Introduction

Background

The State Education Department (Department) approves private schools to provide educational services to preschool students with disabilities. Each school is required to report revenue, expenses, and full time equivalent (FTE) attendance. This information is used by the Department to calculate tuition rates. The county or municipality in which the student resides pays the student’s tuition at the approved rate and the Department reimburses the municipality or county for a portion of the tuition.

Crossroads School for Child Development (School), located in Inwood, New York, Nassau County, provides educational services to preschool age and infant children. The School operates various programs including preschool, early intervention, and evaluation programs. The School reported total expenses of $2.7 million and served about 90 FTE students in the preschool and early intervention programs in the 1999-00 school year.

A prior audit (SE-1195-1) by the Department in 1997 identified significant deficiencies in financial related areas for the School, including questionable allocation methods, non-reimbursable and undocumented expenses, accounting and reporting errors, undisclosed related party transactions, and weaknesses in internal controls. In total, the audit reduced reimbursable expenses for the preschool program by over $750,000. The audit adjustment and the impact on subsequent years’ tuition rates led to the deterioration of the School’s financial condition.

Objectives, Scope and Methodology

Pursuant to Part 200.18 of the Regulations of the Commissioner of Education (Regulations), the audit was undertaken to assess the School’s financial viability and the actions taken by School officials as of June 30, 2001 to implement the recommendations from our prior audit. The scope of the audit did not include verifying the accuracy and reliability of expenses, revenue, and FTE attendance reported to the Department for the current year.

To accomplish our objectives, we reviewed applicable laws, regulations, policies and procedures; interviewed Department and School management and staff; examined records and supporting documentation; sampled transactions on a non-statistical basis; and reviewed the School’s audited financial statements.

We conducted our audit in accordance with Government Auditing Standards issued by the Comptroller General of the United States. An audit includes examining, on a test basis, evidence supporting transactions recorded in the accounting and operational records, and applying other audit procedures considered necessary in the circumstances. An audit also includes assessing the estimates, judgments, and decisions made by management. We believe that the audit provides a reasonable basis for our findings, conclusions, and recommendations.

Audit Results

The audit questions the financial viability of the School and the adequacy of its plan to become financially solvent. The School needs to closely monitor its financial position and amend its financial plan as needed. The School made some progress in implementing the recommendations of the previous audit: 16 recommendations were fully implemented, 3 were partially implemented, and 5 were not implemented. The School needs to take action to address the recommendations that were not fully implemented.

The School provides a much needed service to the children in the New York metropolitan area. The Department will continue to work with the School to provide comprehensive services to children.

Comments of School Officials

School officials’ comments about the findings were considered in preparing the report. Their comments are included as Appendix B. School officials believe the financial plan and the repayment plan allow the School to maintain its financial viability and provide quality services to the children and families it serves. In regard to the recommendations, School officials initially disagreed with several recommendations related to accounting and allocating costs, and calculating student FTE, but now have indicated their willingness to make the necessary improvements.

Financial Viability

Schools approved by the Department to provide special education services to children should be financially viable. However, the audit questions the financial viability of the School and its ability to continue as a going concern.

The School’s financial statements for the 1999-2000 year show net assets of negative $2.1 million as of June 30, 2000, i.e., liabilities exceeded assets by this amount. The negative position is primarily a result of the cumulative effect of audit adjustments related to non-reimbursable expenses. The audit adjustments impacted subsequent years’ tuition rates resulting in the School owing New York City and Nassau County about $2.6 million. The following graph shows the School’s net assets for the past six years.

Source: Crossroads' Financial Statements 1994-95 through 1999-2000

The decreasing trend with net assets is caused primarily by insufficient revenue to cover expenses. For the 1995-96 through 1998-99 school years, the School operated in the red and had not been able to keep expenses in line with revenue. For example, expenses exceeded revenue by $142,406 for the 1998-99 school year before any prior year tuition adjustments.

Under the current tuition reimbursement system, schools are paid for actual expenses to operate the preschool programs, subject to certain limitations. Any decreased spending for program services or cost savings will result in lower tuition rates and reimbursements. In general, the primary sources of funds for disallowances (deficit positions) are payments from fundraising, donations, surpluses from other programs such as the early intervention programs, and prior year savings. However, the School has not been able to access these funds to any great degree. The School’s deficit position is being primarily funded by pending arrangements with New York City and Nassau County.

To address its financial condition, the School instituted a restructuring process in July 1999 that included changes to personnel. The School indicated that the changes have allowed it to operate in a more streamlined and effective manner. In fact, the School was able to generate a $176,000 surplus for the 1999-2000 school year. However, the surplus appears to be related to the preschool programs and will, in all likelihood, be repaid to municipalities when lower tuition rates are set.

The School has not provided accounting reports (trial balance) or financial statements for the year ended June 30, 2001 so the audit is not able to comment on the results of operations for the year. For the 2001-02 school year, the School has expanded the early intervention programs and expects to earn a surplus from these programs. This surplus and any surpluses from future years will be used to pay amounts owed New York City and others. The School's strategy for expanding the early intervention programs, addressing its deficit, and paying its debts is spelled out in its financial plan and repayment plan.

Financial Plan

The financial plan includes detailed projections of revenue and expenses for the preschool and early intervention programs for the 2001-02 school year. The plan shows that the preschool programs will break even and the early intervention programs will generate a surplus of about $313,000. Our review of the plan identified the following concerns.

· The plan only addresses the 2001-02 school year and does not make any projections for subsequent years.

· The plan does not include any cash flow projections or identify any sources of loans or lines of credit. Without this information, there is less assurance that the School will meet its payroll and other obligations.

· Some of the projection of student enrollments and, therefore, revenue seem overly ambitious. For example, the School projects that the early intervention - home based program will grow from 5 students to 30 students (500 percent increase) from July 2001 to November 1, 2001. The School has not provided updated actual student enrollment data, as requested.

· The projection of costs for the early intervention - home based program does not include any costs for the teachers who provide the services.

· Some salary projections may be understated. For example, the School used an average salary of $40,000 in projecting costs for its therapists, but the School's payroll records for 1998-99 show the average pay for a therapist was $55,577, or $15, 577 more than the projected amount for each therapists.

· The plan shows that the preschool programs will generate 70 percent of the revenue and incur 77 percent of the costs. The early intervention programs will generate 30 percent of the revenue and incur only 23 percent of the costs. The unequal distribution of revenue and expenses between the programs raises questions about the reasonableness of the allocations and direct charges of costs to the various cost centers. Recommendations 1 and 3 in the subsequent section of the report address our concerns with the School's methods for accounting, allocating, and reporting costs.

· The financial statements show employees' fringe benefits rates of 15.7 percent and 19.4 percent for the 1998-99 and 1999-2000 years, respectively. However, the School used a rate of 12.4 percent for the preschool programs and 15.0 percent for the early intervention programs in its financial plan.

The audit did not attempt to correct or restate the projections. However, these concerns highlight the fact that the plan is based on assumptions and projections that may not materialize. As such, the School must closely monitor its financial position and amend its plan as needed. The School should also inform the Department and New York City of any significant changes in a timely manner.

Repayment Plan

The School prepared a repayment plan in June 2001 to address the amount owed New York City. The plan calls for four monthly payments of $20,000 (September 2001 through December 2001), 102 monthly payments of $25,000 (January 2002 through June 2010), and a final payment of $29,324 (July 2010). This plan shows it will take the School about 10 years to pay off the amount owed. As of November 1, 2001, New York City had not approved the plan. Our review of the plan identified the following concerns.

· The plan does not provide for any interest charges on the loan. It is our understanding that New York City intends to charge the School interest on the loan. This would need to be factored into the repayment plan and would significantly extend the final payment date.

· The plan does not include any provisions to pay amounts owed to Nassau County and the pension plan. The School needs to consider amounts owed to others to provide a more realistic picture of the required repayments over the next decade.

The School’s financial plan and repayment plan may not be adequate and the School will continue to have financial difficulties. For example, the School has not been able to meet its contributory requirements and owes the pension fund $272,920. Faced with financial difficulties, the School may also have some difficulty in providing mandated student services. As such, the Department and New York City must closely monitor the School's program services, its financial position, and its ability to continue as a going concern. Also, the School needs to keep its accounting records current and prepare financial statements in a timely manner.

The School did not close its accounting records and file its Consolidated Fiscal Report (CFR) and financial statements in a timely manner. For example, the 1998-99 CFR and financial statements, which were due on December 1, 1999, were not received by the Department until May 2, 2000, or five months after the due date. Similarly, the 1999-2000 and the 2000-01 CFRs and financial statements have not been received by the due date. Failure to submit the data by the required due date may delay the calculation of the tuition rate and impact cash flow. Also, if the accounting records are not closed out and the financial statements prepared in a timely manner, it is more difficult for the School to monitor its financial condition. The School needs to improve its accounting and reporting procedures to ensure the reports are completed and submitted by the due date.

Recommendations

1. Develop a long-term financial plan (three to five years).

2. Prepare a cash flow statement to help ensure the School will be able to meets it payroll and other obligations.

3. Closely monitor the School’s financial position and amend the financial plan as needed.

4. Inform the Department and New York City of any significant changes in the School's financial position or its financial plan in a timely manner.

5. Revise the repayment plan to provide for the repayment of any interest charges required by New York City, and amounts owed to Nassau County and the pension plan.

6. Keep the School's accounting records current and prepare the financial statements and CFR in a timely manner.

Status of Prior Audit Recommendations

Of the 24 prior audit recommendations, School officials fully implemented 16 recommendations, partially implemented 3 recommendations, and did not implement 5 recommendations. The audit is particularly concerned about the failure of the School to accurately account for expenses as specified in the Department’s Cost Manual. The School has not agreed to direct charge expenses, allocate expenses to all programs benefiting from the expense, or allocate expenses on a fair and reasonable basis. This results in inaccurate accounting records and reports and the Department is not able to set appropriate tuition rates. A discussion of each recommendation and our concerns follow.

Recommendation 1

Improve procedures to ensure that allocation methods are fair and reasonable and supported by documentation.

Status – Not implemented.

School action – School officials stated that they implemented the recommendation and made their best effort to allocate expenses based on programs benefited. However, the audit determined the School did not adequately address the recommendation. It allocated all teacher and teacher assistant salary expenses to the educational programs using student FTEs even though some of the individuals only worked in one program and should have been direct charged to that program. In fact, the Cost Manual states that allocation methods are to be used only after all attempts have been made to direct charge an expense.

The School charged $20,841 in car expenses for its Executive Director and Assistant to the early intervention programs. The Cost Manual states that any expenditure that cannot be charged directly to a specific program must be allocated across all programs benefited by the expenditure. Since the car expenses also benefited the preschool programs, the School does not have the option to charge the whole expense to the early intervention programs.

School officials stated telephone expenses were allocated based on the number of employees. However, the audit determined the telephone expenses were allocated to each program based on the number of hours worked by each employee. This is not reasonable in that teachers and assistants account for 60 percent of the hours worked, but spend the majority of their time in the classroom away from telephones. Ratio value or student FTE would have been a more accurate method of allocating telephone expenses to the educational programs.

The School allocated certain expenses using student FTE. However, the School did not calculate student FTE in accordance with Department Regulations (See Recommendation 11). As a result, the School’s salary allocations were not accurate, but the impact on allocated costs was minimal.

The School needs to direct charge expenses where possible and allocate other expenses to all programs that benefit from the expense. Failure to do this will result in inaccurate accounting and reporting of expenses.

Recommendation 2

Maintain adequate records to enable the proper allocation of salary expenses.

Status – Fully implemented.

School action – School officials stated that the recommendation was implemented and adequate documentation is being maintained. The audit found documentation is being maintained to support the allocations. However, the documentation for the therapist salaries had a mathematical error that resulted in inaccurate allocations as follows.

Program	Audited	Difference	Reported
Preschool Full Day	$141,078	+15,364	$125,714
Preschool Half Day	16,977	-22,576	39,553
Integrated	9,295	+1,008	8,287
Early Intervention	42,397	+4,613	37,784
Related Services	5,151	+582	4,569
Evaluations	9,071	+1,009	8,062
Total	$223,969	0	$223,969

Recommendation 3

Establish procedures to ensure that direct program expenses are identified, segregated and accumulated by program.

Status – Not implemented.

School action – School officials stated that all employees must submit requisition forms identifying the program and type of expenses. However, the audit determined the School continues to use the student FTE method to allocate expenses for such accounts as children’s activities, field trips, and educational supplies, rather than directly charging the programs that benefited from the expenses. Also, the School continues to allocate salaries rather than directly charging the amount to the programs where the teachers and teacher assistants worked. The actual salary amounts for 1:1 aides were not charged to the 1:1 aide cost center, rather an allocated amount of salaries was charged to the cost center. As stated in Recommendation 1, failure to do this will result in inaccurate accounting and reporting of expenses.

Recommendation 4

Ensure that bonus compensation is paid in accordance with the Manual.

Status – Fully implemented.

School action – School officials stated that all bonuses are now paid in accordance with the Manual. The audit of bonuses paid to two employees showed the School was in compliance with the requirements of the Manual.

Recommendation 5

Establish procedures to ensure that only expenses that are reimbursable according to the Manual are claimed.

Status – Fully implemented.

School action – School officials stated that its Controller reviews all expenses for appropriateness. The audit of a sample of expenses found the School did not claim for reimbursement any expenses specifically disallowed by the Manual.

Recommendation 6

Ensure that adequate documentation is retained for all expenses claimed.

Status – Partially implemented.

School action – School officials stated that proper documentation is now maintained. However, the audit determined the School did not maintain adequate documentation to support $3,100 in expenses for credit card payments that were charged to the early intervention programs in the educational supplies account. The account shows that $7,580 was paid to credit card companies. The audit also noted other credit card charges were posted to various accounts including cleaning supplies, dues and subscriptions, computer expenses, auto gas/repairs, and others. We are particularly concerned about the lack of documentation for these payments given that the prior audit identified numerous personal and questionable items including socks, laundry supplies, dog biscuits, snacks, shrimp, and soft drinks. The School also did not provide any documentation to show that its Controller reviewed and approved these expenses. In addition, the School did not provide adequate documentation to support a correction to the accounting system, including $3,300 in salaries.

Recommendation 7

Improve procedures to ensure that expenses are properly classified.

Status – Fully implemented.

School action – School officials stated that expenses are posted to the proper accounts. The audit determined that the School properly classified fringe benefits for grants and salaries for the program administrator and the clinical supervisor.

Recommendation 8

Improve procedures to ensure that items are capitalized in accordance with the Manual.

Status – Fully implemented.

School action – School officials stated that procedures were established to capitalize assets costing $1,000 or more and a useful life of two or more years.

Recommendation 9

Ensure that all programs are reported separately as required by the CFR Manual.

Status – Fully implemented.

School action – School officials stated that all programs are now reported separately on the CFR. The audit found that the School has reported all its programs, including 1:1 aides, on the CFR.

Recommendation 10

Repay $581 in federal grant funds for Grant 94-142.

Status – Fully implemented.

School action – School officials implemented the recommendation and the audit confirmed repayment of the grant funds.

Recommendation 11

Improve procedures to ensure that FTE attendance is calculated and reported in accordance with Section 175.6 of the Regulations.

Status – Not implemented.

School action – School officials stated that the recommendation was implemented. However, the audit determined the School did not calculate student FTEs in accordance with the Regulations. The School used 40 weeks to calculate FTE rather than the 39 weeks that should have been used to calculate student FTEs for the ten-month programs for this school year. As a result, FTEs were overstated by 0.339 for the ten-month programs and 1.249 for the summer programs.

	Ten-Month Program	Summer Program
Reported	73.788	57.333
Audited	73.449	56.084
Difference	0.339	1.249

Recommendation 12

When the tuition rates are certified, adjust tuition billings to reflect the appropriate FTE attendance.

Status – Fully implemented.

School action – School officials stated that billing calculations are adjusted for final tuition rates when certified. Both New York City and Nassau County revise the rates to reflect any changes in the certified tuition rates.

Recommendation 13

Improve procedures to ensure that evaluation components are accurately reported.

Status – Fully implemented.

School action – School officials stated that procedures for evaluations have been improved and evaluation logs are maintained to help ensure accurate reporting. The audit determined that the School maintains a schedule listing the student name and the type and dates of evaluations. This information is used to report the number of evaluations.

Recommendation 14

Ensure that loans are not made that conflict with the best interests of the school.

Status – Fully implemented.

School action – School officials stated that they have discontinued making loans. The audit of School records showed no funds were loaned out during 1998-1999.

Recommendation 15

Ensure that payments to related parties are properly disclosed on the CFR and the financial statements.

Status – Fully implemented.

School action – School officials stated that all related party transactions are now properly disclosed on the CFR and the financial statements. The audit found that the related party transactions were disclosed in the 1998-99 CFR including:

· $24,000 in payments to the son of the School’s Executive Director for billing, payroll, and computer services;

· $35,000 in salary paid to the daughter-in-law of the Executive Director for her services overseeing tuition billings; and

· $47,000 in salary paid to the husband of the School’s Assistant Executive Director for his services as Comptroller.

Recommendation 16

Ensure that adequate documentation is maintained for all expenses.

Status – Partially implemented.

School action – School officials stated that the record keeping functions have been strengthened and improved. However, the School could not provide adequate documentation to support three of the eight sample transactions (38 percent). The three transactions were payments to a credit card company and were charged to the educational supplies account for the early intervention programs.

Recommendation 17

Develop and implement an effective inventory control system.

Status – Fully implemented.

School action – School officials stated that they have implemented a system over fixed assets whereby identification tags and location documentation are utilized.

Recommendation 18

Improve procedures to ensure that invoices are adequately reviewed before payment.

Status – Partially implemented.

School action – School officials stated that the recommendation was implemented and all employees must use a requisition form and obtain department head and Comptroller approval to purchase all items. However, the audit of a sample of transactions determined only five of the eight transactions (62.5 percent) had written evidence of department head or Comptroller approval.

Recommendation 19

Develop and implement a system that identifies, segregates and accumulates expenses by program.

Status – Not implemented.

Recommendation 20

Segregate and report food expenses separately on the CFR.

Status – Fully implemented.

School action –School officials stated that they implemented the recommendation. The audit found the food expenses are accounted for separately.

Recommendation 21

Establish and maintain subsidiary ledger accounts for revenue as required by the Manual.

Status – Fully implemented.

School action – School officials implemented the recommendation and now maintain subsidiary revenue accounts for the preschool full day, half day, and integrated programs.

Recommendation 22

Bill municipalities in accordance with Part 175.6 of the Regulations.

Status – Not implemented.

School action – School officials stated that they implemented the recommendation. However, the audit determined the School did not calculate student FTE in accordance with the Regulations. Refer to our comments for Recommendation 11.

Recommendation 23

Ensure that reporting to appropriate authorities is done accurately and submit amended statements if required.

Status – Fully implemented.

School action – School officials stated that they implemented the recommendation. The audit determined the School reported the necessary information to the appropriate tax authorities.

Recommendation 24

Ensure that all programs are reported separately on the CFR as required.

Status – Fully implemented.

School action – School officials stated that they implemented the recommendation. The audit determined that all programs were reported separately on the CFR.

Table of Contents

Recommendation 1

Recommendation 3

Recommendation 4

Recommendation 7

Recommendation 8

Recommendation 9

Recommendation 10

Recommendation 11

Recommendation 12

Recommendation 13

Recommendation 14

Recommendation 15

Recommendation 16

Recommendation 17

Recommendation 19

Recommendation 20

Recommendation 21

Recommendation 23

Recommendation 24