### Control Number ED-OIG/A05-D0030

Mr. Charles I. Wilson, Director

C. I. Wilson Academy II

# 2033 E. Southern Ave.

# Phoenix, AZ 85040

Dear Mr. Wilson:

This **Final Audit Report** presents the results of our audit of the C.
I. Wilson Academy II's (Academy) use of U.S. Department of Education
(ED) funds for the period July 1, 2001, through June 30, 2002 (project
period). The objective of our audit was to determine if the Academy
expended ED funds according to the law and applicable regulations.

Our audit disclosed that the Academy did not expend Public Charter
Schools Program (PCSP) grant funds in accordance with the law. The
Academy was unable to show adequate support for \$63,189 of the
\$160,000 in PCSP funds it received for the project period. The Academy
was unable to show that it expended \$20,277 in PCSP funds for the
project period (the Academy's general ledger showed it spent only
\$139,723). In addition, the Academy was unable to provide adequate
support for \$42,912 (of \$139,723) charged to the PCSP grant.

We provided a draft of this report to the Academy. However, the Academy
did not provide us with comments.

## AUDIT RESULTS

**Finding No.** **1** **The Academy Could Not Support Its Use of
\$63,189 in PCSP Funds**

During the project period, the Academy was unable to support its use of
\$63,189 in PCSP funds received. The Academy drew down \$160,000 in PCSP
funds for the project period. However, the Academy's general ledger
showed only \$139,723 of expenses charged to the grant, a difference of
\$20,277. In addition, of the 10 expenses (totaling \$139,723) recorded
in the Academy's general ledger, the Academy had no support or
inadequate support for 4 (totaling \$42,912). The Academy was unable to
provide any supporting documentation for costs charged to the grant for
"Renting Land and Buildings" (\$14,778). Further, the Academy did not
provide adequate support for costs charged to the grant for
administrative oversight (\$6,600), curriculum development
(\$7,766),[^1] and computer technicians (\$13,768). The documentation
provided in support of the administrative oversight, curriculum
development, and computer technicians costs was inadequate because the
Academy did not provide documentation such as employment contracts,
memoranda, or other documentation to describe the work performed or the
rate of compensation.

According to 34 C.F.R. § 75.702,[^2] a grantee shall use fiscal control
and fund accounting procedures that insure proper disbursement of and
accounting for federal funds. Also, 34 C.F.R. § 75.730 states that a
grantee shall keep records that fully show (a) the amount of funds under
the grant, (b) how the grantee used the funds, (c) the total cost of the
project, (d) the share of that cost provided from other sources, and (e)
other records to facilitate an effective audit.

Office of Management and Budget Circular A-122, *Cost Principles for
Non-Profit Organizations*, Attachment B, Section 39(b), states that in
determining the allowability of costs in a particular case, no single
factor or any special combination of factors is necessarily
determinative. However, the adequacy of the contractual agreement for
the service (e.g., description of the service, estimate of time
required, rate of compensation, and termination provisions) is a
relevant factor. Circular A-122, Attachment B, Section 7(m)(1), states
the distribution of salaries and wages to awards must be supported by
personnel activity reports, except when a substitute system has been
approved in writing by the cognizant agency.

During the project period, the Academy did not have policies and
procedures for reconciling the amount of PCSP grant funds received to
the amount spent. Also, at the start of our audit in December 2002, the
Academy's current controller had only recently started working for the
Academy. At that time, he was not completely familiar with the computer
system and related codes for financial transactions. Additionally, we
noted that the 10 expenses charged to the PCSP grant in the Academy's
general journal consisted of 10 adjusting entries on June 30, 2002. The
Academy's use of general journal adjusting entries to record expenses
indicates the expenses were not recorded and charged to the grant when
they were incurred.

Without records showing how it used the funds, the Academy cannot
demonstrate that it used \$63,189 (\$20,277 + \$42,912) for the intended
purposes of the PCSP grant.

**Recommendations**

We recommend that the Chief Financial Officer, Office of the Chief
Financial Officer, in conjunction with the Deputy Under Secretary for
Innovation and Improvement, instruct the Academy to

1.  refund \$63,189 to ED;

2.  develop and implement policies and procedures that provide
    reasonable assurance it records expenses when incurred and regularly
    reconciles the amount of federal funds received to the amount spent;
    and

3.  develop and implement policies and procedures that provide
    reasonable assurance that it maintains adequate supporting
    documentation for all costs charged to federal grants.

## BACKGROUND

The purpose of the PCSP is to provide grants for the planning, design,
and initial implementation of charter schools created by members of the
local community. Grants may be made for a period of up to three years.
Funds may be used to plan and design the education program of the
charter school and evaluate the effects of charter schools.

Charter schools are governed by the charter school legislation enacted
in the Elementary and Secondary Education Act of 1965, as amended by the
Improving America's Schools Act of 1994, Title X, Part C, Section
10304(f)(3), and the Charter School Expansion Act of 1998.[^3] Charter
schools that receive a grant directly from the federal government must
also adhere to regulations listed in 34 C.F.R. Parts 75, 82, and 99.

The Academy received its charter from the Arizona State Board for
Charter Schools and opened in August 2001. The Academy applied for a
PCSP grant and received its award from ED on August 15, 2001. The grant
provided the Academy with startup funding for a three-year period. For
the project period (July 1, 2001, through June 30, 2002), the first year
of funding, the Academy received \$160,000.

**OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of our audit was to determine if the Academy expended ED
funds according to the law and applicable regulations. Our audit covered
the award ED made on August 15, 2001, for \$160,000 and costs charged
for the project period.

To accomplish our objective, we

-   interviewed Academy personnel;

-   reviewed accounting records and identified 10 expenses charged to
    the PCSP grant totaling \$139,723; and

-   compared the accounting records to supporting documentation (payroll
    information, invoices, and canceled checks) to determine if the 10
    expenses charged to the PCSP grant were allowable and supportable.

We also relied, in part, on the Academy's computer-processed general
ledger maintained using Peachtree© software. We compared the Academy's
general ledger data with that in ED's Central Automated Processing
System. We also compared the Academy's supporting documentation
(consisting of payroll information, invoices, and canceled checks) with
its general ledger data. Based on our tests, we concluded the data were
sufficiently reliable to be used in meeting the audit's objective.

We performed our audit work between February and April 2003. We did not
visit C.I. Wilson Academy II. However, we did visit C.I. Wilson Academy
I on December 11, 2002,[^4] and discussed the results of this audit with
Academy officials on April 15, 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 the Academy's
management control structure applicable to all federal awards because
this step was not necessary to achieve our audit objective. Instead, we
relied on testing of the Academy's compliance with the PCSP law and
applicable regulations. Our testing disclosed material weaknesses in the
Academy\'s management controls over ED awards. The Academy did not have
policies and procedures in place to provide reasonable assurance that it
accounted for all federal funds received and recorded expenses when they
were incurred. In addition, the Academy lacked policies and procedures
that provide reasonable assurance that it maintained supporting
documentation for all costs charged to federal grants. These weaknesses
are 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 action on the audit.

Jack Martin

Chief Financial Officer

Office of the Chief Financial Officer

400 Maryland Avenue, SW, Room 4E313

Washington, DC 20202

> Nina Shokraii Rees, Deputy Under Secretary

Office of Innovation and Improvement

U.S. Department of Education

400 Maryland Avenue, SW, Room 4W317

> 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

[^1]: Includes \$1,035 in travel expenses related to curriculum
    development.

[^2]: Unless otherwise specified, all regulatory citations are to the
    July 1, 2001, volume.

[^3]: The law was amended by the No Child Left Behind Act of 2001, Title
    V, Part B.

[^4]: C.I. Wilson Academy I and C.I. Wilson Academy II have common
    administrators and are located next to one another in the same
    compound. We audited the PCSP funds awarded to C.I. Wilson Academy
    II after determining C.I. Wilson Academy I could not support its use
    of all PCSP funds (Control Number ED-OIG/A05-D0019).