Budget & Finance Q&A

How to Prepare for ESSER Spending Scrutiny: Advice From a Veteran Auditor

By Mark Lieberman — July 18, 2022 7 min read
Eric Russell, CFO for the city of Columbus, Ohio, pictured on July 15, 2022.
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School districts get a lot of flexibility on how to spend their share of the nearly $200 billion in federal COVID-19 relief money. But the federal government and states will inevitably audit that money, and smaller districts with less experience undergoing such reviews need to prepare.

The laws around the relief packages require states to oversee school spending in a variety of ways, from reviewing plans to collecting financial reports. Some states have asked districts to revise their spending plans to ensure they meet federal guidelines.

The U.S. Department of Education’s Office of the Inspector General is already hard at work scrutinizing schools’ spending on technology and efforts to address learning loss.

The federal Government Accountability Office will likely pursue an investigation of federal relief funds for districts, colloquially known as ESSER spending.

And any government entity, including a school district, that spends more than $750,000 in federal funds in one year will be audited, per a decades-old federal law. The majority of districts got far more than that to spend between 2020 and 2024, according to the ESSER database from Associated Press and EdWeek.

With all these investigations on the horizon, many districts are wondering how to be transparent about their spending decisions—and what kinds of decisions or omissions might get them in trouble.

Eric Russell has many of those answers. He’s audited and consulted for more than 100 school districts nationwide, as well as state education agencies, nonprofits, foreign governments, and foreign government businesses receiving federal funds.

He recently served as deputy finance director for the city of Columbus, Ohio. He currently serves as president of the National Grants Management Association.

Education Week sat down with Russell for his thoughts on what schools can expect from audits of their ESSER spending—and how they can prepare to help them go as smoothly as possible.

Russell’s biggest advice is for smaller districts to start getting comfortable with the audit process, which can take up to three months. Some will be facing a scrupulous auditor for the first time.

By contrast, “your large school district goes through a comprehensive single audit every year,” he said. “It won’t be anything new for them.”

The following conversation with Russell was edited for length and clarity.

As schools continue to spend their federal relief funds, what should they assume auditors will be examining later?

The first item is going to be understanding what the applicable requirements are that are subject to audits. They’re going to have to support the eligibility of the costs they’ve billed back to the government, and whether they timely expended federal funds.

They’ll also have to really look at the [infrastructure and] construction aspect. Depending on the state they’re in, this is one of these items where they need to team with legal counsel.

There may be state law requirements related to construction funding as well as federal. That will be a heavy, heavy aspect of the upcoming audit.

Are there particular red flags that will cause an auditor to detect that something’s not right?

A lack of policies and procedures. That raises an immediate red flag.

I would also say the auditor will be looking how much relative experience the district has with spending federal funding. It does help the auditor to understand what type of risk they’re dealing with. If you usually spend a million federal dollars a year, and federal ESSER is $5 million a year, that’s significant.

The next piece that they’re really going to want to get an understanding of is how well the dollars and expenditures were tracked. Did the right people have their eyes on the program and the transactions? To the extent you’ve got a really good core team of program managers and financial managers, the risk is pretty low. But if the auditors see there’s lack of coordination, or a lack of formality in the program management arena, that usually raises a red flag.

Who conducts audits for school districts?

It’s going to vary by state. For example, I live in Ohio, where the auditor of the state, by state law, has the right of first refusal. The auditor of the state may go in and do the audit himself, or the state may contract that audit or allow the district to contract the audit.

In other states, districts may have the flexibility to contract their own auditor. Federal regulations say when it’s not a state agency that has to conduct the audit, it’s up to the organization receiving the funding.

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When the auditors arrive, what will they ask to see?

The first item that districts need to provide is going to be their general ledger showing costs incurred by program and award. That’s going to identify what types of costs they have for the period.

They’ll have to provide a population of programs and awards. That’s going to be included on what’s called the Schedule of Expenditure of Federal Awards—it’s effectively the financial statement of the compliance aspect of the audit. It’ll say, “For ESSER we spent x million dollars. For Title I, etc.” The auditors use that schedule to figure out how they’re going to focus their work.

And then they’ll have to submit a list of policies and procedures for how they went about spending the funds and how they monitored the program.

How much detail will districts need to share?

Depending on how well the procedure piece is done, the auditors may or may not have to go really deep. Auditors really want to look at four main things:

  • Whether the costs are allowable in accordance with the program rules.
  • Whether the dollars drawn down from the federal government or the state were expended in a timely fashion.
  • Whether the district complied with state and federal requirements for procurement. [Those rules] are not always in sync. Depending on the type of items you’re purchasing, there may be specific requirements that are applicable.
  • How well the procedures and policies were designed and whether they were implemented effectively

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Illustration of a person buried under paperwork
Fanatic Studio/Getty

What happens if the auditor determines something was amiss?

Depending on the severity of the issue, it may or may not result in an audit finding. If there’s a finding, then either the state education agency will have to take action and identify what corrective action is required by the district, or the federal government may step in, if the state agency itself is being audited.

There’s a corrective action process that you have to go through that identifies what steps the district is taking to resolve the issue. The state agency that oversees the districts—or the federal government [agency] that oversees the state, will monitor that corrective action. They’ll either clear the finding, or they’ll keep it open until additional steps are taken.

What does that corrective action process look like?

The first is going to be, to understand what’s the root cause of the problem. The district ultimately is the entity that’s going to draft its initial corrective action plan. They need to understand the root cause so they can actually address the problem going forward, but also identify what steps can be taken to handle what happened in the past.

Repayment of dollars, reports that have to be refiled—it’ll really depend on the nature of each issue. And then they’ll have to formally document that corrective action.

With ESSER specifically, what do you expect will be the most common mistakes that will set auditors on edge?

Potentially lacking documentation that links whatever the costs are to COVID.

Second is going to be the adequacy of the supporting documentation that’s retained—whether there’s sufficient information in the documents provided to allow the auditors to complete their test.

The third is probably going to be that construction zone—making sure districts comply with prevailing wage requirements, which are still pretty new to districts.

Some critics of the ESSER program say it’s not mandating sufficient accountability. How do you feel about that?

I think the audit process, because it requires the involvement of the school board, the senior management of the district, as well as the financial managers of the district, and the state, it really mandates accountability. Part of that process is that the reports have to be issued to the district leadership. And then they also have to be submitted to the state agencies as well. There’s inherently a structured follow-up process on any issues that arise. That’ll help with the accountability piece.

There was such a rush to get the dollars out that the structure wasn’t quite built yet. The audit activities will help to identify where there are some gaps that may exist, that give districts a chance to correct things going forward.

There’s so much more federal money rolling around out there than usual. Does the nation have enough auditor capacity to scrutinize all this spending?

The entire audit industry is stretched right now. That’s just a function of the COVID-19 funding.

I don’t think you have the risk of less accountability. There are standards in the audit industry that dictate what has to happen. But what you do have is a risk of schedule challenges.

The audit firms are stretched thin, and the state agencies are stretched thin. Districts really have to be prepared for the audit. Auditors just don’t have the time to keep extending deadlines.

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