New York State Comptroller Alan G. Hevesi blasted an East Setauket, N.Y.-based CPA firm for failing to identify a multi-million-dollar fraud, failing to meet several professional standards and violating auditor independence standards in its audits of a Long Island school district.

An audit by the comptroller's office said that Miller, Lilly & Pearce, which also audits 54 other school districts on Long Island and in the lower Hudson Valley, performed work "so flawed and so far below professional standards" that it failed to identify millions of dollars apparently stolen by school district personnel even after the firm was aware that fraud had occurred. The report found that the firm failed to meet nine mandatory professional standards for its Roslyn audit.

According to the report, which was issued last week, when a whistleblower first exposed the fraud in 2002, the CPA firm investigated and found only $223,136 in inappropriate payments, while state auditors using the same methodology found $1.6 million in questionable payments. The CPA partners also sold financial and other software to the district, violating auditor independence rules.

The state auditors also said that the CPA firm neglected to look at cancelled checks in its testing of district spending, and that its workpapers, supposedly created in 2002 and 2003, contained payment information that was put in the district's records by district officials in 2004 to cover up fraud.

The state comptroller's office, which said that some 250 school districts statewide use the software developed and sold by the firm's partners, referred its audit findings to the State Board for Public Accountancy and to the Nassau County District Attorney's Office.

At a press conference last Thursday, Hevesi, who called the firm's work "appallingly inadequate," said that the state auditors found fraud "so pervasive that it would have taken significant effort not to uncover it. Even a rudimentary review of disbursements and cancelled checks would have revealed many instances of wrongdoing."

The firm's senior partner, Andrew Miller, did not return calls for comment, but his attorney, William S. Petrillo, of Rockville Centre, told WebCPA, "The only thing appallingly inadequate is the absurd suggestion that the actions may have been criminal. This firm has long held a well-deserved, outstanding reputation for professionalism and integrity, which is why they have been inundated with calls offering support."

Hevesi also referred the audit findings to the other school districts now audited by Miller, Lilly & Pearce, and to all school districts statewide.

He noted that the 250 school districts that use the partners' accounting software program must make sure that the software controls have been activated to prevent fraud.

According to the report, two of the CPA firm's three partners had 55 percent ownership in the company that sold the Roslyn district its financial management software, "Finance Manager," and two partners received a commission from the sale of a second software package to the district, called "Student Manager."

The CPA firm also failed to test the computerized accounting system that it sold to the district to ensure that the controls built into the software were operating as intended. According to the report, the controls hadn't even been activated, enabling many employees to access and manipulate the district's financial system.

The state auditors also said that while the district's written policies and procedures to procure audit services were adequate, the district didn't actually follow those policies by seeking competitive offers from other firms.

Former assistant superintendent for business and finance Pamela Gluckin and former Superintendent Frank Tassone have both been charged with first-degree grand larceny for allegedly embezzling more than $1 million each from the district, and former accounting clerk Debra Rigano was charged with second-degree larceny for allegedly stealing more than $300,000.

A separate audit of the finances of the Roslyn School District is expected to be completed soon.

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