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### Control Number ED-OIG/A05-D0028

####### NOV 19, 2003

Mr. Nasuhi Yurt, Executive Director

Daisy Education Corporation (d/b/a Sonoran Science Academy)

# 2131 West Ina Road, Building G

# Tucson, AZ 85741

Dear Mr. Yurt:

This **Final Audit Report** presents the results of our audit of the
Sonoran Science Academy's (Academy) use of U.S. Department of Education
(ED) funds for the period August 1, 2001, through July 31, 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 and
regulations. The Academy charged \$20,519[^1] of the \$158,500 in PCSP
funds it received for the project period for costs that were
unallowable.

We provided the Academy with a draft of this report. The Academy
concurred that it did not have adequate policies and procedures in place
to provide reasonable assurance that PCSP funds were expended for
allowable activities during our audit period. However, the Academy
generally did not concur with the finding and recommendation to refund
PCSP funds to ED. The Academy did not agree that the costs it paid with
PCSP funds were unallowable, and it provided a detailed justification
explaining why it considered the costs allowable. Our review of the
Academy's explanation and supporting documentation caused us to accept
some costs that we initially identified as being unallowable. The
Academy's comments are summarized after Finding No. 1 and included in
their entirety as an attachment to this report.

## 

## **AUDIT RESULTS**

**Finding No.** **1** **The Academy Charged Unallowable Costs to the
PCSP Grant**

For the project period, the Academy charged \$20,519[^2] to the PCSP
grant for costs that were unallowable. We reviewed expense descriptions
recorded in the Academy's accounting records. We also judgmentally
selected 13 expenses totaling \$109,263 from the 134 expenses totaling
\$159,485 charged to the PCSP grant for the project period. We reviewed
invoices and cancelled checks supporting these 13 expenses. Our review
of the expense descriptions, invoices, and canceled checks disclosed
that the Academy charged

1.  Eight expenses totaling \$15,186 for costs incurred prior to the
    start of the grant award period (August 1, 2001). One of the eight
    expenses totaling \$5,408 consisted of prepaid construction costs
    that were refunded to the Director but not documented in the
    Academy's accounting records. Four of the eight expenses totaling
    \$7,200 were for fees paid to a teacher exchange organization (see
    number 2).

2.  Six expenses totaling \$11,250 for fees paid to a teacher exchange
    organization hired by the Academy to facilitate hiring teachers from
    foreign countries. We discussed this type of expense with a program
    official who informed us that these costs would not be an allowable
    use of PCSP grant funds.

3.  One expense totaling \$1,283 for a payment to a psychologist for
    student evaluations. This expense should have been paid with other
    funds.

According to 34 C.F.R § 75.703, "A grantee may use grant funds only for
obligations it makes during the grant period." In addition, 34 C.F.R. §
75.702 and 75.730(b)[^3] state that a grantee shall use fiscal control
and fund accounting procedures that insure proper disbursement of and
accounting for federal funds. Pursuant to Office of Management and
Budget, Circular A-122, *Cost Principles for Non-Profit Organizations*,
Attachment A, Section A(2)(g), a grantee must keep records that fully
show how it used federal funds.

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,[^4] 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 expended funds on unallowable costs because it did not have
policies and procedures in place to provide reasonable assurance that
PCSP funds were expended for activities that were allowable under the
law. Instead, Academy officials relied on their own interpretation of
the charter school law when expending 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 incurring these
costs, the Academy may not have expended PCSP funds on unallowable
costs.

Because Academy officials charged costs to the PCSP grant before
receiving the PCSP award and used PCSP grant funds to pay for general
operational costs, the Academy was unable to use those funds to purchase
items and services 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, Office of Innovation and Improvement, instruct the Academy to

1.  refund \$19,534[^5] to ED; and

2.  develop and implement policies and procedures to provide reasonable
    assurance that ED funds are expended on costs that are allowable
    under the law.

## 

#### Auditee Comments

##### The Academy recognized that it needed better financial controls during the project period and stated that it has developed policies and procedures to prevent any future incorrect expenditures. However, the Academy generally disagreed with the finding, commenting that it expended PCSP funds in a timely manner, for the design of the Academy, and for serving students consistent with its curriculum. 

##### 

##### The Academy stated that it believed that it used PCSP funds in a timely manner even though the funds were expended prior to the grant award date. The Academy contracted with contractors to perform work on the Academy's facilities to ensure that it was in compliance with the Americans with Disabilities Act and to gain a certificate of occupancy. Most of the work commenced and was paid for after the award date. The Academy stated that it could not have opened unless it used PCSP funds for construction costs prior to the award period. In an amendment to the Academy's written response to the draft audit report, the Director provided documentation supporting the Academy's use of PCSP funds prior to the award period. The Director also commented that the company hired to perform the construction work at the Academy reimbursed him at the direction of the Academy for the unused retainer amount of \$5,408. This was done because the Director previously loaned the Academy money 

##### The Academy commented that it used PCSP funds to hire a teacher exchange organization to assist them with attracting, recruiting, and hiring educators that had an emphasis in mathematics and science. The Academy hired this organization because Arizona was suffering from a severe mathematics and science teacher shortage. This organization assisted the Academy to ensure that it hired the most qualified and competent staff for the open positions at the Academy.

##### The Academy originally stated that using PCSP funds to pay for a psychologist was an allowable use of PCSP funds. The Academy stated that it hired the psychologist to provide services unrelated to special education needs (testing specifically in the areas of mathematics and science, consistent with the Academy's curriculum). In an amendment to the Academy's written response to the draft audit report, the Director stated that the Academy made an error when it stated that the psychologist did not perform special education services for the Academy. After further review, the Academy determined the psychologist was hired to perform special education services.

#### OIG Response

We reviewed the Academy's comments and modified our finding. However, we
did not change our position that the costs charged to the grant prior to
the Academy's award (payments to the Director, the teacher exchange
organization, and a psychologist) are unallowable.

-   Because the Academy was not able to provide documentation accounting
    for \$5,408 paid to the Director from an Academy contract vendor, we
    do not have assurance it was used for allowable purposes.

-   The Academy did not provide convincing evidence supporting that it
    had a difficult time hiring mathematics and science educators on its
    own. This cost was not an initial implementation cost and should not
    have been paid with PCSP funds.

-   The Academy used PCSP funds to pay for a psychologist to perform
    special education services for the Academy. We reviewed a copy of
    the invoice that the Academy provided us. This invoice shows that
    the psychologist performed special education consulting services
    that consisted of file reviews, legal compliance issues, program
    development, individualized education program meetings, and
    re-evaluations for Academy students. Special education services are
    an ongoing operational cost that should have been paid with other
    sources of funding.

## **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.[^6] 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 Daisy Education Corporation (d/b/a Sonoran Science Academy) received
its charter from the Arizona State Board of Education and opened in
September 2001. The Academy applied for a PCSP grant and received its
award from ED on August 10, 2001. The grant provided the Academy with
startup funding for a three-year period. During the project period
(August 10, 2001, through June 30, 2002), the Academy received \$158,500
in PCSP grant funds.

**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. For the purpose
of this report, our audit covered the PCSP award ED made on August 10,
2001, for \$158,500 and costs charged to the grant for the project
period.

To accomplish our objective, we

-   interviewed the Academy's Principal;

-   reviewed accounting records and identified 134 expenditures totaling
    \$159,485 charged to the PCSP grant;

-   judgmentally selected 13 expenditures totaling \$109,263. We
    selected large expenses and/or those with cost descriptions that, in
    our opinion, were inconsistent with the intent of the PCSP grant;
    and

-   reviewed supporting documentation (invoices and canceled checks) to
    determine if the 13 expenses were allowable and supportable. During
    our testing, we identified 2 expenses totaling \$4,050 for teacher
    exchange service costs that were charged to the grant. After
    determining that the costs were unallowable, we reviewed the
    Academy's accounting records for payments to the same organization.
    We identified 4 additional expenses totaling \$7,200 for teacher
    exchange service costs that were charged to the grant for the
    project period.

We also relied, in part, on computer-processed data the Academy
maintained using QuickBooks© software. We compared the data with
information from ED's Central Automated Processing System. We also
compared supporting documentation (invoices and canceled checks) with
the Academy's computerized 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 December 2002 and June 2003. We
visited the Academy on December 9, 2002, and discussed the results of
our audit with the Academy's Principal on March 21, 2003, and a
representative of the charter holder on June 25, 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 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 PCSP awards. The Academy did not
have written policies and procedures in place to provide reasonable
assurance that PCSP funds were expended according to the law and to
prevent PCSP funds from being expended prior to the project period. 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.

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

## 

###### Attachment

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[^1]: The Academy charged \$159,485 to the PCSP grant, \$985 more than
    the \$158,500 it had available for the project period.

[^2]: Includes \$15,186 charged to the PCSP grant before the Academy
    received its award from ED, \$11,250 in fees paid to a teacher
    exchange organization (less \$7,200 included in the \$15,186), and
    \$1,283 for contracted services that were charged to the PCSP grant.

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

[^4]: The law was further amended by the No Child Left Behind Act of
    2001, Title V, Part B.

[^5]: The Academy charged \$159,485 to the PCSP grant, \$985 more than
    the \$158,500 it had available for the project period. Therefore, we
    only recommend recovery of \$19,534 (\$20,519 in unallowable costs
    less \$985).

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