San Diego Unified School District’s decision to close its internal audit office next year may violate a state law that prevents schools from freely outsourcing employee jobs – something the district said it plans to do.

The office is part of an accountability system created in 1974 to assuage concerns raised during the district’s bid for fiscal independence from the county superintendent.

School board trustees recently voted to eliminate the internal audit office to save $460,000 next year. It was one of many cuts made to close a $124 million deficit in the district’s billion-dollar general fund.

The director of the office and two audit managers – who audit district operations and special education – are scheduled to be laid off. Two remaining auditors, who monitor school Associated Student Body money, will be moved to the finance department, as first reported by the San Diego Union-Tribune.

Though the change is presumably happening because of budget cuts, school board officials are characterizing the move as an improvement. Other experts disagree.

Next year, it’s important that “the ability to respond to concerns that are raised and the ability to proactively conduct investigations is as strong, or stronger, than our current capacity,” school board president Richard Barrera said. “I think the concern has been raised by both the superintendent and the finance and legal department that the current internal audit capacity we have does not actually have the expertise to go in and conduct analysis of particular areas.”

The plan, according to district officials, is to outsource audits to firms with specialized knowledge in the areas needing review, which historically has included everything from student attendance reports to health benefit payments to charter school operations.

District officials said audits of district operations and programs would not be less frequent, nor less thorough next year. They will just be performed by outsiders.

External auditors will report to the audit and finance committee, “giving the committee greater autonomy and protecting against internal influences,” per the district’s budget website.

A decision about who will handle complaints to the district’s fraud hotline has not yet been made, a district spokeswoman said.

Union representatives for the laid off audit managers are currently discussing the district’s outsourcing decision and impacts at the bargaining table.

To justify outsourcing employee jobs, the district must meet several state Education Code requirements. Included is a requirement that the district “clearly demonstrates that the proposed contract will result in actual overall cost savings to the school district.”

Labor attorney Ricardo Ochoa, who represents non-teaching employees at Poway Unified, Chula Vista Elementary School District, San Diego Community College District and supervisors at Southwestern College, said the outsourcing plan may not pass legal muster.

“It is not common to lay off current employees and have that work be performed by outside contractors,” Ochoa said. “The language of (the Education Code) is pretty clear that you can’t displace workers. You can’t lay them off, demote them, transfer them to a new classification. You can transfer them to a new location.”

The district has not publicly shared any analysis comparing internal to external auditor costs. A request for such an analysis, if it exists, was not answered last week.

Even if the district had calculated it could save money by outsourcing the job, there’s a higher hurdle it still may not clear. That’s the requirement that “the potential economic advantage of contracting is not outweighed by the public’s interest in having a particular function performed directly by the school district.”

There’s also a broad prohibition against displacement of employees to prevent layoffs, demotions and involuntary job changes.

“The district looked at the greatest areas of financial exposure and whether the current organization was sufficient to respond to those exposures. The current model was found to be lacking, and that is why the change is being made,” district spokeswoman Shari Winet said in an email.

“We are confident our plan complies with all requirements of the law,” the district’s general counsel, Andra Donovan, said in a statement.

The History

When San Diego Unified School District sought fiscal independence from the county superintendent of schools in 1974, changes had to be made to show a robust and independent internal audit function would continue to safeguard taxpayer dollars.

The district wanted to skip the middleman and issue checks to vendors from the county treasury without waiting three to five days for the county superintendent to review them first.

The county superintendent at the time, M. Ted Dixon, said such a change “weakens the check and balance system,” and warned in a letter to state officials that a “too close relationship” existed between the district’s internal auditors and the accounting and payroll offices, records show.

Dixon recommended the state superintendent deny San Diego Unified’s petition for independence.

But San Diego County’s auditor and controller at the time, Gerald Lonergan, supported the petition, so long as the district restructured things to address potential conflicts.

To quell concerns, an internal audit office was created and an internal auditor was hired that reported directly to the deputy superintendent, instead of accounting and payroll. The new office would review the work of those in accounting, and perform its own reviews of various district operations to make sure checks went to legal and appropriate expenses.

San Diego Unified began writing checks without county superintendent review in July 1975, records show.

Others Weigh in

No one knows San Diego Unified’s internal audit office like Andrea Niehaus, who led the office for more than 30 years from 1979 to 2011. Niehaus said she was shocked to hear about the planned closure.

Normally, “the external auditor is maybe just looking at the giant picture. They aren’t looking at the details,” said Niehaus. “A lot of their (internal) audits more than pay for themselves, and they identify a lot of fraud within the school district.”

Given their oversight role, Niehaus said she wonders why the County Office of Education hasn’t objected to the closure, which, “to me is negligent on their part.”

Another state law says the county superintendent can recommend the state revoke a district’s fiscal independence any time he or she determines accounting controls are inadequate.

“SDCOE has not made such a recommendation and does not plan to, due to San Diego Unified’s retention of some auditors and its Fiscal Control department,” Music Watson, spokeswoman for the San Diego County Office of Education, said in an email.

Neihaus also questions the planned relocation of the two Associated Student Body auditors to the finance department, which she said, “were there 20 years ago. They were transferred because of an outside study of the district determined that it was not appropriate.”

“It’s supposed to be an independent appraisal, and there is no way they can be independent doing this,” Niehaus said.

Winet, the district spokeswoman, didn’t share that concern.

“ASB funds are mostly administered at the school site level, so having someone at the districtwide level perform oversight should not compromise the independence of their review,” she wrote in an email.

San Diego City Auditor Eduardo Luna, whose office is separate from the school district, also expressed concerns about the upcoming change.

“It is always unfortunate when internal audit offices are disbanded,” Luna wrote in an email. “The challenge in outsourcing audit functions is that you lose the regular follow-through on previously issued audit recommendations. Without audit recommendation follow-up, you could lose gains in efficiency and effectiveness.”

Richard F. Chambers, president of the nonprofit Institute of Internal Auditors, said in a statement the district was making the wrong move.

“The San Diego Unified School District’s sudden decision to outsource its internal audit function should raise serious concerns for the county’s taxpayers,” Chambers said. “Outsourcing the function, while potentially generating short-term benefits, may not be the most effective or efficient solution in the long-term.”