The State Auditor’s Office has issued a report finding fault with Vashon Island School District.
According to the report, the district’s business office staff lacked adequate training and did not gain an adequate understanding of their duties, did not have an effective secondary review of their work, and lacked a process to adequately reconcile some cash accounts to their general ledger.
The auditor’s Aug. 22 report, detailed at a school board on Tuesday, Aug. 27, followed routine annual audits of the district’s financial statement from Sept. 1, 2022, through Aug. 31, 2023, and separately, the district’s compliance with federal grants during that same period.
The review of the district’s compliance with federal programs came back clean, but a finding accompanied the audit of the financial statements, saying the district “did not have adequate internal controls ensuring adequate reporting” of the statements.
In the parlance of state audits, “findings” address and document how a publicly-funded entity has made errors or been non-compliant in properly accounting for how revenues were spent within the guidelines of state and/or federal law. Findings can also impact the interest rate the district is charged for bonds.
Specifically, auditors found the following errors in the financial statements submitted for the VISD’s audit, which the district subsequently corrected in the financial statements:
• The debt service fund property taxes receivable and unavailable revenue taxes were each overstated by approximately $4.5 million.
• The capital project fund property taxes receivable and unavailable revenue taxes were each overstated by approximately $488,000.
• The general fund deposits in transit, revenues and unassigned fund balance were each understated by approximately $390,000.
The report noted that the auditor’s review of journal entries also identified numerous entries that the district had entered incorrectly and subsequently reversed.
“Although the district identified and corrected those errors prior to our audit, the number of incorrect entries that it originally posted to the general ledger indicates a deficiency in the review process,” the report said.
Cause of condition
Auditors determined that the errors in the district’s financial statements were caused by several conditions.
“The district experienced significant turnover in several business office positions, most of which it did not refill due to a lack of resources,” the report said. “The district assigned business office responsibilities to a single person after it had previously assigned them to multiple positions, which increased the risk of error due to time pressure and a lack of segregation of duties. Additionally, new staff did not receive adequate training to perform their duties, due to a lack of resources and vacancies in the business office position.”
Recommendation
Auditors recommended a corrective course for the district to strengthen its internal controls over financial reporting, saying the district should:
• Dedicate sufficient resources to ensure staff responsible for accounting and financial reporting have adequate training and knowledge to perform their duties.
• Establish an effective secondary review of journal entries to ensure they are reasonable, accurate and supported.
• Reconcile all district accounts to the general ledger at least monthly.
District responds
The report included the district’s response to the finding and its plans for corrective action.
“The district acknowledges the lack of adequate controls, oversight and reconciliation processes and recognizes the critical nature of this finding,” the district’s statement said. “In May of 2024, the district began to contract with Puget Sound Educational Service District (PSESD) to provide a comprehensive review of fiscal processes including internal controls. In partnership with PSESD, the district has established internal controls that solidify business practices for the future.”
PSESD is one of nine educational service districts created by the legislature in Washington to provide centralized financial and other services for the 35 local districts it serves in the region.
The statement also noted VISD’s hire of a new business director and PSESD’s continuing role in providing fiscal guidance to the superintendent and staff.
At the Aug. 27 board meeting, both McSheehy and PSESD’s financial director, Justin Lanting, discussed plans to provide comprehensive training for VISD’s new director of business and finance, Cassie Zizah, as well as provide ongoing oversight of her work.
PSESD also assisted in the development of the district’s budget for its 2024-25 school year, with Lanting saying he would continue to provide financial reports and updates on the budget to the board.
According to a contract governing the scope of PSESD’s continued work for VISD, the district’s payments to the PSESD will not exceed $25,000 in the coming school year.
Zizah, currently a senior budget analyst for the Highline School District, will fill the post held by Kim Mayer, who has now resigned from the district, effective Aug. 31.
In a district email to the community announcing Mayer’s resignation, McSheehy praised her work in the district following her hire in January 2023.
“Kim’s dedication and leadership have been instrumental to our district’s operational success,” McSheehy said.
Audit timeline
Problems with the annual state audit first surfaced in May, when Superintendent Slade McSheehy told the board he had engaged PSESD to take over communication with the state auditor’s office.
At a May 23 meeting, Mayer — who had originally prepared the district’s statements for the audit — said communication with the auditor assigned to the district had become difficult.
Mayer said repeatedly at the meeting and meetings that followed that she did not understand some of the accounting practices of Matt Sullivan and Kay Adams, two longtime VISD business office leaders who both left the district, respectively, in August and December of 2022, to work at Mercer Island School District.
At the time of Sullivan’s resignation as the district’s financial chief, McSheehy announced that he was eliminating Sullivan’s position as a cost savings to the district, and had hired Adams to a new role as the district’s director of business and finance. However, a few months later, Adams, too, announced that she would join Sullivan’s staff on Mercer Island, and Mayer was hired.
Mayer had previously served as the fiscal office of the Enumclaw School District for seven years. Before that, she had worked in VISD’s business office from 2002-2015 — experience cited by McSheehy in announcing her rehire to the district.
Last year, the district’s state audit of its financing for the 2021-22 school year was prepared by Mayer based on Sullivan’s and Adams’ accounting. That audit came back clean, with no findings — earning praise from McSheehy in a community email and board meeting. At the time, McSheehy thanked not only Mayer but also Sullivan and Adams for the district’s then nine-year streak of clean audits.
Bond rebate
At a June 13 school board meeting, Lanting identified a significant issue his office had found in VISD’s financial books while working on the audit.
In July of 2023, he said, a $392,000 bond rebate payment had been directly deposited into the district’s general fund — but Mayer had not followed the district’s longtime prior practice of transferring the funds into the district’s debt service account to be able to make payments on the bond.
The $47.7 million bond — obtained as a Qualified School Construction Bond (QSCB), a U.S. debt instrument created as part of the American Recovery and Reinvestment Act of 2009 — was approved by voters in 2011 to build the new Vashon High School.
Since that time, the district has annually made two interest payments and one principal payment on the QSCB bond — hence the need to transfer rebate payments, received twice annually, to the debt service account.
Not knowing that procedure, Lanting said, Mayer had instead spent the rebate on other pressing expenses, including payroll.
During the meeting, he described Mayer’s spend of the tax rebate in language that cast it as a benefit to the district, because it had ameliorated a cash flow crunch and prevented the district from having to borrow from its capital fund to pay its bills.
“[The district has] used that cash, it’s wonderful cash and it works very well — [and the district] spent it on paychecks and everything else,” he said.
However, he also described the consequence: the rebate payment will now need to be recouped for VISD to make payments on the bond due in October. To do so, he said, the district would likely work with its bond underwriter and attorneys to raise the bond’s levy rate — suggesting the impact of the increase could be 10 cents per $1,000 of assessed home value.
But at the Aug. 27 meeting, Lanting said he now believed, looking at cash flow projections for the coming year, that it was possible that no increase would be needed in the levy rate. However, he said he would not know for sure about this until October.
During the meeting, Lanting also put a positive spin on the auditor’s report — a perspective gained from his months of working with the auditor’s office on behalf of VISD.
“Honestly, I’m very pleased,” he said. “The hours that we spent with them, helping them understand our systems and our processes, really helped with the words that were put in this report.”
McSheehy, in an email to the community about the auditor’s report, also focused on the positive and the district’s future.
“VISD is moving in the right direction,” he said.
Read the audit in full by visiting tinyurl.com/VISDAudit.
