January 7, 2005
Audit Faults Accountant in Roslyn School Scandal
By BRUCE LAMBERT , NY TIMES

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GARDEN CITY, N.Y., Jan. 6 - A new state audit concludes that the accounting firm chosen by the Roslyn school district as its fiscal watchdog was hired without competitive bidding, had a blatant conflict of interest in the sale of financial software to the district, grossly neglected basic duties like reviewing canceled checks and failed to catch rampant multimillion-dollar corruption - even after a whistleblower's tip on thefts of $223,000.

The withering critique could have implications far beyond Roslyn. The accounting firm, Miller, Lilly & Pearce of East Setauket, has also been the independent auditor for 54 other school systems in New York State, including more than a third of Long Island's districts and three upstate, and for several local governments and nonprofit groups.

State Comptroller Alan G. Hevesi, who released his staff's report at a news conference here Thursday, said he had no evidence of major problems in other schools but was alerting all 701 districts across the state.

So far in Roslyn's growing scandal, three people have been arrested and charged with defrauding the district of more than $2.3 million, though investigators predict the ultimate amount could be several times that. Those arrested are the fired school superintendent, Frank Tassone; the former business manager, Pamela Gluckin; and her niece, a former accounting clerk, Debra Rigano.

The accountants hired to detect and prevent fraud utterly failed, Comptroller Hevesi said.

"The work of Miller, Lilly & Pearce was so appallingly inadequate that it would shock anyone associated with the auditing profession and certainly the taxpayers who depend on the firm to safeguard their money," he said. "This is just an awful performance by this auditor. They are unprofessional.

"The fraud was so pervasive that it would have taken significant effort not to uncover it. Even a rudimentary review of disbursements and canceled checks would have revealed many instances of wrongdoing."

Mr. Hevesi declined to say whether he thought the accountants had committed any crimes. But he said he was turning over the findings to the Nassau district attorney to investigate.

The comptroller also referred the case to a branch of the State Education Department that punishes public accountants for misconduct. An agency spokesman said it had already been investigating the firm in cooperation with Nassau prosecutors.

In addition, Mr. Hevesi notified the New York State Society for Certified Public Accountants for a disciplinary review.

In Roslyn, which has new school leadership in the aftermath of the scandal, officials welcomed the report and said it bolstered their effort to sue the accountants.

Mr. Hevesi said the state's review found that two of the firm's partners, Andrew Miller and William Lilly, owned a controlling share of another company, Finance Manager, that sold financial software to Roslyn and 251 other districts statewide. That software seemed to be adequate, though its internal controls on who was allowed to change fiscal entries were not activated in Roslyn, and the accountants failed to check that, he said.

"They failed to test their own computerized accounting," Mr. Hevesi said.

In another apparent conflict, the same partners also collected commissions as brokers on the sales of additional school management software to Roslyn from yet another company, Mr. Hevesi said.

Four calls seeking comment from the firm and its partners were not returned. In the past, Mr. Miller has said crooked school officials misled the accountants.

Mr. Hevesi said he did not yet have a complete list of the districts that bought the software but added, "I presume there's a substantial overlap" with those for whom the firm was auditor.

The report cited many failures by Miller, Lilly & Pearce, including violating nine of 22 basic auditing principles, Mr. Hevesi said.

The firm never examined canceled checks to compare actual payees to those listed, the report said. In a sample of 16 such payments the firm had supposedly reviewed, the state found five recipients' names were changed.

In one case, a payment listed as going to a school vendor actually went to pay an American Express bill. No further details were provided.

The comptroller found that the firm never checked frequent budget changes, overspending in various accounts and large expenditures. The firm also ignored other red flags like blank checks kept in an unlocked cabinet and Mr. Tassone's lending his school credit card to others.

A review of 205 transactions the firm claimed to have checked found no supporting documentation to confirm the review the firm claimed to have done. The firm's files for 2002 and 2003 were also found to include fictitious data that was actually entered into the records in 2004 to cover up the fraud, the report said.

"Very suspicious, questionable behavior," Mr. Hevesi said. "Is there a good explanation? I can't think of any."

Worst of all, Mr. Hevesi said, was that after an informant told the firm about spending abuses at the district, it found only $223,000 of unauthorized expenditures by Ms. Gluckin, the former business manager, who then repaid the money.

But the firm looked no further, the report said. "They never pursued it," Mr. Hevesi said.

Using the firm's purported accounting procedure, state auditors said they found $1.6 million more of highly questionable items, Mr. Hevesi said.

Since the Roslyn scandal erupted last year, other school officials have scurried to review their practices and many have been attending seminars on safeguarding their financial systems.

"The Roslyn situation cast a pall over all school districts," said Lorraine Deller, executive director of the Nassau-Suffolk School Boards Association. "We are all dealing with the fallout."

After the scandal broke, Miller, Lilly & Pearce worked with the district attorney for a time and identified some $7.8 million in dubious expenses. Frustrated at the belated discoveries, the school board replaced the firm.

Related Stories:

Roslyn, Long Island's Culture of 'Permissive Spending'

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Roslyn, Long Island, NY: The Enron of Education Fraud and Corruption.