![](media/image1.wmf)

**December 6, 2006**

> **Control Number**
>
> **ED-OIG/A09****G0010**

######## Mr. Richard Barth 

KIPP Foundation

Chief Executive Officer

######## 345 Spear Street, Suite 510

######## San Francisco, California 94105

Dear Mr. Barth:

This **Final Audit Report**, entitled *KIPP Foundation's Administration
of the Fund for the Improvement of Education Grants*, presents the
results of our audit. The purpose of the audit was to determine whether
the KIPP Foundation conducted six Congressionally‑directed grants
provided under the Fund for the Improvement of Education (FIE) in
accordance with the authorizing legislation, approved grant
applications, and applicable Federal regulations. Our review covered the
period July 1, 2004 through August 24, 2006.

BACKGROUND

The Knowledge Is Power Program (KIPP) is an educational program used to
operate a nationwide network of free open-enrollment college-preparatory
public schools in under-served communities (KIPP schools). The KIPP
Foundation (Foundation) is the national non-profit organization
established in 2000 and located in San Francisco, California that
supports the network. The Foundation recruits, trains, and supports
educators through its KIPP School Leadership Program, which provides a
training program for future KIPP school leaders and other training
events (i.e., retreats, conferences, summits, etc.). The Foundation
reported that 8,835 students were enrolled at the 45 KIPP schools in
school year 2005‑2006.

The U.S. Department of Education's Office of Innovation and Improvement
(OII) awarded the six FIE Congressionally-directed grants to the
Foundation. In addition to the FIE grants included in our review, the
Foundation received an unsolicited FIE grant for \$1,462,422 (grant
period from September 17, 2001 through September 16, 2004) and a Credit
Enhancement for Charter School Facilities Program grant for \$6,805,891
(grant period from June 14, 2006 through June 14, 2021). The
Foundation's Office of Management and Budget (OMB) Circular A-133 single
audit reports show that the Foundation did not receive funds from other
Federal agencies during the period covered by our audit.

-   Grant Number U215K040068, which provided \$3,976,400, was the first
    Congressionally‑directed grant awarded to the Foundation. Of the
    total award, approximately half was used by the Foundation for the
    KIPP School Leadership Program. The remaining amount (approximately
    \$2,000,000) was disbursed among 35 KIPP schools to support school
    leader and teacher training, professional development, and sharing
    of best practices activities for school year 2004‑2005. Because the
    Congressional language for the grant did not provide for subgrants,
    the Foundation used vendor agreements to provide grant funds to the
    schools. Under the terms of the vendor agreements, KIPP schools
    submitted invoices to the Foundation for activities performed each
    quarter. The Foundation paid the invoiced amounts with grant funds
    on a reimbursement basis.

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-   Grant Number U215K050531 was a Congressionally‑directed grant for
    \$2,976,000. The Foundation used \$873,800 to support the KIPP
    School Leadership Program activities and events. The remaining
    \$2,102,200 was subgranted to 47 KIPP schools for extended learning
    programs conducted at the schools.[^1] The Foundation continued to
    require schools to submit detailed invoices, but added the
    requirement for schools to include supporting documentation for
    their grant-related expenses. The Foundation paid the invoiced
    amounts to KIPP schools on a reimbursement basis, just as they had
    done in the previous year for U215K040068 grant funds.

-   The Foundation was awarded four additional Congressionally‑directed
    grants for subgrants to KIPP schools specified in the award
    documents. The funds for these school‑specific grants were primarily
    budgeted for personnel costs for extended learning time, teacher
    training, and curriculum development. The Foundation provided the
    grant funds to these schools in the same manner as described above
    for the U215K050531 grant.

The table below summarizes the characteristics of each grant.

+----------+------------+--------+------------------------------------+
| #######  |            |        |                                    |
| ## Table |            |        |                                    |
|  1: FIE  |            |        |                                    |
| Grants A |            |        |                                    |
| warded t |            |        |                                    |
| o the Fo |            |        |                                    |
| undation |            |        |                                    |
+----------+------------+--------+------------------------------------+
| **Grant  | **P        | **G    | **Use of Funds**                   |
| Number** | erformance | rant** |                                    |
|          | Period**   |        |                                    |
|          |            | **A    |                                    |
|          |            | ward** |                                    |
|          |            | (a)    |                                    |
+----------+------------+--------+------------------------------------+
| U21      | 10/1/2004  | \$3,9  | KIPP leadership training program   |
| 5K040068 | through    | 76,400 | and KIPP school leader and teacher |
|          | 9/30/2005  |        | development activities.            |
+----------+------------+--------+------------------------------------+
| U21      | 10/1/2005  | \$2,9  | KIPP leadership training program   |
| 5K050531 | through    | 76,000 | and extended learning time at all  |
|          | 9/30/2006  |        | KIPP schools.                      |
+----------+------------+--------+------------------------------------+
| U21      | 8/23/2005  | \$     | Sub-grant to one KIPP school in    |
| 5K050511 | through    | 24,800 | Philadelphia for extended learning |
|          | 11/23/2006 |        | time personnel and supplies.       |
+----------+------------+--------+------------------------------------+
| U21      | 8/23/2005  | \$1    | Sub-grant to nine KIPP schools in  |
| 5K050516 | through    | 98,400 | California for curriculum          |
|          | 11/23/2006 |        | development and teacher training.  |
+----------+------------+--------+------------------------------------+
| U21      | 8/23/2005  | \$1    | Sub-grant to two KIPP schools in   |
| 5K050519 | through    | 48,800 | Tennessee for extended learning    |
|          | 11/23/2006 |        | time personnel and supplies.       |
+----------+------------+--------+------------------------------------+
| U21      | 8/23/2005  | \$     | Sub-grant to one KIPP school in    |
| 5K050524 | through    | 49,600 | Oklahoma City for curriculum       |
|          | 11/23/2006 |        | development and teacher training.  |
+----------+------------+--------+------------------------------------+
| \(a\)    |            |        |                                    |
| The      |            |        |                                    |
| U21      |            |        |                                    |
| 5K040068 |            |        |                                    |
| and      |            |        |                                    |
| U21      |            |        |                                    |
| 5K050531 |            |        |                                    |
| grant    |            |        |                                    |
| awards   |            |        |                                    |
| provided |            |        |                                    |
| for      |            |        |                                    |
| indirect |            |        |                                    |
| costs at |            |        |                                    |
| 6.26     |            |        |                                    |
| percent  |            |        |                                    |
| and 6.63 |            |        |                                    |
| percent  |            |        |                                    |
| of       |            |        |                                    |
| direct   |            |        |                                    |
| costs,   |            |        |                                    |
| respe    |            |        |                                    |
| ctively. |            |        |                                    |
| The      |            |        |                                    |
| other    |            |        |                                    |
| grant    |            |        |                                    |
| awards   |            |        |                                    |
| did not  |            |        |                                    |
| provide  |            |        |                                    |
| for      |            |        |                                    |
| indirect |            |        |                                    |
| costs.   |            |        |                                    |
+----------+------------+--------+------------------------------------+

AUDIT RESULTS

The Foundation generally conducted the FIE grants in accordance with the
authorizing legislation, approved grant applications, and applicable
Federal regulations. We concluded that the Foundation and KIPP schools
were conducting activities in accordance with the goals and objectives
of the project. We also determined that the Foundation's financial
management system generally met the standards for proper administration
of FIE funds. However, the Foundation did not fully comply with the
applicable regulations when it included unallowable costs and costs
lacking required supporting documents or budget approval in its charges
to the FIE grant accounts. The Department intended the FIE funds awarded
to the Foundation to be used to support the KIPP School Leadership
Program, curriculum development, teacher training, and extended learning
time at KIPP schools. While we did not identify any serious deficiencies
that prevented the Foundation from achieving the grant goals,
improvements to the financial management system are needed to ensure
that FIE grant funds are used only for allowable and allocable costs.

In its comments to the draft report, KIPP concurred with our finding and
agreed to implement our recommendations. The full text of KIPP's
comments is included as an attachment to the report.

# FINDING - KIPP's Financial Management System Needs Improvement 

The Foundation's financial management system generally met the
requirements specified in the Education Department General
Administrative Regulations (EDGAR) 74.20 through 74.28. The Foundation
used accounting software to process and record financial transactions
and maintained separate records of accountability for each FIE grant.
The Foundation also had policies and procedures in place for handling
Federal grant funds at the Foundation and the individual KIPP schools
(subgrantees). However, our review of selected expenditures found that
the Foundation included unallowable costs in its charges to two grant
accounts and did not have required supporting documentation for other
costs charged to the accounts. We also found that the Foundation
reimbursed a school for staff costs not included in the school's
approved budget.

+------------------+--------+-------+--------+-------+-------+-------+
| #                |        |       |        |       |       |       |
| ######## Table 2 |        |       |        |       |       |       |
| : Drawn Funds, R |        |       |        |       |       |       |
| ecorded Expendit |        |       |        |       |       |       |
| ures, and Result |        |       |        |       |       |       |
| s of OIG Review  |        |       |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| **Grant #U215K** | **04   | **050 | **05   | **050 | **050 | **050 |
|                  | 0068** | 531** | 0511** | 516** | 519** | 524** |
|                  |        |       |        |       |       |       |
|                  | **Gen  | *     | **     | **    | *     | **Okl |
|                  | eral** | *Gene | Philad | Calif | *Tenn | ahoma |
|                  |        | ral** | elphia | ornia | essee | Sch   |
|                  |        |       | Sc     | Scho  | Scho  | ool** |
|                  |        |       | hool** | ols** | ols** |       |
|                  |        |       | (a)    |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| Grant Funds      | \$3,9  | \     | \$     | \$7   | \$5   | \$4   |
| Drawn as of      | 76,400 | $1,37 | 24,800 | 3,596 | 8,218 | 9,600 |
| August 24, 2006  |        | 9,650 |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| Expenditures     | \$4,6  | \$1,  | \$     | \$7   | \$5   | \$4   |
| Recorded in      | 00,523 | 401,3 | 24,800 | 8,155 | 8,218 | 9,600 |
| Grant Accounts   |        | 82(c) |        |       |       |       |
| as of            | \(b\)  |       |        |       |       |       |
| August 24, 2006  |        |       |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| Expenditures     | \$6    | \$34  | \$     |       |       |       |
| Reviewed By OIG  | 01,206 | 4,425 | 24,800 |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| Unallowable      | \      | \$    | \-\--  |       |       |       |
| Costs Included   | $7,762 | 7,778 |        |       |       |       |
| in Recorded      |        |       |        |       |       |       |
| Expenditures     |        |       |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| Expenditures     | \$     | \$1   | \-\--  |       |       |       |
| Lacking Required | 18,059 | 5,316 |        |       |       |       |
| Documentation    |        |       |        |       |       |       |
| (d)              |        |       |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| Reimbursement    | \-\--  | \(e\) | \-\--  |       |       |       |
| for Staff Costs  |        |       |        |       |       |       |
| Not Included in  |        |       |        |       |       |       |
| School Budget    |        |       |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+
| \(a\)            |        |       |        |       |       |       |
| Expenditures for |        |       |        |       |       |       |
| the Philadelphia |        |       |        |       |       |       |
| school were      |        |       |        |       |       |       |
| selected for     |        |       |        |       |       |       |
| review because   |        |       |        |       |       |       |
| the school could |        |       |        |       |       |       |
| receive          |        |       |        |       |       |       |
| reimbursement    |        |       |        |       |       |       |
| from three       |        |       |        |       |       |       |
| grants during    |        |       |        |       |       |       |
| our audit period |        |       |        |       |       |       |
| (U215K040068,    |        |       |        |       |       |       |
| U215K050531, and |        |       |        |       |       |       |
| U215K050511).    |        |       |        |       |       |       |
|                  |        |       |        |       |       |       |
| \(b\) For        |        |       |        |       |       |       |
| U215K040068,     |        |       |        |       |       |       |
| recorded grant   |        |       |        |       |       |       |
| expenditures     |        |       |        |       |       |       |
| exceeded amounts |        |       |        |       |       |       |
| drawn by         |        |       |        |       |       |       |
| \$624,123.       |        |       |        |       |       |       |
|                  |        |       |        |       |       |       |
| \(c\) For        |        |       |        |       |       |       |
| U215K0505031,    |        |       |        |       |       |       |
| the Foundation   |        |       |        |       |       |       |
| reduced travel   |        |       |        |       |       |       |
| costs for the    |        |       |        |       |       |       |
| School Leaders   |        |       |        |       |       |       |
| Retreat by       |        |       |        |       |       |       |
| \$21,732 in      |        |       |        |       |       |       |
| order to remain  |        |       |        |       |       |       |
| within its       |        |       |        |       |       |       |
| travel budget.   |        |       |        |       |       |       |
| Thus, recorded   |        |       |        |       |       |       |
| expenses         |        |       |        |       |       |       |
| exceeded the     |        |       |        |       |       |       |
| total amount     |        |       |        |       |       |       |
| drawn on the     |        |       |        |       |       |       |
| grant.           |        |       |        |       |       |       |
|                  |        |       |        |       |       |       |
| \(d\) Using      |        |       |        |       |       |       |
| alternative      |        |       |        |       |       |       |
| documentation,   |        |       |        |       |       |       |
| we were able to  |        |       |        |       |       |       |
| determine that   |        |       |        |       |       |       |
| the unsupported  |        |       |        |       |       |       |
| employee benefit |        |       |        |       |       |       |
| costs (\$18,059  |        |       |        |       |       |       |
| for U215K040068  |        |       |        |       |       |       |
| and \$2,816 for  |        |       |        |       |       |       |
| U215K050531)     |        |       |        |       |       |       |
| were reasonable. |        |       |        |       |       |       |
|                  |        |       |        |       |       |       |
| \(e\) The        |        |       |        |       |       |       |
| reimbursement    |        |       |        |       |       |       |
| did not result   |        |       |        |       |       |       |
| in an            |        |       |        |       |       |       |
| unallowable use  |        |       |        |       |       |       |
| of FIE grant     |        |       |        |       |       |       |
| funds.           |        |       |        |       |       |       |
+------------------+--------+-------+--------+-------+-------+-------+

## The Foundation Included Unallowable Costs in {#the-foundation-included-unallowable-costs-in .RptSubcaption}

## Its Charges to FIE Grant Accounts  {#its-charges-to-fie-grant-accounts .RptSubcaption}

The Foundation charged the U215K040068 grant account for \$7,762 of
unallowable alcoholic beverage and entertainment costs and the
U215K050531 grant account for \$7,778 of unallowable costs that
comprised \$3,387 in unallowable alcoholic beverage costs, \$3,718 in
overcharged employee benefit costs, and a \$673 duplicate charge for
travel costs.

*Unallowable Alcoholic Beverage and*

*Entertainment Costs Charged to Grant Accounts*

The Foundation included unallowable alcoholic beverage and entertainment
costs in the amounts charged to FIE grant accounts.

-   The Foundation held a Math Retreat in New York City, New York in
    January 2005 for math teachers to discuss successful teaching
    strategies used at two high‑achieving KIPP schools. The Foundation
    charged the U215K040068 grant account for \$61,608 in travel‑related
    costs for approximately 70 persons who attended the three‑day event.
    The amount included \$1,919 for alcoholic beverages purchased during
    a restaurant dinner.

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-   The Foundation held a School Leaders Retreat in Cancun, Mexico in
    February 2005 for KIPP school leaders to meet and discuss issues
    relevant to their professional growth and KIPP schools. The
    Foundation charged the U215K040068 grant account for \$90,749 in
    travel-related costs for the approximately 70 persons who attended
    the four‑day event. The amount included \$2,988 for alcoholic
    beverage purchases, \$2,318 for three hours of DJ and Karaoke
    services, and \$537 for basketball equipment setup.

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```
-   The Foundation held another School Leaders Retreat in Cancun, Mexico
    in February 2006. The Foundation charged the U215K050531 grant
    account for \$68,147 in travel‑related costs for the approximately
    70 persons who attended the four‑day event. The amount included
    \$3,387 for alcoholic beverage purchases.[^2]

EDGAR 74.27 requires that private non-profit organizations determine the
allowability of costs charged to grants in accordance with the cost
principles contained in OMB Circular A‑122. OMB Circular A‑122
Attachment B, paragraph 3 (Alcoholic beverages) and paragraph 14
(Entertainment costs) prohibit the use of Federal grant funds for
alcoholic beverage and entertainment costs. Foundation staff did not
thoroughly review expenditure documentation to ensure that only
allowable costs were charged to the FIE grant accounts.

The unallowable alcoholic beverage and entertainment costs charged to
the FIE grant accounts did not result in the improper use of FIE funds
because the Foundation did not use FIE funds to cover \$624,123 of
U215K040068 grant expenditures and reduced its draw of FIE funds for
U215K050531 by \$21,732 to stay within the travel budget in the approved
grant. However, the Foundation holds several training events each year.
Because we did not review all event‑related expenditures, there is a
risk that other alcoholic beverage and entertainment costs may have been
charged to the FIE grant accounts that were not detected by our review.
Additionally, there is a risk that FIE funds may be used inappropriately
in the future if the Foundation continues to charge alcoholic beverage
and entertainment costs to the FIE accounts and does not adjust
expenditure totals for the unallowable costs when determining amounts to
be drawn from the grant awards.

*Employee Benefit Costs*

*Overcharged to the Grant Account*

The Foundation charged an amount to the U215K050531 grant account for
Foundation employee benefit costs (for the first two quarters of the
grant year) that was \$3,718 in excess of the amount allocable to the
FIE grant. OMB Circular A‑122 Attachment A, paragraph A defines
allowable costs as reasonable for the performance of the award and
allocable to the grant and requires that the costs charged to grants be
consistent with policies and procedures that apply uniformly to both
federally-financed and other activities of the organization. The
Foundation improperly charged \$3,368 because business office staff used
19 percent for the calculation instead of following the Foundation's
methodology, which used a percentage representing the ratio of employee
benefits to salaries for all Foundation employees. The Foundation's
Controller stated that the different methodology was used due to a
misunderstanding of the direction provided to the staff by the
Controller. We determined that the error was a one-time occurrence. The
remaining improper charge of \$350 was due to a math error. Based on our
recalculation, we concluded that the Foundation overcharged the
U215K050531 grant account by \$3,718 for employee benefit costs and had
drawn FIE funds for this amount. The Foundation needs to correct the
improper charges in the FIE grant account and adjust future draws from
the grant award for the \$3,718.

*Travel Costs Charged Twice*

*to the Grant Account*

The Foundation charged the U215K050531 grant account twice for \$673 of
travel-related costs for the School Leaders Retreat. The business office
staff said that the duplicate entry was previously identified and
reversed, but then erroneously reentered. The \$673 duplicate charge to
the U215K050531 grant account did not result in the improper use of FIE
funds because the Foundation reduced its draw for funds from the
U215K050531 grant by \$21,732 to stay within the approved travel budget.
However, the Foundation needs to correct the duplicate charge in the FIE
grant account to ensure that the amount is not included in expenditure
totals used to determine future draws from the grant award.

## The Foundation Did Not Have Required {#the-foundation-did-not-have-required .RptSubcaption}

## Supporting Documentation for Costs {#supporting-documentation-for-costs .RptSubcaption}

## Charged to FIE Grant Accounts {#charged-to-fie-grant-accounts .RptSubcaption}

The Foundation did not have required supporting documentation for
\$18,059 charged to the U215K040068 grant account for Foundation
employee staff benefit costs and \$15,316 charged to the U215K050531
grant account for Foundation employee staff benefit costs (\$2,816) and
personnel costs incurred at the KIPP Tulsa College Prep School
(\$12,500). In addition, Foundation employees did not sign labor
allocation worksheets used to support personnel costs charged to the
grant accounts for the earlier part of our audit period.

#### 

#### *Employee Benefits Not Documented*

The Foundation did not provide any documentation to support \$18,059 of
Foundation employee benefit costs charged to the U215K040068 grant
account and did not provide adequate documentation to support \$2,816 of
Foundation employee benefit costs charged to the U215K050531 grant
account.[^3] The employee benefit costs had been calculated by former
Foundation staff. Thus, current staff were unable to explain how the
employee benefits were calculated or locate supporting documentation.

##  {#section-1 .Style1}

Since the documentation was not readily available to assess the
allowability of employee benefit costs charged to the FIE grants, we
used the following alternate methods. For the \$18,059 of employee
benefit costs, we compared the 3‑month average rate (5.9 percent) used
to calculate the \$18,059 to the 6‑month average rate (10.1 percent)
used to calculate the employee benefit costs for a more recent period.
Since the current rate was supported by payroll documentation and was
significantly higher than the 5.9 percent, we concluded that the 5.9
percent rate was reasonable. To assess the reasonableness of the
\$2,816, we calculated the monthly rates using currently available
payroll documentation for the same historical period, and then used the
rates to recalculate the employee benefit costs. We determined that the
amount charged to the grant was less than the amount derived from our
calculation. Based on these two analyses, we concluded that the \$18,059
and \$2,816 were reasonable charges to the FIE grant accounts.

This finding applied to calculations and recordkeeping practices
performed by the Foundation's previous business office staff. Based on
our review of subsequent staff benefit costs charged to the grant
accounts, we determined that the current business office staff
maintained adequate supporting documentation for employee benefit
charges. Thus, no additional corrective action is needed.

*School Personnel Costs Based on*

*Budgeted Rather Than Actual Expenditures*

The Foundation charged the U215K050531 grant account for \$12,500 paid
to KIPP Tulsa College Prep School for personnel costs that were based on
budgeted rather than actual school expenditures. The school's invoice
package for the first quarter of school year 2005‑2006 showed that the
school divided the annual budgeted personnel costs of \$50,000 by four
and submitted an invoice to the Foundation for the resulting amount of
\$12,500. OMB Circular A‑122 does not allow the use of budget estimates
as support for charges to Federal grants.[^4] Additionally, the
Foundation's internal guidance requires schools to provide copies of the
school payroll reports, including annotations of amounts for grant
related activities, with the invoices submitted for reimbursement. Tulsa
College Prep School staff did not adhere to the internal guidance even
though actual expenditures were available from the school's payroll
system. Business office staff, who performed the review of Tulsa College
Prep School's invoice package, did not identify the school's
non‑adherence to the Foundation's guidance. Because the \$12,500 was
based on budgeted rather than actual costs, there is no assurance that
the amount was, in fact, used for allowable personnel costs. Our review
of selected school invoice packages found that other schools' packages
contained payroll reports to support personnel costs included in the
school's invoice.

##  {#section-2 .Style1}

*Unsigned Labor Allocation Worksheets*

Neither Foundation employees nor their supervisors signed the Labor
Allocation Worksheets (employee monthly timesheets) that were used to
support personnel costs charged to the U215K040068 grant account.
Specifically, for one three-month sample (January through March 2005),
we found that 8 of 18 employee monthly timesheets did not have
signatures and for another three-month sample (July through
September 2005), we found that 7 of 8 employee monthly timesheets were
not signed. While the monthly timesheets provided space for employee
signatures, the Foundation's policy allowed the acceptance of unsigned
employee timesheets.

The Foundation's policy was not in compliance with the wages and
salaries documentation requirements of OMB Circular A‑122, Attachment B,
paragraph 8m(2)(c).[^5]

However, except for the lack of employee signatures noted above, we
concluded that the employee monthly timesheets appeared to be accurately
prepared and we had no reason to doubt that they represented a
reasonable accountability of personnel costs charged to the grant
account.

A similar finding was reported in the Foundation's OMB Circular A‑133
single audit report for the fiscal year ended June 30, 2005. As a result
of the audit finding, the Foundation revised its policy to require
employee signatures. To assess the effectiveness of the Foundation's
corrective action, we reviewed an additional 16 employee monthly
timesheets for the period October 2005 through March 2006. We found that
all 16 timesheets contained employee signatures. These additional test
results indicated that the condition was corrected by October 2005.

##  {#section-3 .Style1}

## The Foundation Reimbursed a School {#the-foundation-reimbursed-a-school .RptSubcaption}

## For Staff Costs Not Included {#for-staff-costs-not-included .RptSubcaption}

## in the School's Approved Budget  {#in-the-schools-approved-budget .RptSubcaption}

The Tulsa College Prep School included personnel costs in its invoice
for grant account U215K050531 that were not in the school budget
approved by the Foundation. The school's approved budget of \$50,000
included allocated amounts for teacher compensation for extended hours
(\$40,000), Summer school (\$6,000), and Saturday school (\$4,000). The
documentation submitted with the invoice for the first quarter of school
year 2005‑2006 showed that the school had reallocated budgeted amounts
as follows: teachers (\$36,203), secretary (\$12,225), and library
personnel (\$1,572). The Foundation paid the school's invoice.

[]{.mark}

The Foundation's Controller stated that school budget changes are not
allowed after the budget has been finalized and approved and that she
was not aware that Tulsa had submitted an invoice to the Foundation
based on a budget change. OMB Circular A‑110, Subpart C, paragraph 51(a)
holds award recipients responsible for managing and monitoring each
project, program, subaward, function or activity supported by the award.

[]{.mark}

### **Recommendations** 

We recommend that the Chief Financial Officer, in collaboration with the
Assistant Deputy Secretary for the Office of Innovation and Improvement,
require the KIPP Foundation to---

1.  Ensure that all staff is aware that Federal funds cannot be used for
    alcoholic beverage and entertainment costs and revise its
    procedures, as needed, to ensure that FIE funds are not used for
    such costs.

2.  Review FIE grant accounts to identify any other alcoholic beverage
    and entertainment costs charged to the accounts, determine whether
    FIE funds were used for the costs, and, if so, return the funds to
    the Department or adjust future draws of FIE funds, whichever is
    appropriate.

3.  Correct the charges to the U215K050531 grant account for the \$3,718
    of overcharged employee benefit costs and \$673 of duplicate travel
    expense and ensure that future draws from the grant award are
    adjusted for the amounts.

4.  Instruct Tulsa College Prep School to submit annotated school
    payroll reports to support grant‑related personnel costs incurred
    for the first quarter of school year 2005‑2006 and confirm that the
    school claimed actual personnel costs and submitted the required
    payroll reports in subsequent invoice packages. If charges to the
    U215K050531 grant account do not reflect actual personnel costs, the
    Foundation should adjust future draws from the grant award to
    reflect the actual costs.

5.  Confirm that budget variances for Tulsa College Prep School have
    been resolved and that any changes to the school's budget are
    aligned with program objectives.

6.  Review its policies and procedures and implement changes, if needed,
    to ensure that sufficient safeguards are in place to prevent
    accounting errors or unapproved school budget changes, and promptly
    correct such errors/unapproved changes, if they occur.

**KIPP Comments**

[]{.mark}

In its comments to the draft report, KIPP generally concurred with each
condition listed in the finding and described the corrective actions
taken and planned to address each condition. The actions taken and
planned were responsive to our recommendations.

OBJECTIVE, SCOPE, AND METHODOLOGY

# The objective of our audit was to determine whether the Foundation conducted the six FIE grants in accordance with the authorizing legislation, approved grant applications, and applicable Federal regulations.  Our review was limited to assessing whether the Foundation's financial management system complied with the standards defined in EDGAR 74.20 through 74.28, activities had been conducted in accordance with the goals and objectives of the grant projects and grant funds were used for grant purposes in compliance with OMB Circular A‑122. Our review covered the period from July 1, 2004 through August 24, 2006.

To assess the Foundation's financial management system, we evaluated its
written policies and procedures for grant administration. We interviewed
Foundation management and staff in the business office (including the
current and prior Chief Financial Officers), the School Leadership
Program, the Office of General Counsel, Human Resources and Information
Technology, as well as officials responsible for monitoring academic and
business operations at the KIPP schools.

To assess whether activities had been conducted in accordance with the
goals and objectives of the grant projects, we reviewed documentation of
the activities, including invoices, event schedules, and performance
reports issued by KIPP review teams.

To determine whether grant funds were used for grant purposes and
whether the grant expenditures complied with OMB Circular A‑122, we
reviewed ten judgmentally selected expenditure packages.[^6] The ten
expenditure packages were for three of the six grants, and included
expenditures for the Foundation (four packages) and four KIPP schools
(six packages). We selected eight of the expenditure packages based on
assessed risk, such as the possible use of estimated amounts,
overlapping grant periods, a high proportion of grant funds expended in
the pre-award period, and funding from multiple grants for one school.
We selected the remaining two expenditure packages because the packages
were the only Foundation packages prepared by the current business
office staff. Each selected expenditure package included many individual
transactions for activities occurring over a three to six-month period.
The Foundation expenditure packages included payroll, employee benefits,
travel, and indirect cost expenditures for the KIPP School Leadership
Program. The school expenditure packages consisted primarily of salary
expenses for extended learning instruction, as well as expenses for
training and curriculum development. For the selected expenditure
packages, we reviewed documentation that was maintained at the
Foundation's business office. We did not review records maintained at
the KIPP schools unless such records had been submitted to the
Foundation as part of an expenditure package.

To select our sample, we relied on expenditure reports that the
Foundation created from information contained in its accounting system.
We tested the completeness of the reports by comparing the grant income
reported in the Foundation's accounting system to the drawn funds
recorded in the Department's Grant and Procurement System (GAPS). For
the ten sampled expenditure packages, we confirmed the expenditure
amounts to amounts contained in the supporting documentation. Based on
these tests, we concluded that the expenditure reports provided by the
Foundation were sufficiently reliable to use for our sample selection.

We performed on‑site fieldwork at the Foundation's offices in
San Francisco, California. We held an exit briefing with Foundation
officials on September 21, 2006. Our audit was performed in accordance
with generally accepted government auditing standards appropriate to the
scope of the review described above.

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 Department of Education
officials.

If you have any 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 Education Department officials, who will
consider them before taking final Departmental action on this audit:

> Morgan Brown

Assistant Deputy Secretary

Office of Innovation and Improvement

U.S. Department of Education

400 Maryland Avenue, SW

Washington, D.C. 20202

Lawrence A. Warder

Chief Financial Officer

Office of the Chief Financial Officer

U.S. Department of Education

400 Maryland Avenue, SW

Washington, D.C. 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 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/ *Beverly Dalman for*

> Gloria Pilotti

Regional Inspector General for Audit

Attachment

## Attachment: KIPP's Comments to Draft Report

![](media/image3.jpeg){width="6.49375in" height="8.907638888888888in"}

![](media/image4.jpeg){width="6.492361111111111in"
height="8.904166666666667in"}

[^1]: Congress included language in the authorizing legislation for the
    Federal fiscal year 2005 grants that allowed the Foundation to
    subgrant funds to KIPP schools.

[^2]: The trips to Cancun, Mexico did not require prior Department
    approval because travel to Mexico is not considered foreign travel
    under OMB Circular A-122, Attachment B, paragraph 51e. In addition,
    the travel expenses charged to the grant were less than the per diem
    allowance established by the U.S. General Services Administration
    for Cancun, Mexico and were comparable to the allowances established
    for San Francisco and cities in the Los Angeles area.

[^3]: For the \$2,816, the Foundation provided some handwritten notes,
    but no source documentation.

    OMB Circular A‑122, Attachment A, paragraph A.2.g states that
    allowable costs must be adequately documented.

[^4]: OMB Circular A-122, Attachment B, paragraph 8m(2)(a) requires that
    support for salaries and wages in payroll records \"must reflect an
    after-the fact determination of the actual activity of each
    employee. Budget estimates (i.e., estimates determined before the
    services are performed) do not qualify as support for charges to
    awards."

[^5]: With regard to time and activity reporting in support of employee
    salaries and wages, OMB Circular A‑122, Attachment B, paragraph
    8m(2)(c) states, \"The reports must be signed by the individual
    employee, or by a responsible supervisory official having first hand
    knowledge of the activities performed by the employee....\"

[^6]: Because we judgmentally selected expenditure packages for our
    review, testing results may not be representative of all expenditure
    packages.