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Controller urges tougher auditing of district

City Controller Alan Butkovitz said Wednesday that the Philadelphia School District should be required to present a five-year financial plan to an independent authority to address accounting problems his office found in an audit.

City Controller Alan Butkovitz said Wednesday that the Philadelphia School District should be required to present a five-year financial plan to an independent authority to address accounting problems his office found in an audit.

Butkovitz, who spoke as he released an audit his office performed on the district's annual financial statement for fiscal 2010, also said he believed the city finance director should be involved with the district's budget and accounting practices. And, he said, his office should be given expanded authority to examine the district's books.

"With poor budgeting practices and inadequate attention to accounting principles and procedures, I believe enhanced measures must be implemented to ensure that the School District gets [its] financial house in order," he said.

Some recommendations, including giving the Controller's Office access to the district's books before they are closed at the end of the fiscal year, would require changing state law, he said.

Butkovitz, who has tangled with the district since the administration of former schools chief Paul Vallas, has called for presenting five-year plans to an independent authority before.

He said the independent body would be similar to the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's finances. With such a board, Butkovitz said, the district could have avoided the $629 million shortfall it was facing.

The district said in a statement Wednesday evening that it "disagrees in the strongest possible terms with the city controller's depiction of the district's financial statement for the fiscal year 2010 and the district's internal financial controls."

Mark McDonald, Mayor Nutter's press secretary, said the Nutter administration had not seen a copy of the controller's report and could not comment on the recommendations.

As The Inquirer has reported, the controller's audit uncovered several serious accounting errors known as "material weaknesses" that - if not corrected - could have resulted in higher borrowing costs for the district.

In response to concerns auditors raised in preliminary versions, changes and corrections were made before the district issued its formal financial statement Jan. 31.

That report is used by bond-rating agencies to grade the district's ability to repay debts. The City Charter requires the Controller's Office to perform the audit.

In its examination of the statement for the fiscal year, which ended June 30, auditors found a lack of documentation to support accounting decisions for several significant transactions. They said that the district's reviews of the accounting practices were not always documented and that procedures had failed to detect some major errors. And auditors said the district had not circulated a completed manual on preparing the annual financial report to the offices that worked on it.

The issues, Butkovitz said, were serious and showed that the district's accounting procedures had not been able to spot the mistakes.

"The last time . . . the Philadelphia City Controller's Office found material weaknesses in the School District's financial statements was in 1999 and 2000 - right before the collapse of the school system," he said. The district was facing a $200 million deficit when legislation was passed that enabled the state to take over city schools in 2001.

Butkovitz, who was elected controller in 2005, had said last week that he believed the 2010 audit was the first time a material weakness had been found in a district financial statement.

The district has downplayed the significance of the errors auditors highlighted.

Michael Masch, the district's chief financial officer, has challenged the language in the audit and said none of the questioned areas was serious enough to be called a "material weakness."

The district's statement Wednesday said the controller's findings were based on preliminary documents "that were provided with the understanding that the documents were preliminary, not final, and would be amended and finalized prior to being considered final and subject to audit findings."

Butkovitz said in his report that his auditors found a $6 million error in a payroll account on the day the district was required to release the final version of its statement.

The report of accounting problems comes as the district seeks more state and city money to help plug the $629 million shortfall and only days after The Inquirer reported that the Internal Revenue Service has launched a separate, comprehensive audit of the district's finances in the 2009 calendar year.