### Control Number ED-OIG/A05D0019

Mr. Charles Wilson, Director

# C. I. Wilson Academy I

# 2033 E. Southern Avenue

# Phoenix, AZ 85040

Dear Mr. Wilson:

This **Final Audit Report** presents the results of our audit of the C.
I. Wilson Academy I's (Academy) use of U.S. Department of Education (ED)
funds for the period July 1, 2001, through June 30, 2002 (2001-2002
school year). 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 and
applicable regulations. The Academy charged \$32,783 of the \$170,000 in
PCSP funds it received for the 2001-2002 school year for costs that were
unallowable. In addition, the Academy was unable to provide
documentation supporting its use of an additional \$1,044 received.

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 Charged \$32,783** **in Unallowable
Costs to the PCSP Grant**

For the 2001-2002 school year,[^1] the Academy charged \$32,783 to the
PCSP grant for costs that were unallowable. We judgmentally[^2] selected
11 expenses totaling \$114,459 from the 57 expenses totaling \$168,956
charged to the PCSP grant for the 2001-2002 school year. The 11 expenses
were selected from 10 cost categories shown in the Academy's general
ledger. We reviewed documentation supporting these expenses and noted
four were for cellular telephone services,[^3] accounting services[^4],
property taxes, and a bank service fee.[^5] We identified three
additional cellular telephone services costs charged to the grant for
the 2001 -- 2002 school year. We do not consider these costs to be
initial operational costs not met by other sources or related to the
initial implementation of the Academy.

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,[^6] 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
intended purpose of the 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 Academy did not have policies and procedures in place to provide
reasonable assurance that federal funds were expended on activities
allowable under the law. Instead, Academy officials relied on their own
interpretation of the charter school law when purchasing items and
services with PCSP funds. The costs we identified as unallowable were
not included in the Academy's PCSP grant budget. Had Academy officials
reviewed their PCSP grant budget or contacted an ED charter school
program official before charging general operational costs to the grant,
the Academy may not have expended PCSP funds on unallowable costs.

Because Academy officials used \$32,783 in PCSP grant funds to pay for
general operational costs, the Academy was unable to use those funds to
purchase items that would increase the chances of the Academy becoming
financially independent.

**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 Academy to

1.  refund \$32,783 to ED; and

1.2 develop and implement policies and procedures that provide
reasonable assurance that federal funds are expended on activities that
are allowable under the law.

**Finding No.** **2 The Academy Cannot Support Its Use of** **\$1,044 in
PCSP Funds**

The Academy was unable to provide documentation supporting its use of
\$1,044 in PCSP funds. The Academy drew down \$170,000 in PCSP funds for
the second year (2001-2002 school year) of the grant but provided
support for only \$168,956.

According to 34 C.F.R. § 75.702 and 75.730(b),[^7] a grantee shall use
fiscal control and fund accounting procedures that insure proper
disbursement of and accounting for federal funds. The grantee must keep
records that fully show how it used federal funds.

For the 2001--2002 school year, the Academy did not have policies and
procedures for reconciling the amount of PCSP grant funds received to
the amount spent. In addition, 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.

Without supporting documentation, the Academy did not demonstrate that
it used \$1,044 (\$170,000 - \$168,956) for the intended purposes of the
PCSP grant.

**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 Academy to

1.  

2.  

3.  2.1 refund \$1,044 to ED.

## 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.[^8] Charter
schools that receive a grant directly from the federal government also
must adhere to regulations listed in 34 C.F.R. Parts 75, 82, and 99.

The Academy received its charter from the Arizona State Board of
Education and opened in September 1999. The Academy applied for a PCSP
grant and received approval from ED on May 3, 2000. The grant provided
the Academy with startup funding for a three-year period. For the
2001-2002 school year, the second year of funding, the Academy received
\$170,000.

**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 July 24, 2001, for \$170,000 and costs charged to
the PCSP grant for the 2001-2002 school year.

To accomplish our objective, we

-   interviewed Academy personnel;

-   reviewed accounting records and identified 57 expenditures totaling
    \$168,956 charged to the PCSP grant;

-   judgmentally selected 11 expenditures totaling \$114,459. We
    selected large dollar expenditures and/or those with descriptions
    that, in our opinion, were inconsistent with the intent of the PCSP
    grant;

-   reviewed supporting documentation (invoices and canceled checks) to
    determine if the 11 expenditures charged to the PCSP grant were
    supportable and allowable.

We also relied, in part, on the Academy's computerized accounting
records maintained using Peachtree© software. We compared the Academy's
accounting records with information from ED's Central Automated
Processing System. We also compared the Academy's supporting
documentation, consisting of invoices and canceled checks, with it's
computerized accounting records. Based on our tests, we concluded the
accounting records were sufficiently reliable to be used in meeting the
audit's objectives.

We performed our audit work between December 2002 and March 2003. We
visited the Academy on December 11, 2002, and discussed the results of
our audit with Academy officials on March 24, 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 ED awards because this
step was not necessary to achieve our audit objective. Instead, we
relied on our testing of the Academy's compliance with the PCSP law and
applicable regulations. Our testing disclosed a material weakness in the
Academy\'s management controls over federal awards. The Academy did not
have policies and procedures in place to provide reasonable assurance
that PCSP funds were expended according to the law. 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 action on the audit.

Jack Martin

Chief Financial Officer

Office of the Chief Financial Officer

400 Maryland Ave, 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 the policy of the U.S. Department of Education 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, if
requested; 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]: The Academy's second year of funding.

[^2]: See Objective, Scope, and Methodology.

[^3]: According to the Academy's Director, Academy staff used cellular
    telephones to communicate with administrators and for security
    purposes.

[^4]: The Academy hired a service provider to perform accounting and
    consulting services. The services performed for the Academy
    consisted of general financial consulting and accounting services
    related to the day-to-day operations of the school.

[^5]: The cost category for the cellular telephone charges consisted of
    four transactions. The cost category for the accounting charges
    consisted of three transactions. The cost categories for property
    taxes and the bank service fee each were comprised of a single
    transaction.

[^6]: The law was amended by the No Child Left Behind Act of 2001, Title
    V, Part B.

[^7]: Unless otherwise specified, all regulatory citations are to the
    July 1, 2001, volume.

[^8]: The law was amended by the No Child Left Behind Act of 2001, Title
    V, Part B.