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# SEP 30 2003

### Control Number ED-OIG/A05-D0024

Mr. Robert L. Duffy, Superintendent

Career Success High School

# 1777 W. Camelback Road, N-100

# Phoenix, AZ 85015

Dear Mr. Duffy:

This **Final Audit Report** presents the results of our audit of Career
Success High School's (School) 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 School
expended ED funds according to the law and applicable regulations.

Our audit disclosed that the School did not expend Public Charter
Schools Program (PCSP) grant funds in accordance with the law. Of the
\$200,000 in PCSP funds received for the project period, the School used
\$16,884[^1] for unallowable costs.

We provided the School with a draft of this report. The School did not
concur with the finding and recommendation to refund PCSP funds to ED
presented in this final report. The School concurred that it did not
have policies and procedures in place to provide reasonable assurance
that PCSP funds were expended for allowable activities during our audit
period. It provided a detailed justification explaining why it
considered costs allowable. Our review of the School's explanation
caused us to change our finding in this report by eliminating some costs
(i.e., basketball jerseys and membership fees) that we initially
identified as being unallowable. We also modified our procedural
recommendation to reflect that the School informed us that it had
implemented policies and procedures. The School's comments are
summarized in the body of the report and included in their entirety as
an attachment.

## **AUDIT RESULTS**

**Finding No.** **1** **The School Charged \$16,884 in Unallowable Costs
to the PCSP Grant**

The School charged \$16,884 to the PCSP grant for costs that were
unallowable. We judgmentally[^2] selected 41 expenditures totaling
\$80,074 from the 145 expenditures totaling \$201,002 charged to the
PCSP grant for the project period. We reviewed supporting documentation
such as requisition forms, purchase orders, invoices, and canceled
checks for these 41 expenditures and noted that 10 were for accounting
and legal services.[^3] These accounting and legal services expenses
were not part of the School's initial startup costs and, therefore, were
not reasonable and necessary for the initial implementation of the
School. The School should have paid these expenses from 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,[^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. Additionally, pursuant to
Office of Management and Budget Circular No. A-122, *Cost Principles for
Non-Profit Organizations*, Attachment A, Section A, paragraphs 2(a) and
3(a), to be allowable, a cost must be reasonable, allocable, ordinary,
and necessary for the operation of the organization or the performance
of the award.

The School did not have policies and procedures in place to provide
reasonable assurance that PCSP funds were expended for activities
allowable under the law. Instead, School 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 School's
PCSP grant budget. Had School officials reviewed their PCSP grant budget
or contacted an ED charter school program official before incurring
these costs, the School may not have expended PCSP funds on unallowable
costs.

Because School officials used \$16,884[^5] in PCSP grant 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.

#### 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 School to

1.  refund \$15,882[^6] to ED; and

#### 1.2 provide evidence that it has implemented policies and procedures that provide reasonable assurance that ED funds are expended on activities that are allowable under the law.

#### 

#### Auditee Comments

The School disagreed that it charged unallowable costs to the PCSP
grant. The School's Superintendent of Schools (Superintendent) stated
that the School considered the legal and accounting fees to be startup
costs. The Superintendent explained that the legal and accounting fees
were allowable during the first year of the grant, and the School did
not receive direction that these costs would not be allowable during the
second year.

The School agreed that, during the audit period, it did not have
controls in place to ensure that PCSP funds were expended on allowable
activities. The Superintendent stated that the School went through some
major internal management and personnel changes that had a direct affect
on the School's ability to track and report on changes in its grants
management system. The Superintendent informed us that the School has
reconstructed the accounting records for the 2001 -- 2002 school year
and used the same accounting procedures for the 2002 - 2003 school year.
Additionally, the School developed policies and procedures that were
implemented during the 2002 -- 2003 school year. These policies and
procedures were implemented to ensure that PCSP funds were expended
according to law and applicable regulations.

#### OIG Response

## 

## We reviewed the School's comments and found no basis for changing our position that the accounting and legal services expenses charged to the PCSP grant were unallowable. The School admitted that these expenses were incurred as a result of the dissolution of the School's original partnership. The PCSP funds expended for the dissolution of the School's partnership were not necessary for the initial implementation and operation of the School.

## 

## **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.[^7] 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 Arizona State Board of
Education and opened in August 2000. The School applied for a PCSP grant
and received its award from ED on May 11, 2000. The grant provided the
School with startup funding for a three-year period. For the project
period (July 1, 2001, through June 30, 2002), the School received
\$200,000 in PCSP grant funds.[^8]

**OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of our audit was to determine if the School expended ED
funds according to the law and applicable regulations. Our audit covered
\$50,000 authorized by ED on June 16, 2001, \$150,000 authorized by ED
on July 24, 2001, and costs charged to the PCSP grant for the project
period.

To accomplish our objective, we

-   interviewed School personnel;

-   reviewed accounting records showing 145 expenditures totaling
    \$201,002 charged to the PCSP grant for the project period;

-   judgmentally selected 41 expenditures totaling \$80,074. We selected
    large dollar expenditures and/or those with cost descriptions that,
    in our opinion, were inconsistent with the intent of the PCSP law;
    and

-   compared the accounting records with supporting documentation
    (requisition forms, purchase orders, invoices, and canceled checks)
    to determine if the 41 expenditures were allowable and supportable.

We also relied, in part, on computer-processed data that the School
maintained using Peachtree© and QuickBooks©. We compared the School's
data with information from ED's Central Automated Processing System. We
also compared the School's supporting documentation (such as requisition
forms, invoices, purchase orders, and canceled checks) with the School's
computerized accounting records. Based on our tests, we concluded the
data 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 School on December 3, 2002, and discussed the results of our
audit with School officials on March 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 School'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 School's compliance with the PCSP law and
applicable regulations. Our testing disclosed a material weakness in the
School\'s management controls over ED awards. The School 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 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 School charged \$201,002 to the PCSP grant, \$1,002 more than
    the \$200,000 in PCSP funds it received for the project period.
    Therefore, we will only recommend recovery of \$15,882 (\$16,884 in
    unallowable costs less \$1,002).

[^2]: We selected large dollar expenditures and/or those with cost
    descriptions that, in our opinion, were inconsistent with the intent
    of the PCSP grant.

[^3]: The accounting and legal services expenses were used to pay for
    dissolution of the School's partnership.

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

[^5]: Comprised of accounting and legal services expenses totaling
    \$16,884.

[^6]: The School charged \$201,002 to the PCSP grant, \$1,002 more than
    the \$200,000 in PCSP funds it received for the project period.
    Therefore, we only recommend recovery of \$15,882 (\$16,884 in
    unallowable costs less \$1,002).

[^7]: The law was amended by the No Child Left Behind Act of 2001, Title
    V, Part B.

[^8]: The School received authorization for \$50,000 in June 2001 and an
    additional \$150,000 in July 2001.