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### Control Number ED-OIG/A05-D0018

Sister Judy Bisignano, Ed.D.

Cesar Chavez Middle School

# 3372 S. 6^th^ Avenue

# Tucson, AZ 85713

Dear Sister Bisignano:

This **Final Audit Report** presents the results of our audit of the
Cesar Chavez Middle School's (School) use of U.S. Department of
Education (ED) funds for the period July 1, 2001, through June 30, 2002
(2001-2002 fiscal year). The objective of our audit was to determine if
the School expended ED funds according to applicable law and
regulations.

Our audit disclosed that the School did not expend Public Charter
Schools Program (PCSP) funds in accordance with the law. The School
received \$200,000 in PCSP funds for its 2001-2002 fiscal year but did
not provide documentation supporting its use of \$183,706. Of the
\$16,294 for which it provided documentation, the School used \$13,099
for costs that were unallowable.

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

**AUDIT RESULTS**

**Finding No. 1 The School Could Not Support Its Use of \$183,706 in
PCSP Funds**

The School did not provide (1) complete and accurate accounting records
that fully showed how it used PCSP funds and (2) documentation that was
sufficient to support its use of \$183,706[^1] in PCSP funds. For the
2001-2002 fiscal year, the School received \$200,000 in PCSP funds. When
we asked for records showing how the School used the PCSP funds, School
officials originally provided accounting records that showed only
\$150,899 was charged to the PCSP grant. We judgmentally[^2] selected
three drawdowns totaling \$94,535 made prior to December 31, 2001, and
three individual expenses totaling \$5,237 posted after December 31,
2001, and asked School officials to provide us with supporting
documentation (requisitions, purchase orders, invoices, and canceled
checks). The documentation the School provided was sufficient to support
its use of only \$16,294.

We informed the School that its records were not sufficient to show how
it used all its PCSP funds. The School's Director assured us that the
School used all \$200,000 in PCSP grant funds received for the 2001-2002
fiscal year for PCSP purposes and provided us with revised accounting
records. The revised accounting records showed that the School charged
\$221,439 to the PCSP grant, \$21,439 more than the School received.
When we asked for documentation supporting the School's use of the
\$200,000 in PCSP grant funds it received for the 2001-2002 fiscal year,
School officials did not provide us the records needed to support
\$183,706.

According to 34 C.F.R. § 75.730,[^3] direct grant recipients are
required to keep records that fully show the amount of funds under the
grant, how the grantee uses the funds, the total cost of the project,
the share of that cost provided from other sources, and other records to
facilitate an effective audit.

School officials had a difficult time maintaining and accessing records
for the 2001-2002 fiscal year. During the 2001-2002 fiscal year, the
School used two different financial services companies to maintain its
financial management system. When the second financial services company
started to perform services for the School, the company made several
adjustments to the School's accounting records. In an attempt to provide
us with complete and accurate accounting records for the 2001-2002
fiscal year, School officials worked with the second financial services
company and had the company make adjustments to the School's accounting
records. Despite its efforts, the School could not provide us with
complete and accurate accounting records and related documentation that
was sufficient to support its use of all PCSP funds. It could not
provide us with accurate records and sufficient documentation because
the School did not have policies and procedures to ensure that its
accounting records were reconciled on a regular basis and accurately
reflected the School's use of PCSP funds.

Without complete and accurate accounting records and supporting
documentation, we could not determine whether the School expended
\$183,706 of PCSP funds according to the law and applicable regulations.

**Recommendations**

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

1.  refund \$183,706 to ED; and

1.2 develop and implement policies and procedures for regularly
reconciling the amount of PCSP funds received with the amount spent.

**Finding No.** **2** **The School Charged Unallowable Costs to the PCSP
Grant**

For the 2001-2002 fiscal year, the School charged \$13,099 to the PCSP
grant for costs that were unallowable under the law. For its 2001-2002
fiscal year, the School received \$200,000 through 25 draws from ED's
Central Automated Processing System, Grant Administration and Payment
System. The accounting records that School officials originally provided
us showed that the School charged only \$150,899 to the PCSP grant for
the 2001-2002 fiscal year. We judgmentally selected three drawdowns
totaling \$94,535 and three individual expenses totaling \$5,237
recorded in the School's system of records.[^4] School officials only
provided us with documentation sufficient to support \$16,294 (\$13,099
in drawdowns and \$3,195 in individual expenses). We reviewed the
documentation and determined that \$13,099 was used for overnight
fieldtrips for students and one piece of artwork. These costs were not
related to the initial implementation of the School. The costs were
general operational costs, not initial operational costs that could not
be met by other sources.

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,[^5] allows
charter schools to spend funds for activities related to post award
planning and design of the educational programs and initial
implementation of the charter school. Activities related to initial
implementation may include (a) informing the community about the school,
(b) acquiring necessary equipment and educational materials and
supplies, and (c) acquiring or developing curriculum materials. Charter
schools are allowed to pay for other initial operational costs not met
by other sources provided that those costs are directly related to the
purpose of the PCSP grant. The intent of the PCSP grant is to pay for
necessary items and services that would support the initial
implementation and operations of the school while also allowing the
school to become financially independent.

The School charged unallowable costs to the PCSP grant because it did
not have policies and procedures in place to provide reasonable
assurance that PCSP funds were expended on activities allowable under
the law. A School official stated that the School received special
approval from ED's Charter School office to expend PCSP funds for
student fieldtrips as part of its educational program. However, the
School official was unable to provide documentation of the approval.
Additionally, School officials were unable to provide an explanation why
artwork was purchased with PCSP funds.

Because School officials used \$13,099 in PCSP funds to pay for general
operational costs, the School was unable to use those funds to purchase
items that would increase the chances of the School becoming financially
independent.

**Recommendation**

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

1.  refund \$13,099 to ED for unallowable costs charged to the PSCP
    grant.

## BACKGROUND

The purpose of the PCSP grant 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. 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 School received its charter from the Higley School District and
opened in August 1999. The School applied for a PCSP grant and received
approval from ED on August 19, 1999. The grant provided the School with
startup funding for a three-year period. For the 2001-2002 fiscal year,
the third year of funding, the School received \$200,000.

**OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of our audit was to determine if the School expended ED
funds according to applicable law and regulations. For the purpose of
this report, our audit covered the PCSP award ED made on September 12,
2001, for \$200,000 and costs charged to the grant for the 2001-2002
fiscal year.

To accomplish our objective, we

-   interviewed School personnel and third party vendors hired by the
    School;

-   obtained and reviewed accounting records;

-   judgmentally selected three drawdowns totaling \$94,535 made prior
    to December 31, 2001, and three individual expenses totaling \$5,237
    posted after December 31, 2001. We selected the drawdowns because
    the School did not provide us with a list of expenses charged to the
    grant before January 1, 2002. We selected expenses posted after
    December 31, 2001, with large dollar amounts and/or cost
    descriptions that were vague or inconsistent with the PCSP law.

-   compared purchase orders, invoices, and canceled checks with the
    School's accounting records to determine whether expenses charged to
    the PCSP grant were supportable and allowable.

As part of our audit, we used computer-processed data contained in the
School's accounting records. We could not determine the reliability of
this data because the School provided us with two versions of its
accounting records that showed it spent different amounts of PCSP funds
for its 2001-2002 fiscal year. In addition, the School was unable to
provide us documentation that would support its use of PCSP funds.
However, we used the computerized accounting records for the limited
purposes of our audit because it was the only information provided that
showed how the School used PCSP funds.

We performed our audit work between December 2002 and July 2003. We
visited the School on December 9, 2001, and discussed the results of our
audit with School officials on March 27 and April 17, 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 School's
management controls applicable to all ED awards because this step was
not necessary to achieve our audit objective. Instead, we relied on our
testing of the School's compliance with the law and applicable
regulations. Our testing disclosed material weaknesses in the School's
management controls over PCSP awards. The School did not have policies
and procedures in place to (1) ensure that its accounting records were
reconciled on a regular basis and accurately reflected the School's use
of PCSP funds and (2) provide reasonable assurance that PCSP funds were
expended on activities allowable under the law. 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 Departmental action on this audit.

Jack Martin, Chief Financial Officer

Office of the Chief Financial Officer

U.S. Department of Education

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]: \$200,000 received less \$16,294 in expenses for which we received
    documentation.

[^2]: See the Objective, Scope, and Methodology section of this report
    for an explanation of our sample selection.

[^3]: Unless otherwise specified, all regulatory citations are to the
    July 1, 2001, volume.

[^4]: Because the School ended its contract with one financial services
    company on December 31, 2001, and hired a new financial services
    company effective January 1, 2002, we selected three drawdowns made
    prior to December 31, 2001, and three individual expenses recorded
    after January 1, 2002. The original accounting records that School
    officials provided us showed that the School's PCSP expenditures
    totaled \$150,899 for the 2001-2002 fiscal year. However, its
    detailed ledger was incomplete and inaccurate. Therefore, we could
    not determine the exact number of expenses charged to the grant for
    the 2001-2002 fiscal year.

[^5]: The law was further amended by the No Child Left Behind Act of
    2001, Title V, Part B.