Activity Fund Best Practices: 6 Controls That Prevent Audit Findings

Key Takeaways

• Activity funds are a small share of a district’s balance sheet but a disproportionate share of its reputational risk. Auditors test them early because transaction volume is high and oversight is typically at the campus-level.
• Six gaps surface repeatedly in activity fund audits: weak segregation of duties, missing documentation, delayed deposits, unapproved disbursements, poor fund tracking, and insufficient oversight.
• Most districts still account for student activity funds using pre‑GASB 84 guidance, which requires auditors to record annual adjusting journal entries and leads to avoidable repeat findings.

Activity Fund Best Practices: 6 Controls That Prevent Audit Findings

Ask any external auditor where they look first during a K-12 financial audit, and activity funds rise to the top of the list given the risk profile associated with these funds.  High transaction volume, cash exposure, record-keeping that lives at the campus rather than the district level, and staff responsible for financial duties alongside many unrelated responsibilities mean activity funds concentrate nearly every audit risk factor a district faces in one place.

Most of the findings that come out of those reviews trace back to six recurring internal control gaps. None of them look like problems when they happen. They tend to look like a missed receipt, a deposit that sat on a desk over the weekend, or a principal who shared a password with a secretary because approvals were faster that way.

To understand what auditors actually do with activity funds, what they test first, and why the same gaps keep surfacing, we hosted a webinar with two people who’ve lived on both sides of the audit: Dr. Scott Scarborough, CPA and CEO of S|CPA Network and former internal audit manager at the University of Texas System; and Dava Watson, who spent more than two decades in K-12 finance, including as an activity funds accountant at Austin ISD, before moving into nonprofit finance leadership. Between them, they’ve audited school districts, managed activity funds at the campus level, trained bookkeepers across multiple states, and seen first-hand why so many K-12 districts fail their financial audits.

What activity funds are and why they’re treated differently

An auditor coming in for an annual external financial statement audit is going to look at both types of activity funds the district manages. The distinction matters because they carry different sets of obligations.

• Student activity funds are not the district’s money. They belong to outside student organizations — student government, cheerleading, robotics clubs — that have raised the funds themselves. The district is acting as custodian, handling the accounting on behalf of those groups, which is why student activity funds typically show up as fiduciary funds in the district’s financial statements. When auditors arrive, they want to see a full list of the groups with activity accounts, the year-end balances, and the accounts with the highest transaction volumes.
• Campus activity funds are the district’s money. These are dollars the board has set aside for campus purposes, usually under the direction of a principal or an athletic director. Because the money is the district’s, auditors apply different accounting treatment and tighter control expectations than they do for student funds. These typically show up as special revenue funds in a school’s financial statements.

Both sit outside the district’s central finance system because they’re managed at the building level, which makes them the focus of audit testing.

Why activity funds get tested early

Student and campus activity funds together usually represent a small fraction of total assets on the district’s balance sheet. The reason auditors pay so much attention is that the dollars don’t match the risk profile. Transaction volume is high, cash exposure is real, record-keeping happens outside the central finance system, and the people handling the money are usually juggling multiple responsibilities.

There’s also a reputational dimension that district boards tend to underestimate. Scott described a recurring pattern: an organization raises money that donors assumed was going to the school, something goes wrong with the funds, and it hits the local newspaper. The district ends up in the middle of a story it wasn’t technically part of. Board policies about use of the school name and external fundraising affiliations are squarely within the scope of the audit conversation, even when the money never actually touches a district account.

The GASB 84 problem hiding in most districts’ books

There’s a reporting issue most districts haven’t caught up on, and it continues to show up as an audit finding.

Under Governmental Accounting Standards Board Statement No. 84 — commonly called GASB 84 — which took effect for most K-12 districts’ fiscal 2020 reporting period, what used to be called “agency funds” are now “custodial funds,” and the accounting treatment changed meaningfully.

The old model was simple: the district received the money and recorded a due to a student group. Recognition and presentation under GASB 84 work differently, with stricter criteria around when an activity is genuinely a fiduciary activity of the government versus something else.

Every year, the external auditor comes in and adjusts entries to convert the district’s records to the current standard. As Scott put it during the webinar:

“I’ll bet 95% of school districts are still accounting for their student activity accounts under the old accounting rules, which forces the external auditor to come in and do adjusting entries to convert that to the new accounting under GASB 84. So there’s control risk, there’s fraud risk, and there’s financial reporting risk around this.”
— Dr. Scott Scarborough, CPA, CEO of S|CPA Network

The six control gaps that produce most audit findings

1. Segregation of duties

When the same person collects, records, and deposits funds, the district has no meaningful controls in place.

One version of this pattern comes up more often than any other: a principal hands their approval password to a secretary because approvals are faster that way. The secretary is now handling cash coming in for student activity accounts, maintaining the records, and approving disbursements on the principal’s behalf. One person responsible for three functions is the definition of a broken segregation structure.

The right pattern has three people touching any given receipt. The sponsor collects the funds and issues a receipt to the student. The bookkeeper counts the funds in the sponsor’s presence and issues a receipt to the sponsor. A courier takes the consolidated deposit to the bank. Three sets of eyes, three documented handoffs, and no single point of failure.

2. Missing documentation

Documentation is where auditors form their opinion about intent. When a disbursement sample is missing receipts, approvals, or a stated purpose, the auditor has no other information to work with. They’re not going to call you in six months to reconstruct what happened.

The documentation problem tends to grow when activity funds operate outside the central finance system. Campus-level transactions don’t always flow through the same invoice and approval routing that a district office purchase does, and receipts can end up in desk drawers instead of the file system. Approvals that should have been documented in writing sometimes happen verbally between the principal’s office and the bookkeeper’s desk.

3. Delayed deposits

Timeliness is one of the simplest controls and one of the most frequently broken. Most districts set a daily deposit requirement once collections cross a threshold, typically somewhere between $50 and $1,000 depending on the district.

Dava’s benchmark for the bookkeepers she trains is more direct: the threshold should be whatever dollar amount you’d be comfortable reimbursing out of your own pocket, because if something goes missing under your watch, the sponsor and bookkeeper responsibility statements you signed at the start of the year mean you may have to.

When funds sit, three things happen:

• Risk of loss or theft increases with every day the money stays on campus.
• The audit trail degrades as details get forgotten and matching deposits to specific fundraisers starts to rely on memory.
• Funds from different events get commingled, which turns reconciliation into a forensic exercise instead of a routine one.

Dava described a pattern she saw repeatedly in her Austin ISD days: at year-end, sponsors would appear with cash in hand and say, “I found this in my filing cabinet and I don’t know what it’s for.” Someone collected money for something, and no one could reconstruct what or when.

“The longer those funds are held, the harder it becomes to maintain a clear audit trail. Details get forgotten, receipts can be misplaced. What should be a clean, traceable process turns into one that relies on memory instead of documentation.”
— Dava Watson, former activity fund accountant, Austin ISD

4. Unapproved disbursements

Scott kept a question from his internal audit days at the University of Texas System that still works well as a disbursement test: Would we be comfortable with how this money was spent if it showed up on the front page of the newspaper?

The point of internal controls around disbursements is that two people make that judgment call before money moves, rather than after, when the only available action is cleanup.

Approval after the fact is documentation of a decision that was already made, typically without the review the approval was supposed to provide. Internal auditors distinguish between preventative controls, which stop problems before they happen, and detective controls, which catch them after. As Scott put it, “the best kinds of controls are the preventative ones.” Stopping an expenditure before it moves is simpler, cheaper, and less embarrassing than reconstructing what happened after it did.

5. Poor fund tracking

Dava’s favorite best practice for preventing activity fund tracking drift is a bimonthly reconciliation between the bookkeeper and each sponsor, with both parties sitting down together to compare their respective records and confirm the transactions match.

Sponsors forget to record things. Bookkeepers code to the wrong account. Timing differences create apparent discrepancies that dissolve on review. Regular reconciliation catches the drift early, while it’s still a ten-minute conversation instead of a three-month investigation.

It also prevents one of the more common embarrassments in activity fund management: a fund going negative. When a sponsor doesn’t know their real balance, they may approve a purchase against money that isn’t there, and the fund effectively borrows from another fund. Auditors notice.

6. Insufficient oversight

Controls only work when someone is actively monitoring them, and in a lot of districts, no one is. The board sets policy but doesn’t follow through on monitoring. The district office trusts the campuses. The campuses trust the bookkeepers. The bookkeepers trust the sponsors. Everyone assumes someone else is the control.

For districts large enough to have internal audit staff, activity funds should be on the testing rotation. For districts that don’t, oversight must come from the CFO or business manager, with clear accountability flowing down to the principal and ultimately to whoever has signing authority at the campus level.

Building the system that makes audit findings rare

Most of these gaps reflect how processes are designed rather than how staff are performing. Manual systems depend on memory, and staff are juggling multiple responsibilities. As Dava pointed out, the elementary school bookkeeper is frequently also the principal’s secretary and the school nurse, and she’s paid the least of anyone doing finance work in the building. Asking her to execute three-party cash handling protocols flawlessly between answering the phone and triaging a scraped knee is unrealistic.

The districts that have moved past recurring activity fund findings have done three key things:

1. They’ve moved from paper to digital workflows.
2. They’ve automated what they used to do manually.
3. They’ve built controls, approvals, and checkpoints into the process itself rather than asking staff to remember and execute them on top of everything else they do.

What that looks like in practice is:

• Approvals that can’t be given verbally in a hallway because they have to move through the school finance system.
• Reconciliations that surface discrepancies while they’re still small.
• Deposits that flow directly into the general ledger without anyone retyping the numbers.
• Fund balances that prevent overspending before it happens rather than flagging it after the fact.

When controls are embedded in the workflow, the process carries the weight. A bookkeeper can forget a step or a sponsor can miss a handoff and the transaction still reaches the right place with the right documentation attached. Districts that run this way don’t dread audit season. The records are already where they need to be.

See the six gaps in your own district

If your district is still managing activity funds across spreadsheets, paper receipts, and disconnected tools, some version of the six gaps is almost certainly showing up in at least a few of your campuses.

KEV Group’s school finance platform was built specifically to close them, unifying accounting, payments, and reporting for student and campus activity funds across every school in the district.

To see how it works in your district, connect with a school finance expert.