 2 “Federal
Funds.”

Limitations of Internal Control

MCPS management is responsible for establishing and maintaining
effective internal control. Internal control is a process designed to
provide reasonable assurance that objectives pertaining to the
reliability of financial records, effectiveness and efficiency of
operations including safeguarding of assets, and compliance with
applicable laws, rules, and regulations are achieved.

Because of inherent limitations in internal control, errors or fraud

may nevertheless occur and not be detected. Also, projections of
any evaluation of internal control to future periods are subject to the
risk that conditions may change or compliance with policies and
procedures may deteriorate.

In addition to the conditions included in this report, other less

significant findings were communicated to MCPS that did not
warrant inclusion in this report.
Office of 67
Legislative
Audits
Fieldwork and MCPS Responses
We conducted our fieldwork from November 2007 to July 2008.
The MCPS response to our findings and recommendations is
included as an appendix to this report.

68 Office of
Legislative
Audits
 Legislative Audit
Recommendation 1

MCPS should establish procedures for collections received at locations other than the
controller’s office to ensure that these funds are accounted for.

Response

We agree with this recommendation. The Department of Financial Services has developed
written procedures that require individual departments to record receipts immediately upon
receipt, restrictively endorse checks immediately, and maintain a chain of custody. Appropriate
staff in all departments that handle receipts will receive training on these procedures during FY
2009. Stamps for restrictive endorsements have been provided to departments that were not
using them. The Department of Transportation, where this issue was identified, has instituted a
log of receipts, immediate restrictive endorsement, and a chain of custody process.

Recommendation 2

MCPS should develop policies and procedures governing accounts receivable, including a formal
debt collection policy. The policies and procedures should address the proper segregation of
duties and progressive collection steps to be performed to pursue outstanding accounts. In
addition, non-cash credit adjustments should be approved by independent supervisory personnel.

Response

We agree that Montgomery County Public Schools (MCPS) departments and divisions that have
responsibilities for billing and receiving payments should have formal, written guidelines and
procedures established concerning their accounts receivable processes. The Department of
Financial Services will assist these departments and divisions with their procedures and have
them completed by the end of FY 2009. In addition, MCPS will formalize the guidelines for
debt collection and will build in a monitoring process to ensure the timeliness of the follow-up to
unpaid receivables. MCPS will provide proper segregation of duties in its procedures.

Each department that produces receivables will have its own procedures based on the nature of
the billing generated by the department. Receivables are generated in a number of offices for a
variety of reasons. Receivables may be for nonresident tuition charged to parents for students
who live outside the county or for rental of a school bus by a day care center. Receivables also
may be the result of the legislative requirement that teachers be advanced all leave at the start of
the year but may leave MCPS prior to earning the leave. Receivables may be bills for health
care premiums for employees on unpaid leave or retirees whose pension benefits do not cover
their insurance premiums.

Each department’s procedures are designed to maximize collection prior to the collection process
within the Division of Controller. Typically, the local departmental procedures are most
effective. If payment is not made, the service being provided, that the debtor wants to continue,

1
will be discontinued. For example, in the case of nonpayment of insurance premiums, the
individual is notified and coverage is cancelled for nonpayment. These collection procedures
precede the procedures followed by the Division of Controller. Although the Division of
Controller had a formal debt collection process, it was not being followed during the period of
the audit. The monitoring process that will be developed will ensure this does not happen in the
future.

MCPS agrees in part to the recommendation about noncash credit adjustments being approved
by independent supervisory personnel. Currently, audit adjustments over certain amounts are
approved by independent supervisory personnel. MCPS documents all adjustments made to
accounts through the accounts receivable workflow in the Financial Management System.
Receivable adjustments of $5,000 or more, credit memos of $2,500 or more, and receipt write-
offs of $500 or more require separate documented approval of the controller. Adjustments
exceeding stated limits cannot be processed without approval, and all approvals are permanently
documented. These limits are reasonable and prudent for an operation the size of MCPS, and we
do not agree that all adjustments need to be approved by supervisory personnel.

Recommendation 3

MCPS should ensure that all costs associated with providing Medicaid-subsidized services are
recovered. MCPS should also verify that billings received from the third party administrator are
accurate.

Response

We agree with this recommendation. MCPS is instituting a practice, beginning in January 2009,
to verify the accuracy and completeness of claims submitted by the third party biller by
surveying 50 random Medicaid eligible students, as defined and identified by the Maryland State
Department of Health and Mental Hygiene and the Maryland State Department of Education, for
a quarterly fiscal reconciliation. Each quarterly review of 50 students will manually track and
reconcile a complete Medicaid-subsidized billing cycle of services recommended, services
provided, services billed, and services paid to ensure that all costs are recovered. MCPS has
worked with the third party vendor to improve billing transparency and accounting practices
through additional reporting, documented communication with MCPS, and enhanced/refined edit
processing for Medicaid-subsidized services.

Recommendation 4

MCPS should enhance its policies and controls over its credit cards and transactions. MCPS
should also ensure that the credit card manual includes clarification regarding the appropriate
uses of credit cards. Furthermore, MCPS should review past credit card charges for propriety
and recover any inappropriate charges.

2
Response

We agree with the recommendation concerning the segregation of duties in the ordering,
receiving, and distribution of our procurement credit cards. The duties of ordering new credit
cards and the initial receipt and distribution of the cards were segregated before the conclusion of
this audit. Although all account managers and card holders have received required training on
their responsibilities regarding transaction documentation, credit limit reviews, and approvals,
additional reinforcement of these requirements is needed periodically. Therefore, a memorandum
has been sent to managers and card holders reminding them of their responsibilities and
requirements. The procurement card manual is currently under revision and will be distributed to
all card holders by late January 2009.

We agree that all credit card charges should be reviewed for correctness and appropriateness.
Each month the Division of Controller and the Division of Procurement will conduct the review
to ensure compliance.

MCPS does not agree with the findings concerning the purchase of food and the use of vendors
that may not have an obvious relationship with the mission of MCPS. Due to the breadth of our
educational programs, we purchase food for Hospitality programs that provide catering, Family
and Consumer Sciences classes, school-run stores, and a variety of items from entertainment
supply stores that are purchased for the benefit of elementary students.

We also have a provision to provide up to $800 for clothing or assistance to needy students. Due
to the nature of these purchases, we will continue to stress with schools that expenditures in this
area must be submitted to the community superintendent. Our Internal Audit Unit will continue
to monitor and report schools exceeding the limits. If any inappropriate charges are discovered,
those charges are handled and recovered according to the Board policies.

Recommendation 5

MCPS should ensure that all travel is approved in advance, in accordance with existing policy.

Response

We agree that all travel should be approved in advance and comply with Board of Education
policies and MCPS regulations. MCPS requires preapproval of staff travel by the appropriate
supervisor. Regulation DIE-RB, Out-of-State Travel on Official Business, was revised to require
detailed receipts for all travel expenditures. Account managers and supervisors will be reminded
of these requirements. In order to improve controls, MCPS will ensure that MCPS staff and
Board of Education members’ travel expenses continue to be well-documented as to the business
purpose and nature of expenditures. Specific requirements for travel documentation are included
in the Purchasing Card Agreement signed by senior staff and Board of Education members who
are issued credit cards which may be used for travel.

3
Recommendation 6

MCPS should take the necessary corrective actions to ensure that adequate internal controls are
in place over its automated human resources and payroll system. In addition, MCPS should
segregate duties related to processing manual payroll checks. Finally, MCPS should establish an
independent review and approval process.

Response

Although MCPS agrees that it would be ideal to limit the access of employees to only those
functions they are required to perform as part of their job duties, this is not possible with the
Human Resources Information System (HRIS) utilized by MCPS. The cost to develop this
capability for this proprietary software would be prohibitive.

MCPS does not agree that duties related to processing manual payroll checks should be
segregated. Only three people have the knowledge and skills to run the entire payroll process.
To meet payroll deadlines, it is critical that only one person completes these tasks and activities.
Their knowledge of the process is required to complete the complex data input and other system
requirements to accurately pay and account for corrections in a timely manner. Since each
transaction has an audit trail, someone other than the person who runs the payroll process verifies
that the calculations and results are correct.

In order to respond to the intent of this recommendation, MCPS will implement by March 31,
2009, independent reviews of all changes to critical information. In addition, improvements to
the segregation of duties for manual check processing will be implemented.

MCPS agrees with the establishment of an independent review and approval process. Since
HRIS does not allow MCPS to provide authorization by transaction type (e.g., changing an
individual’s salary is one transaction and recording the date of a performance appraisal is another
transaction), MCPS has implemented a review process to identify any individuals who are
processing transactions outside of the scope of their assignment. All transactions processed
during FY 2009 have been reviewed.

Recommendation 7

MCPS should use just-in-time ordering for routine materials and supplies to reduce the amount
of on-hand materials and supplies.

Response

We agree with the auditors’ recommendation to implement this best practice as soon as it is
financially possible. The idea is that schools will receive supplies just when needed instead of
storing them for later use. This systematic process was presented to the legislative auditors
during their field work, and we are extremely pleased that they agree with the efficiency and
effectiveness of this future program.

4
Recommendation 8

MCPS should improve controls over equipment and the related recordkeeping.

Response

We agree with this recommendation. With the recent implementation of the new Financial
Management System, it is an appropriate time to revise our procedures for maintaining
equipment inventory records. Effective January 2009, all monthly inventory records for new
equipment will be validated for completeness and accuracy. Also, our internal auditors will add
physical verifications of equipment to its procedures when they visit a school to conduct an
audit.

Recommendation 9

MCPS should implement appropriate security measures to safeguard its applications and data
systems, including enhancing its IT security by establishing and enforcing stricter password
requirements, logging all significant security-related events, and conducting documented reviews
of logged system activity. MCPS should also improve controls over physical access to its
computer room.

Response

We agree with this recommendation. MCPS is aligning its security policies with the National
Institute of Standards and Technology (NIST) Information Security Standards. To enforce these
policies, MCPS is implementing the Oracle Identity and Access Management suite that enforces
strong passwords, account lockouts, and password expirations for all MCPS staff. The estimated
completion date for this implementation is September 2009. Passwords for high-privilege users,
such as network and database administrators, are now changed every 45 days.

MCPS has instituted a formal security audit log review process for all IBM AIX servers. These
logs run three times per day (once for each operator shift). A written log is maintained in the
MCPS data center stating that process was run, the date and time, the person who ran it, and
notes if any anomalies were found. If a security event occurs, it is reported to the appropriate
system administrator who will initiate further investigation and facilitate resolution of the issue.
MCPS is currently exploring and reviewing options to enable auditing subsystems across the
AIX enterprise systems.

MCPS limits access to the computer room to individuals whose job responsibilities require such
access. However, at the time of the audit, the access list had not been properly updated. MCPS
reviewed and strengthened the process for updating the access card list to ensure it accurately
reflects the individuals authorized to access the computer room. Since December 2007, MCPS
has followed a process of verifying the accuracy of the access list weekly, using termination and
transfer data reports from HRIS. An execution log of the weekly process is kept securely in the
MCPS data center. This revised process will be formally documented in MCPS computer
security procedures.

5
Recommendation 10

MCPS should use industry-recommended best practices for future IT development projects.
Specifically, MCPS should ensure that users of new IT applications are sufficiently involved,
that the cost benefits of contract modifications are formally assessed, and that full system
functionality is achieved during the implementation phase.

Response

We agree with this recommendation that specifically addresses information about the
implementation of the new MCPS Financial Management System (FMS). As a standard
practice, MCPS uses cross-functional application development project teams to ensure that the
users’ requirements are identified and incorporated in all systems, where appropriate.
Stakeholders are involved throughout the development and implementation of all new
applications.

User requirements are prioritized and evaluated for design feasibility, benefit and usability, and
process improvement impact. In the case of FMS implementation, several conference room
pilots were held to gather a wide range of user input and feedback. During these structured,
hands-on worksessions using the system, end users were able to critique and validate how the
written requirements were translated into specified system features. This environment provided
users with the opportunity to provide feedback on the usability of the product. In addition, every
functional area had staff representation on the project team, including a functional manager.

By choosing an established vendor for implementing FMS, with a proven track record of
successfully implementing the Oracle Financial suite, and contracting a separate industry leader
to work with district staff to develop the system requirements and scope of work, MCPS took
appropriate, industry-standard steps to ensure that the implementation was successful. The
limited number of contract modifications was thoroughly assessed for the benefit of the
requested modifications and the cost.

During the evaluation of the Requests for Proposal for the FMS, both the grant accounting and
public sector budgeting modules were judged to meet MCPS requirements. During
implementation, however, MCPS discovered these modules would not satisfy MCPS
requirements. The funds originally earmarked to support the implementation of the budget
module were reassigned to higher priority tasks. MCPS is currently negotiating with the vendor
to replace the original budgeting module with a module with the functionality that meets the
school system’s requirements.

Recommendation 11

MCPS should formally evaluate the extent of its outsourcing of ongoing IT services to ensure it
is cost beneficial.

6
Response

We agree with this recommendation. MCPS evaluates on a case-by-case basis, whether it has
the resources internally to develop and maintain required systems. Systems such as FMS, that
employs technologies new to MCPS staff and is designed to combine many legacy systems,
required outsourced implementation services until additional MCPS IT staff is either hired or
trained to support the specific off-the-shelf solution. MCPS IT resources for both development
and support are limited. To develop all new systems internally would require significant new
staffing in the application development area, which would then require hiring and retaining
significantly more staff that would not be needed after the initial implementation period.

Of the $8.4 million of contractual services in the MCPS IT budget, $4.3 million fund mainframe
and enterprise business systems licensing and business continuity and security services, $3.2
million fund externally hosted instructional and assessment management systems, and less than
$900,000 supports external consultant services. Work is under way in MCPS to bring even more
development efforts in-house.

Recommendation 12

MCPS should establish a process to periodically assess the physical condition of its facilities,
including all major systems, and use this information for planning purposes.

Response

We do not agree with this recommendation. MCPS uses an extensive facilities assessment tool to
prioritize the major modernization of its facilities. The Facilities Assessment with Criteria
Testing (FACT) tool was developed in the early 1990s in cooperation with the state and others to
evaluate facility condition and program capability for buildings in need of major modernizations.
Comprehensive FACT assessments are very costly to conduct. To be accurate and of value, an
assessment team must be staffed with professional architects and engineers and cost between
$5,000 and $15,000 per building. To do this biannually for every building, as suggested in the
audit, would cost MCPS at least $1 million per year. We do not believe the benefit would justify
the cost.

In the early to mid-1990s, MCPS conducted a large number of FACT assessments and
established a priority list for modernizations that is still being used today. For stability in long-
range planning, the prioritized list of modernization projects has remained unchanged since it
was established in 1992 and appended in 1996. Additional FACT assessments may be needed in
the next few years to extend the priority list for future modernizations. However, to periodically
assess all MCPS facilities would be cost prohibitive and would disrupt long-range planning if
scheduled modernizations were reordered every year or even every few years based on changing
FACT scores.

Staff is reviewing the possibility of utilizing the MCPS facility asset management system
completed in August 2008 to develop a facility assessment index. We believe this would more
appropriately address the concerns of the auditors. Over the past two years, facility asset

7
inventory information was collected and entered into Maximo as part of the asset management
system. With this information, staff can develop criteria and a scoring system to produce a
facility index for all schools in the Maximo database. Based on a range of index scores, schools
can be rated on a scale from excellent to poor. MCPS may incorporate the index into its FY 2011
Educational Facilities Master Plan submission to the Interagency Committee for Public School
Construction. We believe that this indexing method will satisfy the intent of the recommendation
for a comprehensive assessment of school property and equipment without the need for
expensive FACT assessments for every school.

Recommendation 13

MCPS should maximize its use of the automated work order system so that actual costs can be
compared to estimated costs for significant projects, and the productivity of staff can be
measured. In addition, MCPS should update its preventive maintenance plan and use the work
order system to track maintenance required and performed.

Response

MCPS agrees with this recommendation and is in the process of developing such measures using
the data in its Maximo work order system. MCPS expects to have cost and productivity data
reporting for all of its Division of Maintenance depots by the end of December 2009. The next
phase of the Maximo system to be implemented is the ability to track required and completed
preventive maintenance work orders. If funding is approved, the preventive maintenance work
order system will be implemented by the end of FY 2010.

Recommendation 14

MCPS should enhance existing policies to address all appropriate factors that impact bus routing.
MCPS should also use the automated routing software in conjunction with other relevant
information to help improve the efficiency of bus routes. In this regard, MCPS should consider
changing its policy by requiring students to ride a specific bus route.

Response

MCPS agrees and is committed to addressing all factors that will improve the efficiency of bus
routes. The Department of Transportation utilizes an annual process of reviewing all routes. This
process requires depot supervisors and routers to analyze all regular education bus routes for
safety and efficiency. All factors contributing to safety and route efficiency are considered,
including student load, mileage, ride time, and stop locations. Information is obtained from a
variety of sources, including the computer assisted routing program, MapNet. As these factors
are considered, recommendations for safety and efficiency improvements are formulated.
Following this process at the depot level, the depot and routing staff are required to present
review results to a panel consisting of the director, assistant director, and bus operations
manager. When recommended route improvements are approved by the department director, a
timeline for implementation is established. A study is under way to determine if this process
would be effective in reviewing special education bus routes.

8
We do not agree with the recommendation that students should be required to ride a specific bus
route. The Department of Transportation has previously considered assigning students to
specific routes and stops, but has rejected this idea. Accurately assigning students to specific
stops would require maintaining data on the pick-up and drop-off address. MCPS has experience
doing this with special education students, where students are assigned to specific stops. This is
a very labor intensive process. In addition, changes to initial student information are received for
50 percent of the students on an annual basis. In regular education, it is much more efficient to
publish stop locations and allow students to use the stop that works best for them. In addition,
assigning students to a specific stop is not possible since we do not know about day care
arrangements or other places students may be before or after school. One variable that is not
known until school starts is how many eligible bus riders will use some other form of
transportation to get to and from school. Many parents drive students to school. Because this
number is hard to predict, it sometimes leads to over- or under-loaded buses. Adjustments are
made shortly after the school year starts. Allowing families to choose a bus stop accommodates
family needs and provides greater customer service. 1

Recommendation 15

MCPS should implement adequate controls over billings and collections of fees charged for
transportation services provided to non-MCPS entities, such as county recreational programs.

Response

MCPS agrees with this recommendation, and the Department of Transportation has segregated
responsibilities for cash receipts from billing. The remittance address on the invoice prepared by
the supervisor of the Field Trip Unit has been modified. Checks from non-MCPS entities are
mailed to the fiscal specialist at the Department of Transportation’s Shady Grove administrative
office. The checks are logged in to a cash receipts spreadsheet and restrictively endorsed upon
receipt. The fiscal specialist prepares a memo for deposit and forwards the checks and memo to
the Division of Controller. The MCPS Department of Financial Services will develop a process
to report deposits received by the Division of Controller so that deposits can be independently
verified by the Department of Transportation, completing the process and ensuring appropriate
controls are in place.

1
Auditor’s Comment:  The desire to provide accommodating services is acknowledged.  However, the additional 
costs to operate a mass transit‐like service for students instead of routes with assigned student riders had not 
been determined by MCPS and reported to its Board for its consideration.  The vast majority of local school 
systems in Maryland operate routes with assigned student riders due to student safety concerns and the 
efficiencies that can be gained by operating fewer routes and maximizing bus capacity based on predictable 
ridership levels. 

9
Recommendation 16

MCPS should improve controls over its cash receipts processing.

Response

MCPS agrees with this recommendation. The Division of Food and Nutrition Services has
updated cafeteria manager procedures to require that a report be printed showing all voided
transactions. The cafeteria manager must then make handwritten notes on the report justifying
the voided transactions and file the report with other daily reports. Internal audit procedures also
have been modified to ensure that documentation for voided transactions has been completed.

Recommendation 17

The Board should consider expanding the scope of the internal auditor unit’s work and should
require the unit to organizationally report directly to the Board’s audit committee. In addition,
the Board should consider the feasibility of establishing a confidential hotline, with formal
follow-up procedures and an employee whistleblower protection policy.

Response

MCPS agrees with the recommendation regarding the scope of the work of the Internal Audit
Unit. During the current year, the Internal Audit Unit will conduct 7 payroll audits, 6 audits of
professional leave use in schools, and 13 cafeteria audits. It also conducts inventory audits and,
as indicated in the response to Recommendation 8, the unit will add the physical verification of
equipment to its procedures. However, it is not possible to increase the number of audits as well
as audit the work of the other MCPS units without the addition of at least one additional internal
auditor. With the current fiscal situation and the priorities facing the Board of Education, it
would not be possible to consider adding another auditor position at this time.

MCPS does not agree with the recommendation to have the Internal Audit Unit report directly to
the Board of Education Fiscal Management Committee. The superintendent of schools has a
fiduciary responsibility for all MCPS resources, including school independent activity funds, and
is the person primarily responsible for the fiscal integrity of the school system. In order to
accomplish this, he needs to have the Internal Audit Unit report to him rather than to the Board.
Although there is a supervisor for this unit, the work of the auditors requires monitoring on a
daily basis by an administrator at an appropriate level in the school system. This unit reports to
the associate superintendent for shared accountability and the deputy superintendent of schools.
It is critical that this supervision be provided to ensure that the unit is effective in its operation
and addresses the fiduciary responsibility of the superintendent. Finally, the Internal Audit Unit
often needs to work with other offices, such as the Office of Human Resources, the Office of the
Chief Operating Officer, and the Department of Financial Services, in order to be effective.
Separating the authority of this unit from the superintendent would result in the unit being less
effective in these working relationships.

10
The Board of Education regularly receives many financial and operational audits in addition to
the work of the Internal Audit Unit. These audits ensure financial and operational accountability
to the Board of Education, the County Council, and the public. These regular audits include:
• An independent certified public accountant audits financial transactions.
• The Maryland State Department of Education audits a variety of areas, including
enrollment, program administration, special education, teacher certification, criminal
background checks of teachers, and grants monitoring.
• The federal government regularly provides mandated A-133 single audits of federal grant
programs.
• The state Interagency Committee on Public School Construction audits the use of state
construction funds.
• The county Office of Legislative Oversight conducts comprehensive budget reviews of
MCPS programs each year.
MCPS also agrees with the suggestion of establishing a fraud and abuse hotline. Currently, the
school system works with the county’s inspector general’s office that reports hotline issues
involving MCPS to the chief operating officer of MCPS. We have pursued the acquisition of a
fraud line for MCPS; however, as a result of the current fiscal situation, we have not contracted
with any company. When the financial situation improves, it is our intent to do so.

Recommendation 18

MCPS should adopt formal policies governing long-term obligations and cash management.

Response

MCPS agrees that it needs to develop formal, written procedures regarding long-term obligations
and cash management. MCPS currently has well-established practices that have been in place
for a number of years. The Board of Education approved a resolution in 2004 concerning the use
of a master lease to purchase some equipment and vehicles. This Board resolution includes the
terms of the lease agreement as well as the amount. Amendments to this resolution have recently
been reviewed by the Board’s Fiscal Management Committee and approved by the Board of
Education.

Recommendation 19

MCPS should enhance its procedures to verify health care costs by ensuring the eligibility of
program participants and the propriety of paid claims.

Response

MCPS agrees with the recommendation to conduct a dependent eligibility audit. On December 9,
2008, the Board of Education awarded a contract for an audit that will be conducted during the
remainder of FY 2009. MCPS also will explore conducting a claims audit. We will contact
other organizations who have conducted such an audit to determine the costs and potential
benefits. If we find from these organizations that the benefits exceeded the costs, we will move
forward with issuing a request for proposals.

11
 AUDIT TEAM

Edward L. Shulder, CPA

Audit Manager

A. Jerome Sokol, CPA

Information Systems Audit Manager

Heather A. Warriner
Senior Auditor

Veronica Arze
Information Systems Senior Auditor

Amin N. Berrah
Michael A. Horvath
Menachem Katz, CPA
Sandra C. Medeiros
Kingsley M. Ndi
Staff Auditors