School Board to Review Auditor's Report on Tax Issue

(Updated October 12, 2022) The Scarsdale School Board continues to  unwind from prior years's trouble when errors were made in the payment of the Scarsdale School District’s payroll withholding taxes. The errors, made in 2020 and 2021,caused an upheaval in the management of the schools and a loss of confidence in the district’s management. These errors resulted in the assessment of penalties, fees and interest against the district which led to a $1.7mm lien against the schools. The issue was concealed from the Board of Education and ultimately Superintendent Thomas Hagerman resigned in May 2022. The district hired attorneys to appeal to the IRS, and after months of appeals, the lien was lifted and the majority of the funds were recouped.

To address the situation and prevent it from happening again, on Monday June 6, the Scarsdale Board of Education agreed to engage new auditors, Nawrocki Smith, to review internal controls and to make recommendations to prevent errors in the future. The auditors released their finding and recommendations in September 2022 and this report will be the subject of a special meeting of the Board of Education on Tuesday October 11, 2022. At the meeting the auditors will present their report.

The report has been included with the board agenda and can be viewed online here:

The firm investigated what errors were made, and found the following:

“We analyzed the federal and state payroll withholdings from January 2020 through April 2022 and confirmed the three (3) clerical errors that resulted in the IRS notices of a federal tax lien filing against the District. Based on our analysis, we noted that two (2) clerical errors pertained to selecting the incorrect quarters and one (1) error pertained to entering the incorrect amount on the online EFTPS system.”

In the report summary, they list their observations and make recommendations for improving processes in the future. They point to limitations in district guidelines, oversight, reporting and reconciliation and suggest ways that all of these processes can be improved.

Here is what they say:

Based on the work performed, we made the following observations regarding the District’s internal controls over payroll withholdings:

-The Business Office has not developed documented guidelines pertaining to payroll withholdings.

-There is limited oversight of the payroll withholding calculations prior to payment processing.

-There is limited oversight of the payroll withholding amounts reported between the SMARTS financial application and Schedule B of Form 941.

-The Business Office utilizes multiple Excel Spreadsheets that result in duplicate data entry processes and increase the risk of clerical data errors.

-The District Treasurer’s electronic signature is accessed by the Payroll Clerk and Accounts Payable Clerk.

-District’s payroll bank accounts have outstanding checks pertaining to payroll withholdings unclaimed since 2016.

Areas where we recommend improvement in processes include:

-Develop documented guidelines pertaining to payroll withholdings.

-Establish a review and reconciliation process of the payroll withholdings reported within the SMARTS application, EFTPS, and Form 941 prior to processing or submitting payments to the IRS.

-Explore the full capabilities of the existing financial application, SMARTS, to implement a process wherein the payroll withholdings are accurately calculated, tracked, and reported to the IRS.

-Consider assigning the Claims Auditor to conduct a thorough and deliberate audit of online ACH payments and wire transfers related to payroll withholdings.

-Limit the check printing and signing authority to the District Treasurer as this position is not responsible for preparing accounts payable or payroll checks within the financial application system.

-Conduct due diligence in contacting the rightful parties before the old unclaimed payroll withholding funds are written off from the District’s balance sheet.

The district’s Treasurer Jeff Martin retired in September and Lisa Zareski, formerly with the Mahopac Schools, has taken his place. She will undoubtedly be charged with implementing some of these procedural changes if the Board votes to adopt the report at the meeting on October 11, 2022.

Update: At their meeting on October 11, 2022, the Audit Committee, which includes all Board Members, unanimously approved recommending the report be approved at by the Board of Education. Since the Board was meeting as an Audit Committee, the final approval of the report will be voted on during a Board of Education meeting. The administration indicated that they are already looking into adopting some of the measures. Watch the meeting here: