Auditor General briefs committee on school district compliance process, flags travel waste and 26 districts in noncompliance

The Arizona Auditor General outlined how her office assesses school districts’ compliance with the Uniform System of Financial Records and how the State Board of Education may withhold funds when districts fail to correct significant deficiencies.

Auditor General Lindsey Perry told the House Education Committee on Feb. 10 that her office reviews annual audit reports that independent CPA firms submit and the USFR compliance questionnaires those firms complete. When noncompliance is identified, Perry said her office notifies district leadership, gives districts 90 days to submit corrective action plans and then conducts status reviews in person to “trust but verify” whether deficiencies have been substantially corrected. “If the district does not submit a CAP or its submitted CAP does not show substantial progress in correcting those deficiencies, we then refer the district to the State Board of Education,” Perry said.

Perry said the Auditor General’s office issues two regular products used in oversight: the annual school district spending report and an annual financial risk analysis that flags districts at higher financial risk using 10 measures. She also described the USFR — the nearly 400‑page Uniform System of Financial Records — which prescribes minimum internal‑control policies and procedures for Arizona school districts.

Why it matters: The process Perry described is the formal pathway that can lead to the State Board of Education withholding up to 10% of a district’s state aid if noncompliance is not corrected. That withholding power was raised repeatedly during committee questions about whether the current system is sufficiently deterrent or timely.

Key facts from the briefing

- Noncompliance counts and process: As of February, Perry said 26 school districts were in noncompliance. Eight of those districts were before the State Board of Education and had state monies withheld (she said those withholdings were generally around 3%). Three districts had been submitted to the State Board and were awaiting action; 12 districts had submitted corrective action plans and were undergoing status reviews; three had been recently notified and were within the 90‑day correction window.

- How a district reaches noncompliance: Perry emphasized the threshold is high. Her office reviews the contracted annual audit reports and the USFR compliance questionnaire (she described it as about a 70‑question questionnaire) and looks for systemic, significant deficiencies across multiple areas (accounting, budgeting, financial reporting). She gave an example of a district with about 50 deficiencies across many areas.

- Isaac Elementary and financial risk: Perry said Isaac Elementary School District has been flagged as one of the highest financial risk districts since at least 2020 and has been in noncompliance 10 months (as of her briefing). Committee members raised concerns about districts that remain in noncompliance for many months — she said some districts withholdings had lasted between 17 and 67 months.

- Travel and other performance audit findings: Perry said the Auditor General’s performance audits, which are distinct from the USFR compliance reviews, regularly identify operational weaknesses and opportunities to save money. In travel reviews the office has found examples of reimbursed travel that exceeded limits, lacked support for being an authorized district purpose, or was unnecessary. She cited one recent performance audit that identified nearly $400,000 in wasteful travel when a district sent about 45 attendees (including non‑staff and students) to out‑of‑state training over two fiscal years, and another set of audits that found districts spending from $8,500 to $65,000 for out‑of‑town board retreats (one in Coronado Island, California).

- Follow up and implementation: Perry said the Auditor General’s office performs follow‑up work and that “approximately 80% of our recommendations are implemented on a yearly basis.” She said her office will work with districts during the 90‑day period and during status reviews and, if appropriate, make referrals to the State Board of Education.

Committee questions and staff clarifications

Committee members pressed Perry on when a deficiency becomes a noncompliance case that could lead the State Board to withhold funds. Perry said auditors assess whether deficiencies are “significant” and “across the board,” and that the 90‑day corrective window and the in‑person status review are important due‑process steps before the referral to the State Board. She said the State Board sometimes hears districts in public meetings and has discretion about whether to withhold funds; it has not always withheld funds even after a public hearing.

Members also asked whether the Auditor General audits charter schools and ESA‑funded schools. Perry said her office’s USFR compliance reviews and the randomized performance audits apply only to school districts; her office has conducted special audits of the ESA program in the past and is following up on prior ESA audits, but routine USFR compliance work covers districts only.

The chair and several members asked whether the current process is sufficient, given multi‑year noncompliance in some districts. Perry said the small number of districts in noncompliance relative to the total number of districts suggests the process largely works to get districts back into compliance, but she acknowledged long cases raise hard questions about local governance and the need for additional accountability.

Ending note

Perry said an updated district spending report would be issued in a few weeks and offered to brief the committee when it is released. She also made her staff available to districts that have been referred to or are before the State Board of Education.

Speakers quoted in this article are identified in the meeting record and are attributed to their roles when first mentioned.