**Control Number ED-OIG/A05-D0037**

**March 23, 2004**

Rutha E. Gibson, Executive Director

Future Teachers of Chicago/Illinois

513 West 72^nd^ Street

# Chicago, IL 60621

Dear Ms. Gibson,

This Final Audit Report presents the results of our audit of the Future
Teachers of Chicago/Illinois' (Future Teachers) Teacher Recruitment
Grant No. P336C020025 (Grant) for the period October 1, 2002, through
June 30, 2003. Our objective was to determine if Future Teachers
expended Grant funds in accordance with the law, applicable regulations,
and Grant terms. Specifically, we tested Future Teachers' (1) management
controls, (2) accounting system, (3) draw down procedures, (4) matching
contributions, (5) Grant expenditures, and (6) Grant reporting.

Future Teachers did not expend Grant funds in accordance with Title II
of the Higher Education Act of 1965, as amended, applicable regulations,
and terms of the Grant award. Future Teachers lacked the ability to
adequately administer the Grant because it was not familiar with program
requirements and, as a result, did not establish or implement an
adequate financial management system and adequate management controls.
During the period October 1, 2002, through June 30, 2003, Future
Teachers drew down \$389,240 of the \$465,000 awarded for the first
year. Future Teachers charged the Grant for costs it did not adequately
support and for unallowable costs, and maintained excess cash.

We provided a draft of this report to Future Teachers. In its response,
Future Teachers acknowledged there were errors in its general ledger due
to the questionable competency of its contracted accountant. Future
Teachers' response included spreadsheet analyses of the accounting
records, a management representation letter, and numerous documents
related to its programs and partnerships.

Future Teachers stated the spreadsheet analyses supported Grant costs
totaling \$294,701. However, Future Teachers did not provide any
accounting records or other documentation to support its spreadsheet
analyses. Because Future Teachers did not provide supporting
documentation, we have questioned all unsupported costs cited in the
draft report. Based on additional documentation Future Teachers provided
regarding its partnership, we removed the Other Matters section. We
summarized Future Teachers' response after the finding. Due to the
voluminous nature of Future Teachers' response, we did not include it as
an appendix to this report. Instead, we sent it under separate cover to
the designated officials responsible for resolving this audit.

We recommend that the Chief Financial Officer, Office of the Chief
Financial Officer (OCFO), and the Assistant Secretary for Postsecondary
Education require Future Teachers to (1) refund questioned costs of
\$364,235 and (2) pay imputed interest of \$1,061. The OCFO should also
take appropriate action pursuant to 34 C.F.R. § 74.62 to protect future
Grant funds.

## **AUDIT RESULTS**

Finding 1 - Future Teachers Did Not Expend Grant Funds in Accordance
with the Law, Applicable Regulations, and Grant Terms

Future Teachers did not expend Grant funds in accordance with Title II
of the Higher Education Act of 1965, as amended, applicable regulations,
and Grant terms. Future Teachers lacked the ability to adequately
administer the Grant because it was not familiar with program
requirements and, as a result, Future Teachers did not establish or
implement an adequate financial management system and adequate
management controls. Without an adequate financial management system and
adequate management controls, Future Teachers charged the Grant
questioned costs totaling \$364,235 (\$359,235 for costs it did not
adequately support and \$5,000 for unallowable costs).

Future Teachers did not establish an adequate financial management
system and adequate management controls to ensure it accounted for all
Grant fund expenditures in accordance with federal standards. It
recorded expenditures of \$701,248, but made adjustments of \$305,634,
resulting in net charges of \$395,614. Future Teachers drew down federal
funds of \$389,240, or \$6,374 less than it charged. Based on existing
records, we could not determine the specific transactions that made up
\$109,150 of the adjustments. Except for scholarships totaling \$30,005,
we were unable to determine the specific costs charged to the Grant.
According to Office of Management and Budget (OMB) Circular A-122, *Cost
Principles for Non-Profit Organizations, Attachment A, General
Principles, Paragraph A, Subparagraph A.2.g.* (1998), to be allowable
under an award, costs must be adequately documented. Because Future
Teachers did not adequately document costs charged to the Grant, we
consider \$359,235 (\$395,614 less \$6,374 not reimbursed and \$30,005
identified as scholarships) to be questioned.

Future Teachers provided scholarships totaling \$30,005 to 11 students.
However, it did not execute the required scholarship agreements with any
of the 11 students prior to providing the scholarships. During our audit
field work, Future Teachers executed 9 of the 11 required scholarship
agreements totaling \$25,005. This amount is considered acceptable.
However, it failed to execute 2 scholarship agreements totaling \$5,000.
This amount is questioned. 34 C.F.R. § 611.49(a) & (b) (2002).

While we could not identify the transactions affected by the \$109,150
in undocumented adjustments, the \$359,235 included several additional
unallowable and questioned costs. Because Future Teachers did not have
an adequate financial management system and adequate management controls
it

● allocated \$26,622 in various costs to the Grant using an unsupported
14 percent rate. *OMB Circular A-122, Attachment A, Paragraph A,
Subparagraph A.2.g.* (1998).

● paid \$20,387 for telephone lines, Internet connections, and software
not related to the Grant and \$2,735 that Future Teachers identified (in
writing) as not Grant related. *OMB Circular A-122, Attachment A,
Paragraph A, Subparagraph**s A.2.a & A.2.g.* (1998).

● paid salaries and stipends of \$18,027 for non-Grant employees and
participants. *OMB Circular A-122, Attachment A, Paragraph A,
Subparagraphs A.2.a & A.2.g.* (1998).

● used Grant funds totaling \$11,802 for unallowable items, consisting
of \$1,507 for t-shirts, \$764 for trophies and awards, \$1,067 for
trinkets (embossed pens, key chains, and squeeze bottles), \$2,490 for
outings to theme parks and sporting events, \$3,481 for food, and
\$2,493 for an awards dinner. *OMB Circular A-122, Attachment A,
Paragraph A, Subparagraphs A.2.a & A.2.g.* (1998).

● charged \$3,757 for unpaid invoices that Future Teachers recorded as
paid. 34 C.F.R. § 74.21(b)(2) (2002).

● maintained excess cash from October 29, 2002, through June 5, 2003,
ranging from \$4,637 to \$173,182. We calculated imputed interest of
\$1,061 on Future Teachers' excess cash using the Department of
Treasury's Current Value of Funds rate. 34 C.F.R. § 74.22(b)(2) & (3)
(2002). In addition, our analysis of Grant funds Future Teachers
received disclosed Future Teachers' bank balance was less than the
amount recorded in the accounting records for 129 of the 164 days we
tested. Future Teachers was using Grant funds for other purposes prior
to recording expenditures in its accounting records. 34 C.F.R. §
74.21(b) (2002).

● did not document sources of transactions posted from the payroll
journal to the general ledger. In order to complete our audit, Future
Teachers prepared supplemental spreadsheets to tie the transactions from
the payroll journal to the general ledger. However, these supplemental
records did not include all transactions. 34 C.F.R. § 74.21(b) (2002).

● backdated some of the adjusting transactions, used posting dates
instead of check dates to record transactions, and recorded some
personnel costs at the net amounts and others at the gross amounts. 34
C.F.R. § 74.21(b) (2002).

● did not submit two A-133 audit reports for the years ended June 30,
2001-2002 as required. The Federal Audit Clearinghouse has no record of
receiving any A-133 audit reports[^1] even though Future Teachers
received other federal funding prior to receiving the Grant. 34 C.F.R. §
74.26(a) (2002).

● reported minor inaccurate statements of fact to the Department of
Education in its performance report for the period October 1, 2002,
through March 31, 2003. 34 C.F.R. § 74.51(d) (2002).

**Recommendations:**

We recommend that the OCFO and the Assistant Secretary for Postsecondary
Education

1.  require Future Teachers to refund \$364,235;

2.  require Future Teachers to pay imputed interest of \$1,061; and

3.  take appropriate action pursuant to 34 C.F.R. § 74.62 to protect
    future Grant funds.

**Auditee Comments**

Future Teachers generally concurred that it had not established or
implemented an adequate financial management system and adequate
management controls. It acknowledged there were errors in its general
ledger due to the questionable competency of its contracted accounting
professional. According to Future Teachers' response, the accountant's
incompetence resulted in personnel incorrectly recording transactions in
the accounting system. Therefore, Future Teachers needed to entirely
restructure its accounting function.

Future Teachers stated that attorneys from Sidley Austin Brown & Wood
LLP and three consultants (one of whom was a Certified Public
Accountant) from Huron Consulting Group LLC analyzed all the accounting
records. The analysis consisted of a line-by-line review of all general
ledger and journal entries to match expenditures to supporting
documentation. This analysis disclosed documents that were missing or
unavailable during our audit. Future Teachers' response contained
spreadsheet analyses documenting the results of the line-by-line review
and calculation of gross pay, fringe benefits, and indirect costs.

The spreadsheet analyses identified transactions totaling \$294,701 as
supported for the period October 1, 2002, through June 30, 2003. The
\$294,701 consists of (1) \$254,714 of transactions recorded in the
general ledger; (2) \$5,294 for the difference between payroll costs
recorded at net instead of gross; (3) \$9,143 for payroll taxes not
previously charged to the grant; (4) \$13,256 for fringe benefits
calculated using the percentages in the budget; and (5) \$12,294 for
indirect costs calculated using an 8 percent indirect cost rate. [^2] In
addition, Future Teachers stated it could support Grant transactions
totaling \$64,050 for the period July 1, 2003, through September 30,
2003.

Future Teachers' response also provided (1) information regarding its
partnerships (including its partnership with Chicago State University
and Chicago Public Schools); (2) a description of its organization,
goals, and programs and how they relate to the Grant; and (3) a
management representation letter.

**OIG Response**

We reviewed Future Teachers' response and have not changed our position
regarding the costs cited in the draft report. Future Teachers' response
did not contain any official accounting records or other documentation
to support the line-by-line spreadsheet analyses. As a result, we could
not determine if Future Teachers had appropriately revised its records
to reflect the spreadsheet analyses. Because Future Teachers did not
provide supporting documentation, we have questioned all unsupported
costs cited in the draft report. Based on additional documentation
Future Teachers provided regarding its partnership, we removed the Other
Matters section. We also made other minor changes to the report.

Future Teachers' response identified \$294,701 as supportable costs
during the October 1, 2002, to June 30, 2003, period. This is \$94,539
less than the \$389,240 Future Teachers received from the Department of
Education during the October 1, 2002, to June 30, 2003, period. In
addition, we compared the spreadsheet analyses to records that were
available during the audit and found (1) the spreadsheet analyses
contained transactions we previously identified as unallowable or
unsupported (\$34,003); (2) calculations of the difference between
payroll costs recorded at net instead of gross included non-grant
employees or program participants (\$354); (3) fringe benefits
calculated using an unsupported rate (\$13,256), and (4) indirect costs
claimed without an indirect cost agreement (\$12,294). Our review
indicates that Future Teachers cannot support at least \$154,446
(\$94,539+\$34,003+\$354+\$13,256+\$12,294) that it drew down during our
audit period. In addition, Future Teachers would have higher excess cash
balances and a higher imputed interest than we originally calculated and
reported. We also noted that the spreadsheet analyses included
additional transactions totaling \$16,406 for the period October 1,
2002, through June 23, 2003, that Future Teachers had not previously
provided to us and \$20,309 recorded between June 23, 2003, and June 30,
2003, that we did not review during our field work.

The \$34,003 that we previously identified as unallowable or unsupported
included (1) \$13,692 for which Future Teachers did not provide
supporting documentation; (2) \$5,000 paid for scholarships where Future
Teachers had not obtained a scholarship agreement; (3) \$211 allocated
using an unsupported 14 percent rate (the \$211 should be covered by the
indirect costs Future Teachers calculated); (4) \$14,662 paid to
non-grant personnel and program participants; and (5) \$438 paid for
unallowable items consisting of \$138 for food and \$300 for an awards
dinner.

Our review of the spreadsheet analyses showing the difference between
payroll costs recorded at net instead of gross disclosed \$354 paid for
non-grant personnel and program participants. If Future Teachers had
provided accounting records and supporting documentation for these
costs, we would question \$354 of the \$5,294 claimed.

Our review of the spreadsheet analyses calculating \$13,256 for fringe
benefits determined these costs were unsupported. At the time of our
field work, Future Teachers recorded transactions and provided
documentation for each fringe benefit cost. The spreadsheet analyses use
two rates, 21 percent for program employees and 7.56 percent for
clerical employees, to calculate fringe benefits. Future Teachers'
response did not provide any documentation to support these rates.

The spreadsheet analyses in Future Teachers' response included \$2,724
of the claimed indirect costs that were unallowable. Future Teachers'
response calculated indirect costs totaling \$12,294. This amount was
based on the maximum indirect rate of 8 percent allowed for the Grant
(34 C.F.R. § 611.61 (2002)). However, 34 C.F.R. § 75.560 (2002) requires
a grantee to have a current indirect cost rate agreement before charging
any indirect costs to a grant. According to Future Teachers' response,
it is still in the process of obtaining an approved indirect cost rate
from the Department of Education. Even if Future Teachers had an
approved rate, \$2,724 of the calculated indirect costs would be
unallowable because they relate to unallowable or unsupported costs.

We did not audit the \$64,050 Future Teachers stated it expended during
the period July 1, 2003, through September 30, 2003. This was beyond our
audit period and, therefore, we cannot comment on the validity of this
amount. However, part of the costs Future Teachers identified for this
period were for fringe benefits calculated using the unsupported rates
in its grant application budget and indirect costs, even though Future
Teachers has not obtained an indirect cost rate agreement.

### BACKGROUND

Future Teachers is a non-profit, community-based organization
incorporated in the State of Illinois in 1996. In 2000, the IRS
classified Future Teachers as a 501 organization that was exempt from
federal income tax. According to the annual report presented on its
website, Future Teachers received and expensed \$1,652,235 for the
period July 1, 2001, to June 30, 2002. Almost \$1.4 million of the funds
Future Teachers received were public funds. Future Teachers\' mission is
\"To increase the number of teachers in Illinois schools through the
development of vibrant Future Teacher programs in learning centers.\"
Future Teachers\' definition of learning centers includes, but is not
limited to, public and nonpublic schools, colleges, universities, and
park sites.

The Teacher Recruitment Grant is authorized by Section 204 of Title II
of the Higher Education Act of 1965, as amended. It is subject to the
provisions contained in 34 C.F.R. Part 611, Education Department General
Administrative Regulations, and OMB Circular A-122, *Cost Principles for
Non-Profit Organizations*. The Department of Education provides eligible
applicants Grant funds (1) to award scholarships to help students pay
the costs of tuition, room, board, and other expenses of completing a
teacher preparation program; (2) to provide support services, if needed,
to enable scholarship recipients to complete postsecondary education
programs; and (3) for follow-up services provided to former scholarship
recipients during the recipients' first three years of teaching; or to
develop and implement effective mechanisms to ensure that high need
local educational agencies and schools are able to effectively recruit
highly qualified teachers.

The Department of Education awarded a three-year Grant totaling
\$1,395,000 to a partnership made up of Future Teachers, Chicago State
University, and Chicago Public Schools for the period October 1, 2002,
through September 30, 2005. Future Teachers, the partnership's fiscal
agent, received \$389,240 of the first year's award of \$465,000.

### OBJECTIVE, SCOPE, AND METHODOLOGY

Our objective was to determine if Future Teachers expended Grant funds
in accordance with the applicable law, regulations, and Grant terms.
Specifically, we tested Future Teachers' (1) management controls, (2)
accounting system, (3) draw down procedures, (4) matching contributions,
(5) Grant expenditures, and (6) Grant reporting.

To accomplish our objective, we

1\. Reviewed the OMB Circular A-133 audit reports for the years ended
June 30, 2001-2002, prepared by an independent public accountant, and
reviewed related working papers for the audit of the year ended June 30,
2002.

2\. Reviewed Future Teachers' July 25, 2002, Grant application
(including budgets), application evaluation reports, Grant Award
Notification for award year 2002, and Department of Education Grant
disbursement information.

3\. Reviewed written policies, procedures, and organizational
information, including an organizational chart, incorporation
documentation, and approval for tax exemption status.

4\. Reviewed various records and documents, including all accounting and
payroll records (including supplemental spreadsheets), bank statements,
invoices, cancelled checks and other supporting documents for
transactions totaling \$701,248 recorded in the Grant accounting records
for the period October 1, 2002, through June 23, 2003.

5\. Reviewed lists of Grant participants, time sheets, and interns'
weekly reports.

6\. Reviewed spreadsheets and supporting documentation to support
matching contributions.

7\. Reviewed 25 randomly selected stipend checks from a universe of 265
stipend checks to ensure stipend checks were cashed by participants.

8\. Reviewed Future Teachers' June 2, 2003, performance report and other
documentation provided to the Department of Education.

9\. Interviewed various Future Teachers, Department of Education,
Chicago Public Schools, and Chicago State University personnel. We also
discussed the response to the draft report with an attorney from the law
firm Future Teachers engaged and a consultant engaged by the law firm.

We conducted our field work at Future Teachers' administrative office in
Chicago, Illinois, from June 20, 2003, through August 8, 2003. We
discussed the results of our audit with Future Teachers' officials on
September 30, 2003.

We asked Future Teachers to provide written representations concerning
the competence of the evidence we obtained (paragraph 6.55 of the
government audit standards, 1994 revision; paragraph 7.54 of the 2003
revision) at the end of our field work. Future Teachers did not provide
representations at that time. However, Future Teachers provided us the
written representations with its response to the draft report. Future
Teachers qualified its representations regarding irregularities
involving other persons (e.g., outside consultants), proper recording of
material transactions, and fair presentation of computer-processed data
and related records as discussed in its response. Our audit was
performed in accordance with generally accepted government auditing
standards appropriate to the scope of the audit described above.

### STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we assessed the system of management controls,
policies, procedures, and practices applicable to Future Teachers\'
administration of the Grant. Our assessment was performed to determine
the level of control risk.

For the purpose of this report, we assessed and classified the
significant controls into the following categories:

● Cash Receipts

● Cash Disbursements

● Accounting for Disbursements

● Reporting on Program Results

Because of inherent limitations, a study and evaluation made for the
limited purpose described above would not necessarily disclose all
material weaknesses in the management controls. However, our assessment
disclosed significant management control weaknesses that adversely
affected Future Teachers\' ability to administer the Grant. These
weaknesses and their effects are fully 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 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 the audit.

Jack Martin, Chief Financial Officer

> Office of the Chief Financial Officer
>
> U.S. Department of Education
>
> Room 4E313

Federal Building No. 6

> 400 Maryland Avenue, S.W.
>
> Washington, D.C. 20202-4300

Sally Stroup, Assistant Secretary

Office of Postsecondary Education

U.S. Department of Education

> Room 7115

1990 K Street, N.W.

Washington, D.C. 20006-5100

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 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 Clearinghouse records currently indicate Future Teachers has
    submitted its A-133 audit report for the year ended June 30, 2002.

[^2]: Future Teachers also stated it is in the process of obtaining an
    approved indirect cost rate from the Department of Education.