School Board of Brevard County, Florida Specific Review of Legacy Academy Charter School. March 12, 2018

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1 School Board of Brevard County, Florida Specific Review of Legacy Academy Charter School March 12, 2018

2 Table of Contents Transmittal Letter... 1 Summary of Results... 2 Fact Sheet... 6 Appendix - Background and Statutes... 7

3 RSM US LLP 7351 Office Park Place Melbourne, Florida T F March 12, The Audit Committee of the School Board of Brevard County, Florida Viera, Florida Pursuant to our approved Internal Audit Plan for fiscal year ( FY ) , we hereby submit our report on specific areas of concern regarding Legacy Academy Charter School (the School ) as identified by the Sponsor, the School Board of Brevard County ( District ). This report will be presented at the next regularly scheduled Audit Committee meeting. This review focused on specific areas of concern related to financial condition and compliance with Florida Statutes 218 and 1002 as they relate to deteriorating financial condition and financial emergency. To address and test the areas noted above, we held interviews with key District employees as well as members of School management with knowledge of School financial condition. We held a meeting with the Principal and conducted onsite fieldwork on February 15, We reviewed documentation provided to us by the District s Office of Equity, Innovation and Choice including the Charter contract between School and District budget and membership information, monthly financial reports and the School s governing board meeting minutes and meeting calendar for FY We reviewed documentation provided to us by the School and/or its accounting services provider, including: Documentation Requested Date Requested Date Received School payroll reports for November 2017 through January /31/2018 2/15/2018 School bank statements and bank reconciliations for FY (July 2017 January 2018) 1/31/2018 2/15/2018 Insurance certificates for the School s most current physical location ( Curtis Blvd. Port St. John, Florida 32927) 2/15/2018 3/4/2018 Proof of notice for the School s governing board meetings in accordance with Florida Statute /15/2018 3/7/2018 Budget amendment (dated 2/23/2018) 2/15/2018 3/7/2018 Per Florida Statute , determination of financial emergency occurs when any one of the listed conditions occurs, including (d)(1) Failure for one pay period to pay, due to lack of funds, wages and salaries owed to employees. We noted that the School had insufficient funds to pay the payroll expenses for the pay period ending December 25, 2017, and paid on December 29, Per Florida Statute (1)(a)(3), deteriorating financial condition means a circumstance that significantly impairs the ability of a charter school to generate enough revenues to meet its expenditures without causing the occurrence of a condition of financial emergency as described in FS (1). We analyzed the most current amended budget for the School and through our adjustments noted a net loss of ($17,247). We would like to thank all those who assisted in this specific review of Legacy Academy Charter School. Respectfully, Internal Auditors 1

4 Summary of Results Transmittal Letter 1. Florida Statute (1) - Determination of Financial Emergency Per Florida Statute (1), determination of financial emergency occurs when any one of the listed conditions occurs, including (d)(1) Failure for one pay period to pay, due to lack of funds, wages and salaries owed to employees. We noted that the School had insufficient funds to pay the payroll expenses for the pay period ending December 25, 2017, and paid on December 29, As shown in the table below, the Principal paid a total of $2,700 into the School operating account on December 26 and 29, 2017, in order to prevent the payroll withdrawal from overdrawing the account due to insufficient funds. See Item #5 for additional discussion on the Principal payments. Operating Account Transaction Schedule Bank Balance 12/22/2017 $ 51, Principal Cash Advance 12/26/2017 $ 1, Bank Balance 12/26/2017 $ 52, Disbursements 12/26 12/29/2017 $ (10,684.07) Bank Balance 12/29/2017 $ 42, Principal Cash Advance 12/29/2017 $ 1, Bank Balance 12/29/2017 $ 43, /29/17 Payroll 12/29/2017 $ (42,482.04) Bank Balance 12/29/2017 $

5 Summary of Results Transmittal Letter 2. Florida Statute (1)(a) - Deteriorating Financial Condition Per Florida Statute (1)(a)(3), deteriorating financial condition means a circumstance that significantly impairs the ability of a charter school to generate enough revenues to meet its expenditures without causing the occurrence of a condition of financial emergency as described in FS (1). We analyzed the most current amended budget for the School, dated February 23, 2018, and which projected a net income for the fiscal year of $27,452. As of the date of this report, the amended budget had not been approved by the School s governing board due to postponed meetings. Through discussion with the School and its accounting services provider, we identified areas of adjustment to the budget, as follows: - The repayment of the loan from the Principal made in December 2017 (see Item #1 and Item #5) was not included in the budget. Adding in the loan repayment reduces net income by $2, The returned check that was written to the consultant and attempted to clear the bank in January 2018 (see Item #3) was not included in the budget. Adding in the check payment reduces net income by $6, The budget allowed for a revenue of $50,000 from a fundraiser gala that was planned to occur in February Upon inquiry, the fundraiser had not yet been held as of the date of this report, and is now expected to occur in April Additionally, per the School and the accounting services provider, the expected proceeds should be reduced to $15,000. This adjustment reduces net income by $35,000. FY Budget Analysis Item Amount FY Budgeted Net Income $ 27, Principal Loan Repayment $ (2,700.00) Consultant Fee Returned Check $ (6,999.00) Fundraising Event Adjustment $ (35,000.00) Adjusted Net Income (Loss) $ (17,247.00) A projected Net Loss, in addition to the insufficient funding to pay payroll noted in Item #1 and the returned check noted in Item #3, are all indications of a school in a deteriorating financial condition. 3

6 Summary of Results Transmittal Letter 3. Returned Checks and Duplicate Check Numbers During our review of the School s Bank Statements, we noted that check number #1006 in the amount of $6, was returned due to insufficient funds on January 10, We inquired of the Principal, who stated that this check was written to a consultant in July We reviewed the bank reconciliations and noted that this check was not included as an outstanding check to reconcile cash. Improperly reconciling cash impedes management from having accurate information regarding the cash balance at the School, which impacts decision making and increases the risk of insufficient funding for operations. During our review of the check noted above, the School s accounting services provider informed us that the School s accounting records showed two separate checks with the same check number #1006. The second version of this check was a payment to Staples for $ which cleared the bank on July 24, Duplicative check numbers in the same bank account increase the risks of error, misappropriation, inaccurate accounting records, and fraud. 4. Frequent Budget Changes The District s Office of Equity, Innovation and Choice provided us with the School s original budget and four (4) amended budgets for FY The School s accounting services provider noted that an additional budget amendment is in process. The frequency of budget adjustments Legacy required is higher than general industry trends of charter schools, as typically a charter school will have 1-2 amendments per year. Frequent budget amendments can be indicative of significant changes to the entity s operating environment, instability, uncertainty, or a lack of consistency in financial monitoring. 5. Loan to School FY Budget Amendments Amendment Date YTD Revenue YTD Expenditures Net Income* Original Budget $ 1,738, $ 1,736, $ 2, /27/2017 $ 1,705, $ 1,705, $ /30/2017 $ 1,705, $ 1,705, $ /20/2017 $ 1,608, $ 1,599, $ 8, /23/2018** $ 1,552, $ 1,525, $ 27, *See Item #2 for discussion on budgeted net income **As of the date of this report, the most recent budget amendment has not been approved by the School s governing board due to postponed meeting dates. As noted in Item #1, the Principal deposited cash into the School s operating account in December This loan to the School was not approved by the School s governing board prior to occurrence. The Principal advised the governing board that the loan had occurred at their January 25, 2018 meeting per the meeting minutes, subsequent to when the deposits were made in December The loan s terms, including interest rate and repayment plan, have not been formalized in writing as of the date of this report. All loans and loan terms are a significant financial event and should be formalized in writing and approved by the governing board prior to occurrence. This will minimize risk of error in financial reporting and protect the School from liability. 4

7 Summary of Results Transmittal Letter 6. Board Governance During fieldwork, we inquired of the Principal regarding the governing board s policies and procedures. The Principal stated that the School s governing board does not have any written policies or procedures in place. Written policies and procedures help clarify roles and responsibilities, set expectations, and promote positive working relationships. They also assist in sustainability and in meeting an entity s purpose and objectives. Standardized documented policies and procedures are necessary in order for the School s governing board to effectively monitor the School and provide proper oversight. We were unable to identify evidence of governing board review of financial activity. The governing board approved the School s budget and amended budgets, but we were unable to verify that documentation of actual financial activity (eg: check disbursement reports, bank reconciliations, income statements, budget vs. actual reports, etc.) Financial transparency is critical to providing the governing board with the information needed to make operational decisions, and to provide proper oversight. 7. Monthly Financial Reporting to Sponsor Per the School s charter agreement with the District, Section 4(G)(3)(i) states The School will submit a monthly financial report pursuant to section (9), Florida Statutes, and Rule 6A , Florida Administrative Code, to the Sponsor no later than the last day of the month following the month being reported. The School submitted the January 2018 Monthly Financial Report after the due date. Per the District records, the report was due on March 2, 2018, and submitted on March 6, Public Meeting Notice Per the School s charter agreement with the District, Section 9(A) states The School s governing board shall have at least four (4) public meetings per school year within the District. The meetings must be noticed, open, and accessible to the public, and attendees must be provided an opportunity to receive information and provide input regarding the charter school s operations. We requested documentation from Legacy to provide us with sufficient evidence that the school has been advertising in accordance with the charter agreement. The School provided us with electronic copies of flyer notifications of the public meetings. We were unable to determine if these flyers were posted timely, or physically posted in public areas. 5

8 Fact Sheet Legacy Membership Student membership** 10/13/2017 1/12/2018 School Forecast District Forecast Headcount for Year **Student membership statistics were provided by the District. Legacy Financial Data Monthly Financial Reports - Assets, Liabilities & Fund Balance 8/31/2017 9/30/ /31/ /30/ /31/2017 Cash and cash equivalents $ 20, $ 26, $ 10, $ $ Other current assets $ - $ - $ - $ 7, $ - Deposits $ - $ - $ - $ 12, $ 20, Other long-term assets $ 12, $ 12, $ 12, $ - $ - Total Assets $ 32, $ 38, $ 23, $ 20, $ 20, Accounts Payable $ 3, $ 12, $ 9, $ 3, $ 10, Salaries, Benefits & Payroll Taxes Payable $ 4, $ $ $ 7, $ 9, Other Liabilities $ $ $ $ - $ - Total Liabilities $ 7, $ 12, $ 9, $ 10, $ 20, Fund Balance Unassigned $ 25, $ 26, $ 14, $ $ Total Liabilities and Fund Balance $ 32, $ 38, $ 23, $ 11, $ 20,

9 Transmittal Letter Appendix - Background and Statutes What is a Charter School? Charter Schools are independently governed by Florida Statute and free standing public schools which offer parents and students another choice in public education outside the traditional school district system. Founded by educators, parents, community groups or private organizations, each charter school is governed by its own school board and operates under a performance contract with its sponsor, the Brevard Public School District (the District). As its sponsor, the District, through the Office of School Choice, monitors each charter school for compliance with all local, state and federal regulations and mandates. Relationship with the District As sponsor, the District should monitor and review the charter school in its progress towards the goals established in the charter as well as the financial condition of the charter school. Charter Schools are reported as discretely presented component units in accordance with GASB14. The Charter Schools report FTE data to the District, which ultimately is reported to the Department of Education ( DOE ). Per the contract with the District, the charter schools provide monthly financial statements to the District including a balance sheet, and a statement of revenues and expenditures and changes in fund balances. The financial statements should be prepared in accordance with Generally Accepted Accounting Principles and in a format to include a detail of all revenue and expenditure activities relating to its operations. The District receives all funds from the DOE and passes them through to the Charter School. The District withholds five percent of those funds as a fee for the support they provide. The support includes contract management services, FTE and data reporting, exceptional student education administration, services related to federal school lunch program eligibility, test administration, processing of teacher certificate data, and information services in accordance with Florida Statute (20)(a). District s Duties as the Charter School Sponsor The following excerpt from F.S (5)(b)(1) describes the District s duties as the Sponsor of a charter school: a) The sponsor shall monitor and review the charter school in its progress toward the goals established in the charter. b) The sponsor shall monitor the revenues and expenditures of the charter school and perform the duties provided in s These duties are shown in the Financial Condition Statutory Requirements section below. The following describes the notification requirements and corrective actions for the identified financial conditions: 7

10 Transmittal Letter Appendix - Background and Statutes District s Duties as the Charter School Sponsor - continued Conditions Notification Requirements Corrective Action 1. Failure to provide an audit required by s , F.S. The existence of one or more of these conditions constitutes a state of financial emergency. 2. Failure to comply with reporting requirements pursuant to s (9), F.S. 3. Failure to pay loans or debt service when due as a result of lack of funds 4. Failure to pay uncontested claims to creditors within 90 days as a result of lack of funds 5. Failure to transfer taxes, social security or retirements/benefits for employees 6. Failure for one pay period to pay wages, salaries or retirement benefits to employees If a charter school fails to provide for an audit required by s , F.S., or fails to comply with reporting requirements pursuant to s (9), F.S., A sponsor shall notify the governing board within 7 business days after conditions 1 and/or 2 occurs. In an audit that reveals that one of the conditions in s (1) has occurred or will occur if action is not taken to assist the charter school or charter technical career center, the auditor shall notify the governing board of the charter school or charter technical career center, the sponsor, and the Commissioner of Education within business 7 days after the finding is made. If one of the conditions in s (1) has occurred or will occur if action is not taken to assist the charter school, the sponsor shall notify the governing board within 7 business days after the condition occurs. Corrective Action Plan for deteriorating or emergency condition. 8

11 Transmittal Letter Appendix - Background and Statutes Financial Condition Statutory Requirements Effective July 1, 2009, Senate Bill 278 amended ss and , and creates s , related to a charter school s financial conditions which include the following: Conditions 1. Failure to provide for an audit required by s , F.S. Statute Excerpts If a charter school or charter technical career center has not been notified by the first day of the fiscal year that a financial audit for that fiscal year will be performed by the Auditor General, the charter school or charter technical career center shall have an annual financial audit completed within 9 months after the end of its fiscal year by an independent CPA retained by it and paid from its public funds (s (1)(e) and (f)). If the charter school fails to provide the audit, the school will be subject to expedited review by the sponsor (s (1)(a)1) 2. Failure to comply with reporting requirements pursuant to s (9), F.S. Charter schools shall provide annual financial report and program cost report information in the state-required formats for inclusion in district reporting. A charter school shall provide a monthly financial statement to the sponsor in a form prescribed by the DOE (s (9)(g)). The governing board shall report its progress annually to its sponsor. The DOE developed accountability report shall include a financial status component which must include revenues and expenditures at a level of detail that allows for analysis of the ability to meet financial obligations and timely repayment of debt (s (9)(k)). If the charter school fails to comply with the reporting requirements, the school will be subject to expedited review by the sponsor (s (1)(a)2). 9

12 Transmittal Letter Appendix - Background and Statutes Financial Condition Statutory Requirements - continued Conditions 3. Charter school is experiencing a deteriorating financial condition 4. Failure to pay loans or debt service when due as a result of lack of funds 5. Failure to pay uncontested claims to creditors within 90 days due to lack of funds 6. Failure to transfer taxes, social security or retirements/benefits for employees due to lack of funds 7. Failure for one pay period to pay wages, salaries or retirement benefits to employees due to lack of funds Statute Excerpts A deteriorating financial condition, identified through an annual audit or a monthly financial statement, means a circumstance that significantly impairs the ability of a charter school or a charter technical career center to generate enough revenues to meet its expenditures without causing the occurrence of a condition described in s (1). (s (1)(a)3). The charter school is subject to expedited review by the sponsor if a deteriorating financial condition is identified (s (1)(a)3). Failure within the same fiscal year in which due to pay short-term loans or failure to make bond debt service or other long-term debt payments when due, as a result of a lack of funds s (1)(a). The charter school is subject to expedited review by the sponsor if notification that this condition has occurred or will occur if action is not taken to assist the school (s (1)(a)4). Failure to pay uncontested claims from creditors within 90 days after the claim is presented, as a result of lack of funds s (1)(b). The charter school is subject to expedited review by the sponsor if notification that this condition has occurred or will occur if action is not taken to assist the school (s (1)(a)4). Failure to transfer at the appropriate time, due to lack of funds: Taxes withheld on the income of employees; or Employer and employee contributions for: Federal social security; or Any pension, retirement, or benefit plan of an employee. s (1)(c) The charter school is subject to expedited review by the sponsor if notification that this condition has occurred or will occur if action is not taken to assist the school (s (1)(a)4). Failure for one pay period to pay, due to lack of funds: Wages and salaries owed to employees, or Retirement benefits owed to former employees. s (1)(d) The charter school is subject to expedited review by the sponsor if notification that this condition has occurred or will occur if action is not taken to assist the school (s (1)(a)4). 10

13 Transmittal Letter Appendix - Background and Statutes Financial Condition Statutory Requirements continued The following represents the recommended steps for creating a corrective action plan: 1. A sponsor shall notify the governing board within 7 business days after one or more of the conditions resulting in the establishment of a corrective action plan occur. 2. The governing board and the sponsor shall develop a corrective action plan and file the plan with the Commissioner of Education within 30 business days after notification is received. 3. If the governing board and the sponsor are unable to agree on a corrective action plan, the Commissioner of Education shall determine the components of the plan. 4. The governing board shall implement the final plan. 5. The governing board shall include the corrective action plan and the status of the implementation in the annual progress report to the sponsor. 6. If the governing board fails to implement the corrective action plan within 1 year after one or more of the conditions resulting in the establishment of a plan occur, the State Board of Education shall prescribe any steps necessary for the charter school or charter technical career center to comply with state requirements. 7. The chair of the governing board shall annually appear before the State Board of Education and report on the implementation of the State Board of Education s requirements referenced above (6). Finally, if the charter school is found to be in a state of financial emergency the following steps should be performed: 1. The charter school shall develop and submit a financial recovery plan to the Commissioner of Education for review and approval within 30 days of being notified that the charter school is in a state of financial emergency and a financial recovery plan is needed. 2. The charter school shall file the approved financial recovery plan with the Commissioner. 3. The governing board shall monitor the financial recovery plan in order to ensure compliance. 4. The governing board shall include the financial recovery plan and the status of its implementation in the annual progress report to the sponsor. The sponsor may decide not to renew or may terminate a charter if the charter school fails to correct the deficiencies noted in the corrective action plan within 1 year after being notified of the deficiencies or exhibits one or more financial emergency conditions for 2 consecutive years. 11

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