I was a high school English teacher when AR first hit the schools -at least in Georgia. This was in the mid-late 90s and it was great in the beginning! I haven't dealt with it since 1998, so I will be interested to see what they've done with it here when my oldest starts kindergarten next year. When I was teaching, we were given very strict guidelines about how we could use AR, and using it as a grade was not okay unless you swapped out one or two quiz-type grades for AR grades every semester. This was school policy, and teachers really didn't have a lot of lee-way in doing anything extra with AR.
From this post and another one yesterday, it sounds like different schools and different school systems -and teachers -are using it in a variety of ways. I think it should strictly be extra credit if used in grading or to replace one quiz grade during a semester. Any parties, prizes,etc. should only be administered in a completely unbiased way -basically, kids read and take the computerized tests and receive their prize from the librarian or administration in that manner. If it's a "class party" thing, then the class with the most total points wins -period. No teachers need to be manually entering anything or handing out trophies.
I like the program and I think it's a great way to get non-readers to pick up a book (since many kids are never going to be encouraged to do so at home), but this situation at your child's school sounds disorganized and out of control!