PHILADELPHIA INTERMEDIATE UNIT NO. 26 AUDITOR S REPORT FISCAL 2009

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1 PHILADELPHIA INTERMEDIATE UNIT NO. 26 AUDITOR S REPORT FISCAL 2009

2 Robert L. Archie, Jr., Esq., Chair and Members of the School Reform Commission 440 N. Broad Street Philadelphia, PA Audits of the Philadelphia Intermediate Unit No Transportation Fiscal Report, and Final Expenditure Report Special Education Core Programs (PDE Forms) for fiscal 2009 were conducted pursuant to the requirements of the Department of Education of the Commonwealth of Pennsylvania. Our audits determined that the above noted PDE Forms presented fairly, in all material respects, the financial activity of the Philadelphia Intermediate Unit No. 26 required to be included on those PDE Forms, for the period ended June 30, 2009 in conformity with accounting practices prescribed or permitted by the Department of Education of the Commonwealth of Pennsylvania. In planning and performing our audits, we considered the Philadelphia Intermediate Unit No. 26 s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the PDE Forms and not to provide assurance on the internal control over financial reporting. However, we noted a certain matter involving the internal control over financial reporting and its operation that we considered to be a significant deficiency and a certain other condition that represents a deficiency in internal control over financial reporting that should be addressed by management. These deficiencies are discussed in detail in the findings and recommendations section of the report. We have discussed our findings and recommendations with School District of Philadelphia personnel and included the District s written response to our comments as part of the report. We are confident that our recommendations, if implemented by management, will strengthen internal control and enhance the financial reporting of the Philadelphia Intermediate Unit No. 26. We would like to express our thanks to the management and staff of the School District of Philadelphia for their courtesy and cooperation in the conduct of the audits. Respectfully submitted, ALAN BUTKOVITZ City Controller cc: Arlene C. Ackerman, Ed.D., Chief Executive Officer Michael J. Masch, Chief Financial Officer

3 CONTENTS I. TRANSPORTATION FISCAL REPORT Page Auditor s Report...1 Financial Form...3 Notes to Financial Form...5 II. FINAL EXPENDITURE REPORT SPECIAL EDUCATION CORE PROGRAMS Auditor s Report...6 Financial Form...8 Notes to Financial Form...12 III. IV. REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF PENNSYLVANIA DEPARTMENT OF EDUCATION FORMS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS...13 FINDINGS AND RECOMMENDATIONS Significant Deficiency Unnecessary Encumbrances Not Liquidated...16 Other Condition Calculation Methodology for Transportation Costs Not Always Documented...16 V. AGENCY S RESPONSE Michael J. Masch, Chief Financial Officer...18

4 To the Chair and Members of the School Reform Commission of the School District of Philadelphia Independent Auditor s Report On Philadelphia Intermediate Unit No. 26 Form PDE-2099 Transportation Fiscal Report We have audited the accompanying Form PDE Intermediate Unit Transportation Fiscal Report (Form PDE-2099) - of the Philadelphia Intermediate Unit No. 26, Philadelphia, Pennsylvania, for the year ended June 30, Form PDE-2099 is the responsibility of the Philadelphia Intermediate Unit's management. Our responsibility is to express an opinion on this form based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether Form PDE-2099 is free of material misstatement. This audit includes examining, on a test basis, evidence supporting the amounts and disclosures in Form PDE This audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of Form PDE We believe that our audit provides a reasonable basis for our opinion. As described in Note 1, Form PDE-2099 was prepared in conformity with accounting practices prescribed or permitted by the Department of Education of the Commonwealth of Pennsylvania which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. In our opinion, Form PDE-2099, referred to above, presents fairly, in all material respects, the financial activity of the Transportation Accounts of the Philadelphia Intermediate Unit No. 26, Philadelphia, Pennsylvania, for the year ended June 30, 2009, in conformity with the basis of accounting described in Note

5 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R In accordance with Government Auditing Standards, we have also issued our report dated July 9, 2010, on our consideration of the Philadelphia Intermediate Unit s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. This report is intended solely for the information and use of the School Reform Commission, management of the Philadelphia Intermediate Unit No. 26 and for filing with the Department of Education of the Commonwealth of Pennsylvania and is not intended to be and should not be used by anyone other than these specified parties. July 9, 2010 GERALD V. MICCIULLA, CPA Deputy City Controller 2

6 3 The accompanying notes to Form PDE-2099 are an integral part of this form.

7 4 The accompanying notes to Form PDE-2099 are an integral part of this form.

8 School District of Philadelphia (IU 26) Transportation Notes to Form PDE-2099 Fiscal Year Ended June 30, PURPOSE OF FORM PDE-2099 Form PDE-2099 has been prepared in conformity with accounting practices prescribed or permitted by the Department of Education of the Commonwealth of Pennsylvania. Under this method, expenditures are reported in the fiscal year they are incurred. Revenues include all payments received from the Commonwealth during the fiscal year, and, if applicable, any amounts received outside of the current fiscal year but directly attributable to it. The form reports certain financial activity of the Philadelphia Intermediate Unit No. 26 to the Department of Education of the Commonwealth of Pennsylvania in compliance with the Public School Code of 1949, Section 2509 as amended. This form presents only the revenues and expenditures and changes in fund balance associated with the transportation of exceptional children to and from school, the transportation of eligible young children to and from an early intervention program, and the transportation of exceptional children in accordance with programs and services specified in their Individualized Education Programs. 5

9 Independent Auditor s Report On Philadelphia Intermediate Unit No. 26 Form PDE Final Expenditure Report Special Education Programs - IU Core To the Chair and Members of the School Reform Commission of the School District of Philadelphia We have audited the accompanying Form PDE Final Expenditure Report Special Education Programs - IU Core (Form PDE-2115) of the Philadelphia Intermediate Unit No. 26, Philadelphia, Pennsylvania, for the year ended June 30, Form PDE-2115 is the responsibility of the Philadelphia Intermediate Unit's management. Our responsibility is to express an opinion on this form based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether Form PDE-2115 is free of material misstatement. This audit includes examining, on a test basis, evidence supporting the amounts and disclosures in Form PDE This audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of Form PDE We believe that our audit provides a reasonable basis for our opinion. As described in Note 1, Form PDE-2115 was prepared in conformity with accounting practices prescribed or permitted by the Department of Education of the Commonwealth of Pennsylvania which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. In our opinion, Form PDE-2115, referred to above, presents fairly, in all material respects, the financial activity of the Special Education Programs - IU Core of the Philadelphia Intermediate Unit No. 26, Philadelphia, Pennsylvania for the year ended June 30, 2009, in conformity with the basis of accounting described in Note

10 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R In accordance with Government Auditing Standards, we have also issued our report dated July 9, 2010, on our consideration of the Philadelphia Intermediate Unit s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. This report is intended solely for the information and use of the School Reform Commission, management of the Philadelphia Intermediate Unit No. 26 and for filing with the Department of Education of the Commonwealth of Pennsylvania and is not intended to be and should not be used by anyone other than these specified parties. July 9, 2010 GERALD V. MICCIULLA, CPA Deputy City Controller 7

11 The accompanying notes to Form PDE-2115 are an integral part of this form. 8

12 The accompanying notes to Form PDE-2115 are an integral part of this form. 9

13 The accompanying notes to Form PDE-2115 are an integral part of this form. 10

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15 School District of Philadelphia (IU 26) Special Education Programs - IU Core Notes to Form PDE-2115 Fiscal Year Ended June 30, PURPOSE OF FORM PDE-2115 Form PDE-2115 has been prepared in conformity with accounting practices prescribed or permitted by the Department of Education of the Commonwealth of Pennsylvania. Under this method, expenditures are reported in the fiscal year they are incurred. Revenues include all payments received from the Commonwealth during the fiscal year, and, if applicable, any amounts received outside of the current fiscal year but directly attributable to it. The form reports certain financial activity of the Philadelphia Intermediate Unit No. 26 to the Department of Education of the Commonwealth of Pennsylvania in compliance with the Public School Code of 1949, Section as amended. This form presents only the revenues, expenditures and encumbrances relating to providing special education services to exceptional children, and eligible young children in an early intervention program. 12

16 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF PENNSYLVANIA DEPARTMENT OF EDUCATION FORMS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Chair and Members of the School Reform Commission of the School District of Philadelphia We have audited Form PDE-2099 Intermediate Unit Transportation Fiscal Report and Form PDE 2115 Final Expenditure Report Special Education Programs IU Core (PDE Forms) of the Philadelphia Intermediate Unit No. 26, Philadelphia, Pennsylvania (Philadelphia Intermediate Unit), for the year ended June 30, 2009, and have issued our reports thereon dated July 9, We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audits, we considered the Philadelphia Intermediate Unit s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the PDE Forms, but not for the purpose of expressing an opinion on the effectiveness of the Philadelphia Intermediate Unit No. 26 s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Philadelphia Intermediate Unit s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we identified a certain deficiency in internal control over financial reporting that we consider to be a significant deficiency. 13

17 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency involving the Philadelphia Intermediate Unit is a control deficiency, or combination of control deficiencies, that adversely affects its ability to initiate, authorize, record, process, or report financial data reliably in accordance with accounting practices prescribed or permitted by the Department of Education of the Commonwealth of Pennsylvania such that there is more than a remote likelihood that a misstatement of the Unit s PDE Forms that is more than inconsequential will not be prevented or detected by the Unit s internal control. We consider the following deficiency described in the accompanying findings and recommendations section to be a significant deficiency in internal control over financial reporting: Policies and procedures do not ensure that all unnecessary encumbrances are liquidated at fiscal year-end. A material weakness involving the Philadelphia Intermediate Unit is a significant deficiency, or combination of significant deficiencies, that results in a more than a remote likelihood that a material misstatement of the PDE Forms will not be prevented or detected by the Unit s internal control. Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses. However, we believe that the significant deficiency described above is not a material weakness. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Philadelphia Intermediate Unit s PDE Forms are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of PDE Form amounts. However, providing an opinion on compliance with those provisions was not an objective of our audits, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted a certain condition that is not required to be reported under Government Auditing Standards, but nonetheless represents a deficiency in internal control that should be addressed by management. This other condition is listed in the table of contents and described in the accompanying report. 14

18 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R The Philadelphia Intermediate Unit s written response to the significant deficiency and other condition identified in our audit is included as part of the accompanying report. However, it has not been subjected to the auditing procedures applied in the audit of the PDE Forms and, accordingly, we express no opinion on it. This report is intended solely for the information and use of the School Reform Commission, management of the Philadelphia Intermediate Unit, others within the entity, and for filing with the Department of Education of the Commonwealth of Pennsylvania and is not intended to be and should not be used by anyone other than these specified parties. July 9, 2010 GERALD V. MICCIULLA, CPA Deputy City Controller 15

19 SIGNIFICANT DEFICIENCY Unnecessary Encumbrances Not Liquidated FINDINGS AND RECOMMENDATIONS Encumbrances represent valid commitments related to contracts not yet performed, and orders not yet filled. As a matter of practice, they are used to control expenditure commitments for the year and to enhance cash management. Of $2,075,149 in Intermediate Unit fiscal year-end open encumbrances we examined, $1,274,948 (61 percent) were determined to be unnecessary and therefore invalid. District management prepared adjustments to correct $631,638 of the invalid amounts we identified, but declined to correct the remaining $643,310 due to its immateriality in relation to the Intermediate Unit Core Program s total expenditures and encumbrances. This condition occurred because the District s encumbrance cancellation policy was neither clear nor adequately communicated to the responsible unit managers. District management informed us that it is the unit manager s responsibility to notify the District s Office of Management and Budget (OMB) when an encumbrance should be cancelled. However, our review found that the District s encumbrance cancellation policy contradicted this statement. The policy instead indicated that the OMB would cancel any remaining fiscal year-end encumbrances. Our discussion with one unit manager responsible for several of the invalid encumbrances noted by our review revealed that the manager s understanding of the policy was that the encumbrances would be liquidated without any action necessary on the manager s part. To improve controls over the encumbrance liquidation process, we recommend that District management revise the encumbrance cancellation policy to clarify the unit managers responsibilities and disseminate this revised policy to the unit managers. District officials should monitor and enforce compliance with the encumbrance cancellation policy. [ ] OTHER CONDITION Calculation Methodology for Transportation Costs Not Always Documented In reporting expenditures on the Intermediate Unit Transportation Fiscal Report (Form PDE- 2099), District personnel must determine the amount of transportation costs allocable to special education. To accomplish this task, District personnel have developed special education allocation percentages, based on such data as the number of bus routes and mileage traveled. Total costs for a specific category are then multiplied by the applicable allocation percentage to arrive at the special education amount. Our testing revealed the following instances where the special education allocation percentages used by the District were not sufficiently documented: Payroll costs for bus attendants were allocated based on the percentage of their time spent traveling on school buses with special education students. When we requested documentation for this percentage, District personnel informed us that the percentage was based on a time study performed several years ago. However, District personnel could not locate a copy of this time study. 16

20 FINDINGS AND RECOMMENDATIONS The calculation of vehicle maintenance costs allocable to special education reflected the removal of costs attributable to non-student vehicles (e.g. vehicles used to transport mail between District locations). When we requested documentation for the percentage used to calculate the non-student vehicles amount, District personnel were unable to provide any support, stating that the percentage used was based on past practice. The transportation expenditures reported on Form PDE-2099 did not include the portion of social security and medicare tax contributions reimbursed by the Commonwealth of Pennsylvania (Commonwealth). District personnel calculated this reimbursement amount by multiplying total social security and medicare tax contributions by 50 percent. The use of 50 percent as the Commonwealth reimbursement rate was a long standing practice for which there was no support. While the fiscal 2009 Commonwealth reimbursement rate for employees hired before July 1, 2004 or previously employed by a Commonwealth public school prior to July 1, 2004 was 50 percent, the reimbursement rate for all other employees was 71 percent. Based upon our review of the Intermediate Unit s fiscal 2009 Reconciliation of Social Security and Medicare Tax Contributions (Form PDE-2105), we estimated that the average Commonwealth reimbursement rate was approximately 60 percent. Our review did not disclose any resulting material misstatements from the above cited instances. However to improve the documentation for and accuracy of the calculation of expenditures reported on Form PDE-2099, we recommend that District management require that analyses be performed to estimate (1) the percentage of bus attendants time spent traveling on school buses with special education students, (2) the portion of vehicle maintenance costs attributable to non-student vehicles, and (3) the Commonwealth s average reimbursement rate for social security and medicare tax contributions. The percentages developed from these analyses should then be incorporated into the calculation of expenditures reported on Form PDE [ ] 17

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