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Crosby ISD orders audit amid financial turmoil

September 25, 2018

Facing a financial crisis and questions from the Texas Education Agency, Crosby ISD in northeast Houston on Monday night voted unanimously to pay independent auditors up to $20,000 to comb through its finances in an effort determine how the district ended up on the brink of insolvency.

Trustees and Superintendent Scott Davis hope the audit by Whitley Penn LLP will provide some answers about what caused the 6,000-student district to drain a large portion of its reserve funds, how former officials spent millions more than the district collected in revenues and why it was forced to take millions from its construction fund to pay teachers.

Those issues have led the TEA to ask the district for a financial solvency plan and Davis to institute bone-deep spending cuts.

Joseph “J.R.” Humphries, who is running uncontested for Crosby ISD’s district 3 seat, said during public comment the district needs to complete the audit in order to be accountable to those who may soon be laid off.

“We have to lay off a lot of people, if we lay them off and we don’t have good answers as to everything that happened, it’s all in vain,” Humphries said.

Davis said he would call another special meeting on Oct. 8 and ask the board to declare an official financial emergency, or financial exigency.

The designation will allow the district to lay-off teachers mid-year, drastically cut funding across departments and seek some legal exemptions, moves Davis said will be necessary to keep the district financially solvent.

The designation has been only been approved by 12 of Texas’ more than 1,200 school districts since 2012, including Beaumont ISD and the now-closed La Marque ISD in Galveston County.

On Monday, questions were also raised about the firm currently auditing the district on an annual basis. Weaver and Tidwell, LLP will present an annual audit of the 2017-2018 fiscal year to Crosby ISD’s board at the regular Oct. 15 meeting, but Davis said Monday that the firm made a glaring mistake in their accounting of the 2016-2017 school year.

That audit failed to note that the district did not include July and August 2017 payroll expenses in its budget after the district moved the end of its financial year from the end of August to the end of June that same year. That meant the district did not recognize $3.8 million in payroll expenses, which caused the reserve fund balance to fall by that amount.

The fact that Weaver and Tidwell LLP apparently missed a $3.8 million mistake in the audit presented last year gave Davis pause.

“When you miss a substantive expense like payroll accruals, that gives you pause,” Davis said. “They (Weaver and Tidwell) would even say ‘I understand that.’”

Celina Cererceres Miller, a CPA with Whitley Penn, said her firm will not begin the independent audit until they receive the annual audit findings from Weaver & Tidwell on Oct. 15.

Trustees have questioned the actions of district’s business and finance department, led by former CFO Carla Merka, who presented the botched audit to the board, according to Board President Carla Mills Windfont. The district’s current financial situation was not revealed until Merka in June left the district in June to take the top finance job with the much larger Pasadena ISD.

Soon after Merka’s departure, current CFO Lesa Jones found a combination of issues contributed to the district’s dire financial straits: questionable construction spending, bloated personnel costs and inaccurate revenue estimations.

She found the district drained more than $9 million in 2016-2017 from its fund balance, essentially its emergency savings account. Officials have had to borrow a total $7.64 million from its construction fund to pay teachers and other staff, which Jones said will be repaid by the end of the year. And in 2016-2017, the district spent about $8 million more than it collected in revenue.

That reality already has forced the district to make some painful decisions. Davis ordered every department to cut their spending by 10 percent in August, and eventually increased the cuts to 60 percent on Sept. 18. Staff are working on a budget amendment that will make further cuts to the $57 million budget trustees voted to adopt in June. And, although Davis does not yet know the extent of lay-offs, he said reduction-in-force notices could be sent to district employees by January.

Officials still don’t know exactly what happened to create the current chaos, and Davis and trustees originally sought a forensic audit for detailed answers. A forensic audit, which would essentially recreate past spending check-by-check, can cost nearly $500,000. Davis said that when he originally proposed the more exhaustive audit, he believed it to be a thorough audit rather than a recreation of the district’s past finances and thought it would not cost a large sum.

“We had to step back for just a second…” Davis said. “We’re actually on a fact-finding mission because of the level of complexity of what we’re talking about.”

The board could still vote to do a forensic audit if the approved audit uncovers specific areas of concern.

Trustees also unanimously approved a motion that the board will guarantee taxpayers that they will prosecute any wrongdoing found in any future audit to the full extent of the law.

Trustee John Swinney, who made the motion, said asked what would happen if the third-party auditors found evidence of a crime. Miller said the firm would present the findings to Davis, who would confer with the board about how to proceed. They would not go straight to the district attorney’s office, but Swinney said taxpayers needed a pledge that trustees would hold those potentially responsible for the district’s current situation accountable.

“If we’re not going to do anything about it, why would we spend a dime?” Swinney said.

shelby.webb@chron.com

Twitter: @shelbywebb

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