### 

### Control Number ED-OIG/A05-D0008

Mr. Tom Horne, Superintendent of Public Instruction

Arizona Department of Education

# 1535 West Jefferson Street

# Phoenix, AZ 85007

Dear Mr. Horne:

This **Final Audit Report** presents the results of our audit of 20
Arizona charter schools' uses of U.S. Department of Education (ED)
funds[^1] for the period October 1, 2000, through September 30, 2001.
The objective of our audit was to determine if Arizona charter schools
expended ED funds according to applicable law and regulations.

Charter schools in Arizona generally expended Title I, Part A (Title I)
of the Elementary and Secondary Education Act of 1965 (ESEA),[^2] and
Part B of the Individuals with Disabilities Education Act (IDEA) funds
in accordance with applicable law and regulations. However, contrary to
the law and regulations, we found that the Arizona Department of
Education (ADE) provided Title I and IDEA funds directly to private,
for-profit entities. We recommend that the Assistant Secretary for
Elementary and Secondary Education and the Assistant Secretary for
Special Education and Rehabilitative Services instruct ADE to

-   refund \$1,129,006 to ED for Title I and IDEA funds provided to
    private, for-profit charter holders authorized by the Arizona State
    Board for Charter Schools during the period October 1, 2000, through
    September 30, 2001;

-   determine the total amount of Title I and IDEA funds that it
    provided to private, for-profit charter holders authorized by the
    Arizona State Board of Education and the individual school districts
    during the period October 1, 2000, through September 30, 2001, and
    refund that amount to ED;

-   determine the total amount of Title I and IDEA funds that it
    provided to private, for-profit charter holders during the period
    October 1, 2001, through June 30, 2003, and refund that amount to
    ED;

-   stop providing Title I and IDEA funds directly to private,
    for-profit entities; and

-   implement procedures to give control of federal funds only to an
    institution that qualifies as a public entity and ensure students
    attending private, for-profit charter schools are provided the
    services to which they are entitled. (Finding No. 1)

Additionally, two of the charter schools that we audited did not expend
Title I funds entirely in accordance with applicable law and
regulations.

-   One charter school used Title I funds to supplant funds intended to
    provide regular classroom instructional services. Because the school
    used Title I funds to supplant rather than supplement other funds,
    Title I eligible students may not have received the extra services
    they needed to gain the skills necessary to meet the State's
    performance standards. We recommend that the Assistant Secretary for
    Elementary and Secondary Education instruct ADE to refund \$89,833
    to ED and instruct ADE to require the school to implement controls
    that provide reasonable assurance that Title I funds are used to
    supplement, not supplant, funds intended to provide regular
    classroom instruction. (Finding No. 2)

-   Another charter school failed to provide adequate accounting records
    showing that it spent all of its Title I funds, inaccurately
    reported to ADE the amount of Title I funds it spent, and drew Title
    I funds in excess of its immediate needs. The charter school
    maintained an inadequate financial management system and
    inaccurately reported on its use of Title I funds because school
    officials failed to familiarize themselves with the regulations. We
    recommend that the Assistant Secretary for Elementary and Secondary
    Education instruct ADE to refund \$46,104 to ED or provide support
    on how the charter school expended Title I funds during our audit
    period. We also recommend that ADE require the school to develop and
    implement controls that will provide reasonable assurance that the
    school accurately accounts for and reports on its use of Title I
    funds, minimizes Title I cash on hand, and limits requests for Title
    I funds to its immediate needs. (Finding No. 3)

In response to a draft of this audit report, ADE provided written
comments agreeing with Finding No. 2 and Finding No. 3. ADE disagreed
with Finding No. 1 and provided a detailed written response explaining
why it disagreed. ADE commented that, consistent with Arizona law, ADE
treats charter schools as public schools whether the charter schools are
operated by a non-profit, public, or for-profit entity. ADE does not
believe that federal law precludes for-profit charter schools from
receiving federal funds. We evaluated ADE's written comments for Finding
No. 1 and have not changed our position. Private, for-profit entities
that hold charters for public schools are not public entities under the
administrative supervision or control of a government other than the
federal government. Subsequently, such entities are not allowed to exert
control over Title I and IDEA funds. ADE's comments are summarized in
the body of the report and included in their entirety as an attachment
to this report.

## AUDIT RESULTS

Finding No. 1 ADE Provided Federal Funds to Private Entities

ADE provided Title I and IDEA funds to private entities that operated
charter schools in Arizona. Though ADE considers each charter holder a
local educational agency (LEA), the private company holding the charter
is not a public entity. Only public entities can receive Title I and
IDEA funds.

The term \"public\" is defined in 34 C.F.R. § 77.1(c) as an agency,
organization, or institution under the administrative supervision or
control of a government other than the Federal Government. According to
ESEA, as amended by the Improving America's Schools Act of 1994, Title
X, Part C, Section 10306(1)(B), the term charter school means "a public
school that is created by a developer as a public school, or is adapted
by a developer from an existing public school, and is operated under
public supervision and direction." According to ESEA, as amended by the
Improving America's Schools Act of 1994, Title XIV, Part A, Section
14101, Paragraph 18, and the IDEA Amendments of 1997, Part A, Section
602(15)(A), a LEA is a public board of education or other public
authority legally constituted within a state for either administrative
control or direction of, or to perform a service function for, public
elementary or secondary schools in a city, county, township, school
district, or other political subdivision of a state. Therefore, Title I
and IDEA funds are required to stay in the control of a public entity.

For the purpose of providing Title I and IDEA funds to charter schools,
Arizona law[^3] does not differentiate between charter holders. Charter
holders in Arizona can be private or public entities. Private entities
that hold a charter from an authorizing entity can open, control, and
operate public charter schools funded with Title I and IDEA funds just
like public entities. When one of these entities holds a charter and
subsequently opens additional charter schools under the original
charter, ADE considers that entity, whether private or public, a LEA.
ADE gives control over Title I and IDEA funds to each LEA and expects
each LEA to expend those funds according to appropriate laws and
regulations.

During our audit period, the Arizona State Board for Charter Schools,
Arizona's largest chartering entity, recognized over 29 private,
for-profit entities that operated at least 75 charter schools. ADE
awarded \$752,490 in Title I funds to these private, for-profit
entities. In addition, ADE awarded \$376,516 in IDEA funds to 13 of
these private, for-profit entities. Giving control of federal funds to a
non-public entity is contrary to the law and could detrimentally affect
the quantity and quality of Title I and IDEA services provided to
disadvantaged students attending a private, for-profit charter school.

**Recommendations**

# 

# We recommend that the Assistant Secretary for Elementary and Secondary Education and the Assistant Secretary for Special Education and Rehabilitative Services instruct ADE to

1.  refund \$1,129,006 to ED for Title I and IDEA funds provided to
    private, for-profit charter holders authorized by the Arizona State
    Board for Charter Schools during the period October 1, 2000, through
    September 2001;

2.  determine the total amount of Title I and IDEA funds that it
    provided to private, for-profit charter holders authorized by the
    Arizona State Board of Education and the individual school districts
    during the period October 1, 2000, through September 30, 2001, and
    refund that amount to ED;

3.  determine the total amount of Title I and IDEA funds that it
    provided to private, for-profit charter holders during the period
    October 1, 2001, through June 30, 2003, and refund that amount to
    ED;

4.  stop providing Title I and IDEA funds directly to private,
    for-profit charter holders; and

5.  implement procedures to give control of federal funds only to an
    institution that qualifies as a public entity and ensure students
    attending private, for-profit charter schools are provided the
    services to which they are entitled.

**Auditee Comments**

ADE did not concur with our finding that private, for-profit entities
are not "public" entities for the purposes of receiving Title I and IDEA
funds. ADE commented that it believes that its practice of distributing
Title I and IDEA funds to Arizona's for-profit charter schools complies
with federal law. ADE stated that Arizona's charter school law does not
differentiate between charter schools operated by non-profit or
for-profit entities. Under Arizona Revised Statutes, all charter schools
are subject to the same financial and electronic data submission
requirements. These requirements include an annual programmatic and
financial external audit and financial reports to the Superintendent
regarding funding by program. The financial and electronic data
information that charter schools are required to submit is to
demonstrate their compliance with state fiscal requirements and program
regulations. In addition to monitoring each charter school's use of
state funds, ADE's program staff monitor how charter schools expend
federal funds. If ADE's program staff are made aware of non-compliance
issues, they work with LEA staff to develop corrective action plans and
continue to monitor the LEA to ensure that the plan is in compliance
with both fiscal and program regulations.

ADE also commented that the Arizona State Board of Education has the
authority to exercise general supervision over and regulate the conduct
of charter schools as public schools, regardless of whether each school
is operated by a non-profit or for-profit organization. Arizona's
charter schools are monitored by one of its three types of sponsoring
entities, which are all public entities and given their authority by
Arizona state statute. The sponsoring entity of an Arizona charter
school, which is authorized by state law and each school's chartering
contract, has oversight and administrative responsibility for each of
the schools that it sponsors. These sponsoring entities monitor each
school to ensure it complies with federal and state law and the terms of
its charter. If a charter school does not comply with applicable federal
and state laws, the sponsoring entity can request that the Arizona State
Board of Education withhold up to ten percent of the monthly
apportionments of state aid due to the school. The sponsoring entity
also has the authority to revoke the school's charter if the school
"breaches one or more provisions of its charter."

Additionally, ADE commented that the Title I and IDEA programs permit
them to distribute funds to public charter schools operated by
for-profit entities. For-profit charter schools have the same legal
obligations to improve student achievement under Title I and to educate
children with disabilities under IDEA. For-profit and non-profit charter
schools meet the definition of public schools by Arizona law and operate
under "public supervision and direction" as defined in the Title I and
IDEA law.

Finally, ADE stated that there is no federal statute or regulation that
prohibits for-profit charter schools from receiving Title I or IDEA
funds.

**OIG Response**

ADE did not provide convincing evidence that private, for-profit
entities holding charters in Arizona are allowed to receive Title I and
IDEA funds. Based on ADE's comments, we did not change the finding or
recommendations in this report.

ADE provided information supporting that it does not differentiate
between for-profit and non-profit schools and that both types of schools
are held to the same state standards. However, ADE did not provide
evidence showing that the for-profit entities that run the charter
schools and are allowed to function as LEAs qualify as "public"
entities. Additionally, ADE did not provide evidence showing that any of
its three types of sponsoring entities (Arizona State Board for Charter
Schools, Arizona State Board of Education, or a school district
governing board) provide "administrative control or direction" of the
private, for-profit entities that hold the charter for the schools. The
controls that ADE points to are directed at the individual charter
school holders that operate one school. ADE's charter school law does
not provide direction on the fiscal administration requirements
pertaining to for-profit entities operating multiple charter schools.

ADE commented that, under Arizona Revised Statutes, all charter schools
are subject to the same financial and electronic data submission
requirements, including annual programmatic and financial external
audits, and are required to submit financial reports to the
Superintendent regarding funding by program. However, the results of our
audit demonstrate that private, for-profit and non-profit charter
schools are not subject to the same financial requirements. Non-profit
charter schools expending over \$300,000 in federal funds are required
to submit to an Office of Management and Budget (OMB) Circular A-133
compliance audit designed to specifically look at the entity's use of
federal funds under generally accepted government auditing standards.
These audit standards were implemented to obtain consistency and
uniformity of audits for state and local governments and non-profit
entities. Private, for-profit charter schools expending over \$300,000
in federal funds are not subject to OMB Circular A-133 audit
requirements, even though private, for-profit entities operating
multiple charter schools have a greater chance of receiving over
\$300,000 in federal funds than those operating a single, non-profit
charter school. Because ADE allows for-profit entities to operate
charter school(s) that receive Title I and IDEA funds, it has allowed
for-profit entities that operate multiple (or large) charter schools to
circumvent the mandatory federal reporting requirement imposed on its
non-profit counterparts. Pursuant to 20 U.S.C. 7221i, Section 5210
(1)(I), a charter school is a public school that agrees to comply with
the same federal and state audit requirements as do other elementary and
secondary schools in the state, unless such requirements are
specifically waived for the purpose of this program.

ADE commented that it treats charter schools as LEAs and oversees all
charter schools in the same manner, regardless of whether the school is
operated by a non-profit, public, or for-profit entity. However, our
audit disclosed that ADE did not maintain sufficient oversight of at
least one private, for-profit entity that functioned as a LEA and
operated multiple charter schools. One of the 20 entities that we
audited was a for-profit entity that held the charter for 12 separate
charter schools. During our audit period, 8 of the for-profit entity's
12 charter schools had poverty percentages of 35 percent or more.
Contrary to the Improving America's Schools Act of 1994, Title I, Part
A, Section 1113, the private, for-profit entity expended Title I funds
at only 3 of its 8 charter schools, and it did not expend any Title I
funds on the charter school that generated the most Title I funds.

The private, for-profit entity functioning as the LEA should have
identified eligible school attendance areas (in this case, each of its
charter schools), ranked each area, and then determined the allocation
for each area. In determining allocations, the LEA must allocate funds
received under Section 1113 to eligible school attendance areas or
eligible schools in rank order on the basis of the total number of
children from low-income families in each area or school. The for-profit
entity determined the percentage of poverty for each school but did not
expend Title I funding at the school that generated the most Title I
funds. If ADE treated the private entity functioning as a LEA the same
as it treated all its other LEAs, it might have identified the LEA's
non-compliance with federal Title I requirements.

**Finding No.** **2 One Charter School Used Title I Funds to Supplant
Other Funds Intended to Provide Classroom Instructional Services**

Contrary to the law, one charter school used Title I funds to supplant,
instead of supplement, funds intended to provide regular classroom
instructional services. The school used \$89,833 of Title I funds to pay
for salaries and fringe benefits for regular classroom teachers. The
school would have employed these teachers even if the school did not
receive Title I funds. Because the school did not have a school-wide
Title I program, teachers paid with Title I funds should have provided
supplemental instruction only to Title I eligible students.

ESEA, as amended by the Improving America\'s Schools Act of 1994,
Section 1120A (b)(1)(A), states that \"... a State or LEA shall use
funds received under this part only to supplement the amount of funds
that would, in the absence of such federal funds, be made available from
non-federal sources for the education of pupils participating in
programs assisted under this part, and not to supplant such funds.\"

When we asked what type of Title I program the school operated, the
director of the school thought the school operated a school-wide
program. However, the school only provided us with documents that showed
it was allowed to operate a targeted assistance Title I program. When we
brought this matter to their attention, ADE Title I program officials
informed us that ADE has a monitoring/oversight system in place for ESEA
programs. ADE's Title I program office relies extensively on the work of
independent auditors performing Office of Management and Budget Circular
A-133 and limited scope audits. In addition, the monitoring/oversight
system includes a self-assessment document that is completed on a
rotating basis at least once every four to five years by every LEA
within the State, including charter schools. After receipt of the
self-assessment document, ADE conducts follow-up, on-site visits of each
LEA. Had ADE scheduled and conducted a site visit, its review might have
disclosed that the school was inappropriately operating as a school-wide
Title I program and using Title I funds to pay regular classroom
teachers' salaries.

**Recommendations**

# We recommend that the Assistant Secretary for Elementary and Secondary Education instruct ADE to

1.  refund \$89,833 to ED; and

2.  instruct the school to implement controls to provide reasonable
    assurance that Title I funds are used to supplement, not supplant,
    funds intended to provide regular classroom instruction.

**Auditee Response**

ADE concurred with our finding and commented that a LEA's compliance
with federal fiscal requirements is monitored by external auditors and
ADE's program personnel who conduct regular monitoring of charter
schools. When an issue of supplanting is found, the LEA is required to
reimburse the federal project with state funds. ADE will take the
appropriate action based on the findings in this report and, if
appropriate, recoup the Title I funds from the respective charter
school.

Finding No. 3 One Charter School Had an Inadequate Financial Management
System, Inaccurately Reported on Its Use of Title I Funds, and
Maintained Title I Funds in Excess of Its Immediate Needs

One charter school's financial management system was inadequate. The
school's system did not provide for tracking expenditures by federal
funding source. In addition, the school inaccurately reported the amount
of Title I funds spent for the 2000-2001 school year (July 1, 2000,
through June 30, 2002) to ADE. For the 2000 -- 2001 school year, the
school requested and received its entire Title I allocation of \$49,175
at the beginning of the year. School officials informed us the school
spent \$3,071 during the year, but reported to ADE that it spent
\$45,000 and carried over the remaining \$4,175 to the subsequent school
year.[^4] When we asked for its accounting records, the school was
unable to provide records showing how it spent the \$49,175. On March
19, 2003, school officials provided accounting records showing the
school only spent \$3,071 in Title I funds during the 2000-2001 school
year, meaning it maintained excessive cash on hand of \$46,104 for most
of the school year.

According to 34 C.F.R. § 80.20(a) and (b), fiscal control and accounting
procedures of a state as well as its subgrantees must be sufficient to
permit the tracing of funds to a level of expenditures adequate to
establish that such funds have not been used in violation of the
restrictions and prohibitions of applicable statutes. Grantees and
subgrantees must maintain records that adequately identify the source
and application of funds provided for financially assisted activities.
These records must contain information pertaining to grant or subgrant
awards and authorizations, obligations, unobligated balances, assets,
liabilities, outlays or expenditures, and income. According to 34 C.F.R.
§ 80.21(b), when advances are made by letter-of-credit or electronic
transfer of funds methods, the grantee or subgrantee must make drawdowns
as close as possible to the time of making disbursements. The Treasury
Regulations at 31 C.F.R. § 205.7(c)(4) provide that recipients shall
request funds not more than three business days prior to the day on
which it makes a disbursement.

The school maintained an inadequate financial management system and
inaccurately reported on its use of Title I funds because school
officials failed to familiarize themselves with the regulations. In
addition, ADE officials informed us that the top 100 LEAs in Arizona
received approximately 90 percent of all the State's Title I funds.
Therefore, these LEAs received the most oversight. Small LEAs[^5]
received less oversight. According to ADE officials, during the
2000-2001 school year, all Arizona schools were required to submit a
minimum of two cash management reports during the year. These reports
were to show the amount of funds received and spent and the remaining
cash balance. Beginning with the 2001-2002 school year, schools were
required to submit monthly cash management reports. The monthly reports
provide ADE's Title I program officials with information that will allow
them to evaluate how the funds were used. The monthly reports should
provide reasonable assurance that charter schools accurately report on
their uses of Title I funds.

School officials also failed to familiarize themselves with cash
management requirements and establish a system to ensure it drew down
Title I funds only for immediate needs. In addition, ADE allowed the
school to draw its entire allocation at the beginning of the year. An
ADE official said a school typically receives its Title I allocation in
a series of monthly payments that reflects the timing of anticipated
expenditures because Title I expenditures usually are mostly salaries.
The official said the school should not have received its entire Title I
allocation at the start of the year unless it could provide support
showing the expenditures would be incurred at the start of the year. We
reviewed the school's 2000-2001 Title I budget and found it was
comprised of \$45,000 in salary and benefit costs and \$4,175 in supply
costs.

Because its financial management system was inadequate, the school could
not show how it spent \$46,104 in Title I funds. Because the school
submitted a completion report to ADE that inaccurately reported the
total amount of Title I funds spent for the 2000-2001 school year, ADE
did not have an opportunity to prevent the school from drawing down
additional Title I funds until it showed it had spent its cash on hand.
The excess cash on hand could have resulted in the United States
Government incurring additional interest costs.

**Recommendations**

# We recommend that the Assistant Secretary for Elementary and Secondary Education instruct ADE to

1.  instruct the school to provide support to show how it spent \$46,104
    in Title I funds received for the 2000-2001 school year. If the
    school cannot show how it spent the funds, require ADE to refund
    \$46,104 to ED;

2.  instruct the school to develop and implement controls that provide
    reasonable assurance that it properly accounts for and accurately
    reports on its use of Title I funds; and

3.  instruct the school to develop and implement controls to minimize
    Title I cash on hand and limit requests for Title I funds to its
    immediate needs.

**Auditee Response**

ADE concurred with the finding and commented that it believed that it
was possible for a LEA receiving less than \$50,000 to receive its
entire allocation at the beginning of the school year. ADE reported that
it has implemented new controls to ensure that a LEA cannot maintain an
excess cash balance of Title I funds. ADE requires all charter schools
to submit quarterly cash management reports and an annual project report
via an electronic grants management system. This system will
automatically place a hold on payments to the LEA if it has "excess
cash" on hand. ADE also offers assistance to charter schools to ensure
that they are accurately reporting the use of Title I funds. If a
charter school is submitting fraudulent reports, ADE will take the
appropriate measures to report the charter school to the Office of the
Attorney General and the sponsoring agency.

## 

## BACKGROUND

Charter schools are public schools that cannot charge tuition and are
required to serve all students, including those with special needs.
Charter schools may apply for and receive Title I funds to provide
academic support and learning opportunities to help low-achieving
children in high-poverty schools master challenging curriculum and meet
state standards in core academic subjects. Charter schools also may
apply for and receive special education funding through the Grants to
States program that provides states with formula grants to meet special
education and related services to children with disabilities aged 3
through 21.

ADE has designated three types of authorizing entities[^6] that may
issue charters[^7] to individual schools. As of October 2001, the
authorizing bodies in Arizona had chartered 419 schools. These charter
schools served 69,884 students. During our audit period, Arizona charter
schools received \$4,786,423 in Title I funds and \$1,482,284 in IDEA
funds.

**OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of our audit was to determine if, for the period October
1, 2000, through September 30, 2001, a sample of Arizona charter schools
expended ED funds according to applicable law \[ESEA, as amended, Title
X, Part C (20 U.S.C. 8061 -- 8067), and Title I, (20 U.S.C., Sections
6301 -- 6514); and IDEA, Section 611-619 (20 U.S.C. 1411 -- 1419)\] and
related regulations \[34 C.F.R. Parts 80, 200, and 300\]. Though our
audit covered PCSP, Title I, and IDEA funds, this report only conveys
the results of charter schools' uses of Title I and IDEA funds.

To accomplish our objective, we

-   interviewed ADE and Arizona State Board for Charter Schools
    personnel;

-   interviewed Arizona Auditor General officials;

-   reviewed ADE's policies and procedures for administering grants;

-   reviewed Arizona State law pertaining to charter schools;

-   randomly and judgmentally selected 20 charter schools from a
    population of 221 charter schools that received either Public
    Charter Schools Program, Title I, or IDEA funds for our audit
    period. We separated the charter schools into two different
    categories, urban and rural, by chartering entity. (Chartering
    entity officials provided the designation of whether the school was
    in an urban or rural area.) We randomly chose 13 schools based on
    the chartering entity that issued their charters -- 4 schools
    chartered by the Arizona State Board for Charter Schools, 4 schools
    chartered by the Arizona State Board of Education, and 5 schools
    chartered by individual school districts. We judgmentally selected
    seven additional schools based on the total amount of federal funds
    expended and based on discussions with ADE and charter entity
    officials. Seven of the 20 charter schools that we selected received
    and expended Title I funds, and 2 received and expended IDEA funds;
    and

-   Audited all 20 schools' uses of federal funds.

During our audit of each school, we visited the school, spoke with
charter school representatives, and reviewed the school's accounting
records pertinent to its use of ED funds. When sufficient accounting
records and related documentation were available, we judgmentally
selected expenditures and compared original source documents (such as
purchase orders, requisitions, invoices, receipts, and canceled checks)
with the school's accounting records. We judgmentally selected the
expenditures based on several factors. These factors included purchase
type (services or salaries), the total expenditure amount, unclear or
vague purchase descriptions, or descriptions that indicated the
expenditure was unallowable.

We also relied, in part, on ADE's computer-processed school data. We
compared ADE's Title I and IDEA award and expenditure data with the
accounting records provided to us by various charter schools. Based on
these comparisons, we concluded ADE's data were sufficiently reliable to
be used in meeting the audit's objective. Additionally, we reviewed
individual charter schools' accounting records. We compared those
records with a sample of supporting documentation such as invoices and
canceled checks. Based on our tests at the individual charter schools,
we concluded that, in general, the data the schools provided were
sufficiently reliable to be used in meeting the audit's objective.

We performed our work between December 2002 and June 2003. We visited 19
of the 20 schools in our sample from December 2 through 12, 2002 (we did
not visit one of the schools because it was not necessary to achieve our
audit's objective). We discussed the results of our audit with ADE
officials on March 31, 2003.

Our audit was performed in accordance with generally accepted government
auditing standards appropriate to the scope of audit described above.

# 

# **STATEMENT ON MANAGEMENT CONTROLS**

As part of our audit, we did not assess the adequacy of ADE's management
controls over its administration of Title I and IDEA programs and funds
because this step was not necessary to achieve our audit objective.
Instead, we relied on testing of charter schools' compliance with
applicable Title I and IDEA law and regulations. Our testing disclosed a
material weakness in ADE\'s management controls. Specifically, ADE
relinquished control of Title I and IDEA funds to private, for-profit
entities because Arizona State law does not differentiate between
public, non-profit and private, for-profit entities. This weakness is
discussed in the **AUDIT RESULTS** section of this report.

## ADMINISTRATIVE MATTERS

## 

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report, represent the opinions
of the Office of Inspector General. Determinations of corrective action
to be taken will be made by the appropriate ED officials.

If you have additional comments or information that you believe may have
a bearing on the resolution of this audit, you should send them directly
to the following ED officials, who will consider them before taking
final Departmental action on this audit.

Ronald Tomalis, Acting Assistant Secretary

Office of Elementary and Secondary Education

U.S. Department of Education

400 Maryland Avenue, SW, Room 3W315

> Washington, DC 20202

Robert H. Pasternack, Ph.D., Assistant Secretary

Office of Special Education and Rehabilitative Services

U.S. Department of Education

330 C Street, SW, Room 3006

> Washington, DC 20202

It is ED's policy to expedite the resolution of audits by initiating
timely action on the findings and recommendations contained therein.
Therefore, receipt of your comments within 30 days would be greatly
appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. §552),
reports issued by the Office of Inspector General are available to
members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

Sincerely,

/s/

Richard J. Dowd

Regional Inspector General

for Audit

## Attachment

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[^1]: Our audit included Public Charter Schools Program, Title I, and
    IDEA funds. This report only covers Title I and IDEA funds. In
    Arizona, Public Charter Schools Program funds flow directly from ED
    to individual charter schools.

[^2]: As amended by the Improving America's Schools Act of 1994 and,
    subsequently, by the No Child Left Behind Act of 2001.

[^3]: Authorized by Arizona Revised Statutes, Chapter 1, Title 15,
    Article 8, Section 15-183(B).

[^4]: After we identified this issue, a charter school official notified
    ADE officials about the inaccurate reporting. On February 18, 2003,
    ADE approved the school's amended 2002 Title I budget. The amended
    budget included the \$46,104 in carryover from our audit period.

[^5]: ADE generally considers each charter school a LEA. ADE considers a
    LEA small if it received less than \$50,000 in Title I funds for the
    school year.

[^6]: These three types of entities are the Arizona State Board of
    Education, the Arizona State Board for Charter Schools, and
    individual school districts.

[^7]: In Arizona, charters can be issued to public and private entities.