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Comptroller audit of Northeast State nets four findings

Rick Wagner • Nov 27, 2018 at 8:53 AM

NASHVILLE — A Tennessee audit of two fiscal years’ worth of finances from Northeast State Community College has produced four findings: two material weaknesses in internal controls deficiencies and two significant deficiencies. Significant deficiencies are less severe than material weaknesses.

The Tennessee Comptroller of the Treasury on Monday morning publicly released the audit of fiscal 2015-16 and fiscal 2016-17, the latter ending on June 30, 2017. The Blountville-based school also has operations in Kingsport, Johnson City, Elizabethton and Gray.

Former NSCC President Janice Gilliam retired in mid-2017 following a Faculty Senate and then full faculty vote of no confidence and a Tennessee Board of Regents investigation of a “climate of fear” and overestimation of revenues and underestimation of spending at the school, among other issues the faculty raised. James King of the TBR staff became interim president in July 2017, and after a search Bethany Flora of East Tennessee State University earlier this month was named to become the new permanent president effective in January. King has said he will remain for a while during a transition process.

“The Comptroller of the Treasury’s audit findings covered the fiscal years of 2015-16 and 2016-17, which were governed by the college’s previous administration,” King said Monday afternoon in an emailed statement from college spokesman Bob Carpenter. “Prior to the issuance of the audit findings, Northeast State’s current administration took notice of financial issues and instituted proper steps to correct concerns that were later noted in the document. Northeast State’s current administration is confident in its recent actions and has placed the college on solid financial footing going forward.”

WHAT WERE MATERIAL WEAKNESSES?

1. “As reported in the previous three audits, management needs to improve financial statement preparation and review procedures to prevent errors in its financial statements,” the audit states on page 62 of 73.

Details on page 64 said one of the three deficiencies is from two prior audits “because management did not take effective corrective action.” Management responded that it has “either corrected those internal control deficiencies or ... implemented a corrective action plan to address them.”

2. “College staff did not conduct proper collection procedures on accounts receivable and properly estimate and report an allowance for doubtful accounts at each year-end.”

On page 65, the audit recounted how changes in personnel contributed to the problem, including a “lack of continuity in the college’s management during the audit period and the staff’s need to deal with day-to-day financial difficulties were probably contributing factors.” The director of financial services prepared 2016 and 2017 financial statements with assistance from staff. The then-chief financial officer reviewed the 2016 statements but moved on to a teaching position, followed by acting chief financial officer from March through June of 2017, and then a new CFO started work in July 2017 and reviewed 2017 statements.

Management responded that “significant turnover” in employees and leadership, coupled with significant cuts, meant “sufficient resources were not available” to prevent or detect financial statement errors. After Gilliam’s departure, King led the “right-sizing” of the school’s annual budget with $5 million in spending cuts.

WHAT WERE SIGNIFICANT DEFICIENCIES?

3. “Northeast State Community College did not provide adequate internal controls in two areas, including one area noted in the prior two audits,” the audit states on page 62. That included, as outlined on page 71, not writing off “older, uncollectible accounts” dating back to 2004. Management said that has been and continues to be done.

4. “College staff did not prepare timely bank reconciliations.” Management responded that since September 2017, “bank reconciliations have been completed in a timely manner.” 

WHAT DO FINANCIAL TERMS MEAN?

“A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis,” the audit states on page 62. “The audit defined material weaknesses as a “deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected on a timely basis.”

The audit defined significant deficiencies as a “deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.”

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