Audit finds widespread procedural exceptions in Knox County Schools’ internal funds; district and auditors point to staffing and process fixes
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Summary
An internal funds audit covering 90+ Knox County schools found nearly $18.7 million in cash across schools and a range of recurring procedural exceptions—most commonly segregation‑of‑duties and disbursement/receipt documentation—while district officials said corrective action plans and staffing changes are underway.
Ted, the auditor leading the internal‑school‑funds review, told the Knox County Audit Committee that auditors examined cash receipts and disbursements across more than 90 schools and found a mix of recurring compliance exceptions and areas of improvement. "The combined cash of all 90 plus schools in Knox County was $18,654,004.48," Ted said, and total school‑level receipts were about $27.5 million with disbursements near $25.8 million.
The audit is performed on Tennessee’s regulatory basis of accounting, Ted said, which requires an adverse opinion under U.S. generally accepted accounting principles but an unmodified opinion on the state regulatory basis; committee members were advised to read the opinion language in the report. Auditors flagged 12 finding areas overall and walked the committee through the most common problems.
Most frequently cited was segregation of duties: auditors identified 49 schools with segregation‑of‑duties issues this year, up from 44 the prior year. "Segregation of duties is certainly a challenge in smaller schools where one person may handle bookkeeping and other administrative tasks," Ted said. Committee members asked whether a single‑school error would be material to the countywide statements; Ted answered that an isolated small‑school fraud would likely not be material to county financials but would require disclosure if fraud occurred.
Documentation exceptions also were widespread. Auditors reported disbursement exceptions at 57 schools (up from 53) and receipts exceptions at roughly 61 schools (stable year over year), noting that most exceptions involved small dollar amounts—"for the most part, our exceptions are smaller dollar items," Ted said, estimating many fell in the $25–$100 range. Purchase‑order exceptions affected 64 schools, and ticket‑reconciliation exceptions were reported at 13 schools.
The audit identified fundraising and sales‑tax errors as an area of increased incidence: auditors found 41 schools with fundraising/resale exceptions this year, up from 25 the prior year, with the bulk tied to improper treatment of sales tax or taxable purchases.
Two new finding categories appeared this year. Auditors recorded one instance of a supplemental salary payment (for example, coach pay) being paid through an internal school fund rather than routed through central payroll, and three instances where coaches or school support organizations collected participation fees directly instead of processing them through school channels.
District staff said steps are being taken to address root causes. "Jennifer Hemmelgarn, Knox County Schools," said the district has implemented pay increases and other measures to improve recruitment and retention of qualified bookkeepers and is now requiring each school to submit its own corrective‑action plan to the district so the central office can track school‑level remediation. The district also engaged an external best‑practices review to recommend procedural improvements beyond corrective action plans.
Auditors said some exceptions are inherent to small‑office operations and volunteer‑run activities such as ticket sales and fundraisers; they recommended reviewing the forthcoming best‑practices report for targeted midyear follow‑up. The audit team also noted that procurement‑card controls and oversight had been strengthened after a prior‑year fraud incident; the bank refunded roughly $174,000 of fraudulent FY24 charges during FY25, and the audit office is finishing a draft procurement‑card audit for follow up.
The committee asked for more granular trend reporting showing which schools are improving and which repeat findings year‑to‑year; auditors confirmed they track schools annually and maintain a school‑level tracking sheet for trends and remediation status. The internal funds audit report and supporting schedules were made available to committee members and will be forwarded to the finance committee for broader review.
