Audit of. Guided Path Academy Charter School

Transcription

1 Audit of Guided Path Academy Charter School May 14, 2009 Report #

2 Audit of Guided Path Academy Charter School Table of Contents Page EXECUTIVE SUMMARY i PURPOSE AND AUTHORITY 1 SCOPE AND METHODOLOGY 1 BACKGROUND 2 CONCLUSIONS 1. School in Financial Emergency Pursuant to Florida Statutes (1) 3 2. Noncompliance with Charter Requirements 8 3. Principal Continued to Pay Herself the Loan She Forgave 9 4. Unsound Business Practices Child Care Funds Principal s Pay 12 APPENDIX Management s Response 15

3 Audit of Guided Path Academy Charter School Executive Summary In response to the requests of Charter Schools Department and Office of Chief Counsel, we have audited Guided Path Academy Charter School (the school) for the period January 1, 2005, through February 28, This request was initiated due to a complaint filed with the Charter Schools Department concerning the school. This audit focused on the allegations contained in the complaint and produced the following major conclusions: 1. School in Financial Emergency Pursuant to Florida Statutes Section (1) Inaccurate Salaries and Taxes Liabilities. The school repeatedly avoided its employer tax obligation, and did not send employees withholdings to IRS. During 2005 through 2008, the school issued handwritten paychecks with net payroll amounts to certain employees. However, salary information for these handwritten paychecks was not provided to the payroll contractor for employment taxes and withholdings calculations. Furthermore, employees earnings through handwritten paychecks were not included in the year-end reporting to IRS, and consequently, these earnings were not included in the employees W-2 Forms. Management s Response: Upon contracting with a subsequent accountant, we were immediately advised to correct the situation. Processes were then implemented to correct the tax obligations associated with the payments. (Please see page 16.) School Avoided, Underpaid, and Under-recorded Employment Taxes. The net pay amounts of handwritten paychecks were recorded in the general ledger as contracted services, resulting in an understatement of salary expense. During 2005 and 2006, IRS 1099 Forms were issued to employees with net payment amounts in lieu of the gross amounts to be reported in the W-2 Forms. However, neither the net payment amounts for 2007 and 2008 were included in the employees W-2 nor the 1099 Forms were issued to the employees. Instead of including the wages in the employees W-2 Forms, issuing 1099 Forms to employees resulted in the school s avoiding payment of employment taxes to the IRS. This also resulted in underreporting payroll tax liability. Management s Response: Handwritten checks were reported to our payroll processor and subsequently recorded therein as manual checks, with the attendant gross pay, tax deductions and net pay amounts calculated to allow for the proper reporting of same in each employee s year end W-2, Wage and Income Tax Statement. Subsequent payments made to satisfy back salaries due were paid through our payroll processor, wherein all appropriate taxes were withheld, reported and remitted to the proper taxing authority. (Please see page 16.) i

4 School Did Not Timely Meet Payroll Obligation. Due to insufficient cash flow, the school was not able to meet its payroll obligation three times during 2006 and The analysis of salary payments indicated that the school s current liabilities reported on the general ledger and audited financial statements were understated by $11, as of June 30, The total salaries payable portion of current liabilities should have been $14,204.70; however, the general ledger recorded only $2, in salaries payable. Moreover, the school continued to pay six individuals between July 1, and November 30, 2008, for unpaid salaries. Based on available payroll records, as of November 30, 2008, the school overpaid one employee $875, while it owed a total of $8, in unpaid salaries to five employees. Management s Response: We agree with the audit findings that payroll obligations were not met during the fiscal year ended June 30, (Please see page 16.) Deficit Fund Balance. As of June 30, 2008, the school s audited financial statements indicated a deficit fund balance of $27,348 and a bank overdraft of $10,050. The school s independent auditor reported that the school met the conditions of financial emergency as defined by Florida Statute, Section (1)(d) and (e). Our review found that the school continued to pay the $37,920 loan forgiven by the Principal; and the salaries payable was understated by $11,605 as of June 30, The school s adjusted deficit fund balance as of June 30, 2008, should have been $76,873, instead of $27,348 as recorded. Management s Response: Several cash infusions (loans) were made to the school by the principal beginning 2003 for a cumulative total of $50,000. At the end of fiscal year 2008, the principal elected to forego repayment of $37,920 of this amount. The forgiveness was recorded in the school s books and records. As of May 5, 2009 Board Meeting, the principal has elected to forego the remaining amount due her in this regard. The Board was advised of her choice and accepted her decision to do so. Board minutes noting this, as well as all other business discussed therein, were prepared and filed as required. (Please see page 16.) Remedial Action Not Accomplished. As required by Florida Statutes Section , the school submitted a Financial Recovery Plan to the School District on November 7, 2008, outlining specific remedial actions for achieving a positive fund balance by February 28, One of the goals of the remedial actions was to increase student enrollment to 65 by February However, actual student enrollment was 49 in February 2009, a reduction of seven students from an enrollment of 56 in October Management s Response: The School submitted an aggressive Financial Recovery Plan on November 7, 2008 for remediating the negative fund balance by February 28, It relied, in part, on meeting student enrollment objectives. The school did not meet this goal. Student ii

5 enrollment, in fact, was reduced due to student relocations out of the area. The affected student families had several siblings attending the school, which greatly impacted the school. Financial cuts from the State reducing basic student allocations placed a further hardship on the school. In spite of these events, the school has made significant progress in meeting its current and previous obligations. Guided Path Academy, Inc has incurred no new liabilities, ensuring its fidelity in repaying prior salaries deferred. (Please see page 17.) 2. Noncompliance with Charter Requirements Section 21.0, P of the Charter requires that all disbursements of the Charter School must contain two authorized signatures. No check may be payable to either of the signatories. However, the Principal obtained and issued six unnumbered bank counter checks totaling $26,297 with only the Principal s signature, including one check written payable to herself, and another one written payable to Cash that was endorsed by her. Management s Response: Upon the initial implementation of the school s Charter, the Principal was given financial authorization to disburse funds on the school s behalf. This authorization is noted in the recorded Board minutes for the school. The principal continues to enjoy the Board s complete support. As such, she is authorized to sign checks for any and all purposes she deems proper up to $2,000.00, on her signature alone. The specific checks cited exceeding this amount were paid for Rent and salary. (Please see page 17.) 3. Principal Continued to Pay Herself the Loan She Forgave On September 1, 2008, the Principal signed a statement indicating that she forgave $37,920 in total personal loan to the school effective June 30, However, on September 12, 2008, the Principal prepared an invoice and signed a Check Requisition for $2,000 payable to herself for partial payment of the loan she previously forgave. A check for another $2,000 loan payment, funded by the day care bank account, was made payable to her on December 8, No Governing Board authorization was found for both payments in the Board meeting minutes. Management s Response: Payments noted to the principal were in satisfaction of the remaining open amount of the loans made to the school not forgiven by her. The remaining open balance due her, after consideration of the payments made in fiscal year , has been fully forgiven. Her decision to do so is reflected and recorded in the Board s minutes for this period. (Please see page 17.) iii

6 4. Unsound Business Practices Poor Accountability of Bank Checks. During the audit, we found that the Principal had possession of the blank checks which were not secured in a vault. The review of check register, voided check file, and general ledger found that four checks could not be accounted for, and nine blank or partially written voided checks were identified as pre-signed. To prevent potential fraud and abuse, checks should not be pre-signed, and blank checks should be secured in a vault. Management s Response: All check stocks are presently secured in locked files, with access only by authorized personnel. Further, check #1377 cited in the report s details as being missing was in fact cashed in February, The remaining four (4) checks cited, out of several hundred negotiated during this period, remain unaccounted for and are being actively monitored. (Please see page 17.) Salaries and Wages Miscalculated. The audit noted that actual salaries and wages for some employees were inconsistent with their contractual amounts; salaries for employees were paid by the hour; timesheets were not maintained for work hours; and employee overtimes were not paid time-and-a-half in accordance with the U.S. Fair Labor Standards Act (FLSA). Some payroll records were missing and inconsistent; this prevented the school from proper use and monitoring of public funds. Management s Response: We disagree with the audits findings asserting the miscalculation of salaries and wages due. Employees were paid as agreed, excepting the periods noted above, with timesheets maintained to support those calculations. To further assure accurate work time records, an electronically based clock-in system was implemented in the current fiscal period. This system adds further integrity to the maintenance of accurate time records with digital archival storage of timesheets. Many of the items noted in the audit resulted from inconsistent use of standards and procedures during prior fiscal periods. Regular reviews by the Board of these practices have led to improved standards and procedures, as necessary, with more consistent application of these guidelines. (Please see page 18.) 5. Child Care Funds A child care program, which was not included in the school s Charter, was established in order to generate additional cash flow for the school. Funding for child care operation came from tuition and Family Central subsidies. Although monies for the child care program were intended to be maintained separately, as of November 30, 2008, funds received from Family Central continued to be recorded in the school s general ledger. Payroll for child care workers were being recorded in and paid from the school s operating account. Child care funds should not be commingled with the school s funds. iv

7 Management s Response: A child care program was implemented in 2007 to grow our student base while ensuring academic accountability, not to generate additional cash flow as suggested in the audit findings. The school s charter is for K through 5 th grade students. The Child Care program is separately licensed and is not part of the school s charter. Financial practices to distinguish each of the non-profit s division performance are being defined and will be reflected accordingly in its records going forward. (Please see page 18.) 6. Principal s Pay The complaint referred to the Charter Schools Department also indicated that the Principal s salary was inconsistent with the employment contract approved by the Governing Board. A review of the available documents found that the Principal was being paid in accordance with the agreement. However, the Principal has entered into a teacher contract with another charter school effective November 1, A review of the Governing Board meeting minutes did not reveal the Board s approval to modify the Principal s employment contract or work schedule. Any modifications of the Principal s employment terms and conditions should be approved by the Governing Board. Management s Response: We agree with the audit s findings that the Principal s pay is consistent with her agreed upon contract and the charge noted in the complaint to the Charter Schools Department is without merit. As a professional courtesy, the Board was made aware of a professional engagement involving the Principal directly by her. We have no desire to hinder opportunities in this regard and respect her considered choices in this manner, particularly given her consistent support and dedication to Guided Path Academy, Inc. (Please see page 18.) v

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9 THE SCHOOL DISTRICT OF LUNG CHIU, CPA ARTHUR C. JOHNSON, Ph.D. PALM BEACH COUNTY, FLORIDA DISTRICT AUDITOR SUPERINTENDENT OFFICE OF THE DISTRICT AUDITOR 3346 FOREST HILL BLVD., B-302 WEST PALM BEACH, FL (561) FAX: (561) M E M O R A N D U M TO: FROM: Honorable Chair and Members of the School Board Arthur C. Johnson, Superintendent of Schools Chair and Members of the Audit Committee Lung Chiu, District Auditor DATE: May 14, 2009 SUBJECT: Audit of Guided Path Academy Charter School PURPOSE AND AUTHORITY In response to the requests of Charter Schools Department and Office of Chief Counsel, we have audited Guided Path Academy Charter School (the school) for the period January 1, 2005, through February 28, The primary objectives of the audit were to: Ascertain the school s financial condition. Determine the school s compliance with the Charter School Charter, and applicable laws and regulations. Determine if school s liabilities were accurately reported in its financial statements. Determine if employee salaries and withholdings were properly recorded and reported to the U.S. Internal Revenue Service. SCOPE AND METHODOLOGY The audit was performed in accordance with Government Auditing Standards by Stephanie Steeves, CIA, and Susy Miller, CIA, between January 21, and March 25, 2009, and included: Reviewing applicable Florida Statutes. Reviewing the school s Charter School Charter (Charter). Reviewing Governing Board meeting minutes. Reviewing the general ledger and bank statements. Reviewing personnel, payroll, and time keeping records. Interviewing school and District staff. 1

10 Draft findings were sent to the President of the Governing Board and the School Principal for review and comments. Management response is included in the Appendix. We appreciate the courtesy and cooperation extended to us by staff during the audit. The final draft report was presented to the Audit Committee at its May 14, 2009, meeting. BACKGROUND The School Board approved a five-year contract (Charter) with Guided Path Academy Charter School on March 10, The term of the contract was for July 1, 2004, through June 30, According to the Charter, the mission of the school is to develop lifelong learners prepared to be innovative participants in a global community while ensuring that all students are self-motivated, self-disciplined, and socially responsible. As of March 20, 2009, the school had 49 students enrolled in grades K-5. The school s primary source of funding comes from the Florida Education Finance Program (FEFP) funds. A child care center for three and four year olds was established during Fiscal Year 2008 to bring in more revenues. However, the child care program was not part of the Charter. The school also receives Federal Title I funding (Elementary and Secondary Education Act) and IDEA funding (Individuals with Disabilities Education Act) to provide specific services for students. On December 8, 2008, the District Charter Schools Department received a copy of the resignation letter from the school s former accountant expressing concerns about the accounting discrepancies and management s mishandling of school assets. The letter was subsequently referred to the Audit Department on December 17, The letter indicated that: A forgiven loan continued to be repaid. The school improperly paid employees as independent contractors and incorrectly reported the school s tax obligation to the U.S. Internal Revenue Service (IRS). The school improperly recorded payroll liabilities on the financial statements. Management s pre-signing blank checks. The lack of oversight by the school s Governing Board. 2

11 CONCLUSIONS This audit focused on the allegations contained in the compliant and produced the following major conclusions. 1. School in Financial Emergency Pursuant to Florida Statutes (1) Financial Emergency. Pursuant to Florida Statutes (1), the criterion for a financial emergency included: (c) Failure to transfer at the appropriate time, due to lack of funds: 1. Taxes withheld on the income of employees; or 2. Employer and employee contributions for: a. Federal social security; or b. Any pension, retirement, or benefit plan of an employee. (d) Failure for one pay period to pay, due to lack of funds: 1. Wages and salaries owed to employees; or 2. Retirement benefits owed to former employees. (e) An unreserved or total fund balance or retained earnings deficit, or unrestricted or total net assets deficit, as reported on the balance sheet or statement of net assets on the general purpose or fund financial statements. Our audit revealed that the school was in financial emergency pursuant to Florida Statutes (1) because it (1) had a $76,873 deficit fund balance as of June 30, 2008, (2) failed to timely meet its payroll obligation, (3) underreported withholdings and social security to IRS, and (4) failed to transfer tax withholdings and social security to IRS. Principal s Continued Recommendation to Close the School. The Principal reported to the Governing Board at multiple meetings during Fiscal Years 2008 and 2009 that the financial condition of the school continued to deteriorate; and that additional revenue streams were necessary in order to continue operations and meet payroll obligations. At three Governing Board meetings, the Principal repeatedly advised the Board of the school s poor financial condition, and recommended that the school be closed. The Governing Board, however, denied the option to close the school. 3

12 Financial Emergency Pursuant to Florida Statutes (1)(c) Inaccurate Salaries and Taxes Liabilities. The school outsourced its payroll processing to a contractor. School staff entered employee work hours and wage data into the payroll system. Based on the data input, the contractor calculates and transmits employment taxes and various withholdings to IRS and issues paychecks to the employees. The cash requirement and payroll processing fees are automatically deducted from the school s bank account. During 2005 and 2006, the school issued handwritten paychecks, with net payroll amounts, to nine and 13 employees respectively. However, information for these handwritten paychecks was not provided to the payroll contractor for taxes and withholdings calculations. Further, the school did not send withholdings and employment taxes to IRS. Employees earnings through handwritten paychecks were not included in the year-end reporting to IRS, and consequently, were not included in employees W-2 Forms. Management s Response: After consultation with the certified public accountant engaged to maintain our financial records at the time, the reporting of wages cited as contractor income was suggested by him. We relied on his professional advice and duly reported the income in this manner. The attendant Forms 1099 and 1096 were prepared by him and forwarded to the Treasury as required. We were never advised as to the ramifications of this type of reporting, nor were alternatives discussed with him to address this circumstance. Upon contracting with a subsequent accountant, we were immediately advised to correct the situation. Processes were then implemented to correct the tax obligations associated with the payments. (Please see page 16.) School Avoided, Underpaid, and Under-recorded Employment Taxes. The net pay amounts were recorded in the general ledger as contracted services, resulting in an understatement of salary expense. IRS 1099 Forms (form for reporting payment amount to independent contractor for income tax filing) were issued to employees at year-end with the net payment amounts in lieu of reporting the gross payments in W-2 Forms. Issuing 1099 Forms to employees instead of W-2 Forms resulted in under-reporting and underpaying employer taxes to IRS for 2005 and It also resulted in under-recording payroll tax liability. For 2007 and 2008, the school again issued handwritten paychecks, with the net amounts, to employees; and the payroll information was not provided to the payroll contractor. However, wages for these periods were again not reported to IRS; and 1099 Forms were not issued to employees. The school consistently avoided its employer tax obligation for these paychecks, and did not send employees withholdings to IRS. Failure to transmit taxes to IRS is a financial emergency item defined by Florida Statute (1)(c). Section 3.1 of the school s Employment Agreements used in Fiscal Year 2006 indicated that, If for any reason, payroll is not met on the required date, employee will be paid under contracted services for the time owed and a 1099 submitted for IRS purposes. 4

13 IRS Publication 15-A, Employer s Supplemental Tax Guide states that employers who classify an employee as an independent contractor and have no reasonable basis for doing so may be held liable for employment taxes for that worker. Handwritten Paychecks Issued to Employees Calendar Year Source of Information Total Amount Forms $49, Forms 49, General Ledger 10, General Ledger 14, Management s Response: There was no attempt to avoid payment of any tax obligation associated with these payments, and we strongly object to the characterization of these events as such. Further, handwritten checks were reported to our payroll processor and subsequently recorded therein as manual checks, with the attendant gross pay, tax deductions and net pay amounts calculated to allow for the proper reporting of same in each employee s year end W-2, Wage and Income Tax Statement. Subsequent payments made to satisfy back salaries due were paid through our payroll processor, wherein all appropriate taxes were withheld, reported and remitted to the proper taxing authority. (Please see page 16.) Financial Emergency Pursuant to Florida Statutes (1)(d) School Did Not Timely Meet Payroll Obligation. Due to insufficient cash flow, the school was not able to meet its payroll obligation three times during 2006 and 2007: December 31, 2006, January 31, 2007, and April 30, As requested by the school s independent auditor, an audit adjustment was made to the June 30, 2007, general ledger to increase the current liabilities by $30, in order to recognize the unpaid salaries for Fiscal Year Moreover, with a clerical error of $ in salary payable for August 2006, the adjusted payable became $29, as of June 30, As of June 30, 2008, current liabilities reported on the general ledger and audited financial statements were understated by $11, This understatement was due in part to misrecording expenses as payables, and re-classifying payables as expenses. The corrected total salaries payable portion of current liabilities should be $14, as of June 30, Under-Reporting of Salaries Payable Salaries payable as of June 30, 2007 (note) $29, Payments during FY 2008 (15,480.00) Salaries payable as of June 30, 2008 (per this audit s analysis) $14, Salaries payable as of June 30, 2008 (per General ledger) 2, Under-reporting of salaries payable ($11,604.79) (Note: Not all inclusive due to incomplete records kept by the school.) 5

14 The school continued to pay five employees between July 1, and November 30, 2008, for unpaid salaries. Based on available payroll records, as of November 30, 2008, the school overpaid one employee $875, and owed five employees a total of $8, in unpaid salaries. Failure to pay salaries and wages is considered a financial emergency pursuant to Florida Statutes (1)(d). Salaries Payable During July 1 and November 30, 2008 Employee Unpaid Salaries Total Payments for (Overpayment) / Unpaid Salaries As of June 30, 2008 Salary Payable As of November 30, 2008 A $2, $ $2, B 1, , C 3, , D 3, , E 1, , F 2, , (875.00) Total Unpaid Salaries: $8, Overpayment: ($875.00) Management s Response: We agree with the audit findings that payroll obligations were not met during the fiscal year ended June 30, The amounts due were recorded and consistent payments made towards satisfying this obligation. Each affected staff member agreed to the deferral of these amounts at the time and was given the opportunity to discontinue employment with any amount due paid in full upon separation of service. Each chose to stay and support the school in this manner. The school, in turn, has consistently honored its commitment for payment of the deferrals since incursion. The audit s findings do not reflect accurate totals in this regard. We have attached a reconciliation of Salaries Payable and can confirm each payment noted by cancelled check (see attachment) and/or via our third party payroll processor, ADP. It should be noted that these deferrals occurred in the prior fiscal period. Cash flow management has greatly improved since that time with no pay periods necessitating deferral since that event. (Please see page 16.) Financial Emergency Pursuant to Florida Statutes (1)(e) Deficit Fund Balance. As of June 30, 2008, the school s audited financial statements indicated a deficit fund balance of $27,348, and a bank overdraft of $10,050. The school s independent auditor reported that the school met the conditions of a financial emergency as defined by Florida Statute, Section (1)(d) and (e). Moreover, we found that the school continued to pay the $37,920 loan forgiven by the Principal. Apparently, the loan had not actually been forgiven. Additionally, the salaries payable was understated by $11,605 as of June 30, Consequently, the school s adjusted deficit fund balance as of June 30, 2008, should have been $76,873, instead of $27,348. This financial emergency of deficit fund balance became worse as the liabilities increased. 6

15 Management s Response: Several cash infusions (loans) were made to the school by The principal beginning 2003 for a cumulative total of $50,000. At the end of fiscal year 2008, The principal elected to forego repayment of $37,920 of this amount. The forgiveness was recorded in the school s books and records. As of May 5, 2009 Board Meeting, The principal has elected to forego the remaining amount due her in this regard. The Board was advised of her choice and accepted her decision to do so. Board minutes noting this, as well as all other business discussed therein, were prepared and filed as required. (Please see page 16.) Remedial Action Not Accomplished. As required by Florida Statutes Section , the school submitted a Financial Recovery Plan to the School District on November 7, 2008, outlining specific remedial actions and a revised Fiscal Year 2009 Budget with the goal of obtaining a positive fund balance by February 28, One of the remedial actions was to increase enrollment to 65 students by February However, actual student enrollment was 49 in February 2009, a reduction of seven students from 56 in October Without an increase in student enrollment, the financial condition of the school will not improve. Management s Response: The School submitted an aggressive Financial Recovery Plan on November 7, 2008 for remediating the negative fund balance by February 28, It relied, in part, on meeting student enrollment objectives. The school did not meet this goal. Student enrollment, in fact, was reduced due to student relocations out of the area. The affected student families had several siblings attending the school, which greatly impacted the school. Financial cuts from the State reducing basic student allocations placed a further hardship on the school. In spite of these events, the school has made significant progress in meeting its current and previous obligations. Guided Path Academy, Inc has incurred no new liabilities, ensuring its fidelity in repaying prior salaries deferred. The Board has reviewed the root cause for not meeting its projected student enrollment objectives. We feel strongly that our present location and the physically limited configuration of plant space has hindered the growth our of student base. The Board has moved to change our site to a more strategic location with greater emphasis on area demographics and public visibility. Two locations meeting these essential criteria have been identified within our charter boundaries. We are presently negotiating a lease agreement to acquire space for use in the upcoming school year in one of these facilities. Accompanying the move will be grand opening events with summer long marketing campaigns to support student enrollment goals. (Please see page 17.) 7

16 Acceptable Fiscal Management Required By Charter. The school s Charter requires the school to operate in a fiscally responsible manner. Specifically, General Provisions, G, states that: The Sponsor may refuse to renew this Charter at the end of the Charter period for a failure by the Charter School to meet generally accepted standards of fiscal management; General Provisions, I, states that: The Sponsor may terminate the Charter during the term of the Charter, for a failure by the Charter School to meet generally accepted standards of fiscal management. Section 21.0, O, states that: If a Charter School is deemed to be operating at a negative fund balance, the Sponsor shall take any and all necessary steps to determine if the Charter School will be allowed to continue to operate in such a manner. The Charter Schools Department should ensure that all charter provisions are properly complied by Guided Path Academy Charter School. 2. Noncompliance with Charter Requirements Section 21.0 C of the Charter requires that: The Charter School shall establish and implement accounting and reporting policies, procedures, and practices for maintaining complete records of all receipts and expenditures. A copy of these policies shall be provided upon written request. The school s accountant has prepared an Accounting and Procedure Manual for the school. However, this procedure manual has not yet been adopted by the Governing Board as of March 25, Section 21.0, P of the Charter requires that: All disbursements of the Charter School must contain two authorized signatures. No check may be payable to either of the signatories. The review of disbursement records found that the Principal obtained and issued six unnumbered bank counter checks totaling $26,297 with only her signature, including one payable to herself and one payable to Cash. This disbursement practice is contrary to the school s Charter, and represents a significant breach of internal control. 8

17 Unnumbered Bank Counter Checks Issued with Only the Principal s Signature Date Payee Purpose (Note) Amount No date (July) Palm Beach County Alliance Staff Development $ /16/2007 A.G. Holley Hospital Rent 9, /13/2007 Grand Bank Fee for Bank Overdraft /13/2007 A.G. Holley Hospital Rent 13, /13/2007 Evelyn Francis (Principal) Payroll 2, /22/2008 Cash (Endorsed by the Principal) To pay youths for passing out flyers 1, Total Counter Checks Issued with Only the Principal s Signature $26, Note: Based on the Principal s monthly report to the accountant and the general ledger. All disbursements should have proper justification, be made on prenumbered checks, and signed by two authorized signatories other than the payee. Management s Response: Upon the initial implementation of the school s Charter, the Principal was given financial authorization to disburse funds on the school s behalf. This authorization is noted in the recorded Board minutes for the school. The principal continues to enjoy the Board s complete support. As such, she is authorized to sign checks for any and all purposes she deems proper up to $2,000.00, on her signature alone. The specific checks cited exceeding this amount were paid for Rent and salary. We, as a Board, were made aware of each instance where a check was disbursed exceeding that authority, and concurred in each case. These instances occurred in the prior fiscal year period. No such disbursements have been made since, with corrective measures suggested by The principal adopted to prevent same in the future. (Please see page 17.) 3. Principal Continued to Pay Herself the Loan She Forgave From September 30, 2005, to October 31, 2007, the Principal loaned the school a total of $50,000. A liability was noted on the school s June 30, 2007, financial statements. During Fiscal Year 2008, five payments totaling $12,080 were made to the Principal. The balance of the note payable on the general ledger was $37,920 as of June 30, On September 1, 2008, the Principal signed a statement indicating that she forgave her personal loan to the school effective June 30, An adjustment was made to reclassify the loan balance of $37,920 to a gift, and recognized the revenue on the June 30, 2008, audited financial statements. 9

18 Note Payable Balance (Personal Loan from the Principal) Date Loan Received / Loan Payment Amount Received Amount Repaid Note Payable Balance 9/30/2005 Loan Received $12,000 - $12,000 2/14/2007 Loan Received 16,000-28,000 3/29/2007 Loan Received 17,000-45,000 10/31/2007 Loan Received 5,000-50,000 11/28/2007 Payment - $5,000 45,000 5/14/2008 Payment ,500 5/16/2008 Payment - 4,500 40,000 5/22/2008 Payment - 1,080 38,920 6/20/2008 Payment - 1,000 $37,920 However, on September 12, 2008, the Principal prepared an invoice and approved a Check Requisition for $2,000 payable to herself for payment of the loans she previously forgave. An additional $2,000 loan payment, funded by the Day Care bank account, was made payable to herself on December 8, No loan payment authorization was found in the Board meeting minutes for both payments. Management s Response: Payments noted to the principal were in satisfaction of the remaining open amount of the loans made to the school not forgiven by her. The remaining open balance due her, after consideration of the payments made in fiscal year , has been fully forgiven. Her decision to do so is reflected and recorded in the Board s minutes for this period. (Please see page 17.) 4. Unsound Business Practices Poor Accountability for Blank Checks. During the audit, we found that the Principal had possession of the blank checks which were not secured in a vault. The review of check register, voided check file, and general ledger found that four checks (# s 1051, 1067, 1081, and 1244) could not be accounted for. Nine blank or partially written voided checks were identified as presigned. To prevent potential frauds, checks should not be pre-signed, and blank checks should be secured in a vault. Management s Response: All check stocks are presently secured in locked files, with access only by authorized personnel. Further, check #1377 cited in the report s details as being missing was in fact cashed in February, The remaining four (4) checks cited, out of several hundred negotiated during this period, remain unaccounted for and are being actively monitored. (Please see page 17.) 10

19 Salaries and Wages Miscalculated. A review of employment contracts for staff, time records, and payroll processor s records revealed that the school miscalculated salaries and wages. Some employees were paid above or below their contractual wages; salaried employees were paid by the hour; no timesheets were maintained for work hours; and non-exempt employees were not paid time-and-a-half for work hours in excess of 40 hours per week in accordance with U.S. Fair Labor Standards Act (FLSA). Missing and inconsistent payroll documentation and the lack of adequate accounting records would negatively affect the ability of the school to demonstrate proper monitoring and use of public funds. Management s Response: We disagree with the audits findings asserting the miscalculation of salaries and wages due. Employees were paid as agreed, excepting the periods noted above, with timesheets maintained to support those calculations. To further assure accurate work time records, an electronically based clock-in system was implemented in the current fiscal period. This system adds further integrity to the maintenance of accurate time records with digital archival storage of timesheets. Many of the items noted in the audit resulted from inconsistent use of standards and procedures during prior fiscal periods. Regular reviews by the Board of these practices have led to improved standards and procedures, as necessary, with more consistent application of these guidelines. (Please see page 18.) 5. Child Care Funds A child care program was established in order to generate additional cash flow for the school. This program was not included in the school s Charter and its primary funding source came from tuition and Family Central subsidies. In July 2008, the school opened a checking account designated for the child care program. On August 7, 2008, the school transferred $2,770 from the school s checking account into that child care program account. Instead of establishing a new cash account in the general ledger for the child care program, the school recorded the transfer as an account receivable. Although monies for the child care program are intended to be maintained separately, as of November 30, 2008, funds received from Family Central continued to be recorded in the school s general ledger. Payroll of child care workers were being recorded in and paid from the school s operating account. Child care fees appeared to be deposited into the child care bank account and no ledger was maintained. Child Care Deposit and Expense Activities From Operating Account Between July 1, and November 30, 2008 Family Central Deposits $19, Child Care Expenses ($11,576.83) Cash in Excess of Expenses $ 7,

20 Child care funds should not be commingled with the school s funds. One of the goals of the day care program was to financially assist the operation of the school. However, no transfer of cash from the Child Care bank account occurred as of November 30, On December 8, 2008, the Principal authorized a $2,000 payment from the child care account to herself for repayment of a previously forgiven loan. The school s financial records should be adjusted to reflect all income and expenditures, including the Child Care Program. Accounting records should reflect the operations of the child care program independent of the school s operations. Management s Response: A child care program was implemented in 2007 to grow our student base while ensuring academic accountability, not to generate additional cash flow as suggested in the audit findings. The school s charter is for K through 5 th grade students. The Child Care program is separately licensed and is not part of the school s charter. Financial practices to distinguish each of the non-profit s division performance are being defined and will be reflected accordingly in its records going forward. (Please see page 18.) 6. Principal s Pay Principal s Salary. The complaint referred to the Charter Schools Department also indicated that the Principal was not being paid in accordance with the approved agreement. A review of the available documents found that the Principal was being paid in accordance with the existing agreement approved by the Governing Board. Part-time Job with another Charter School. The Principal is contracted to work 260 days per year at the school. The Principal has also entered into another contract with The Joseph Littles- Nguzo Saba Charter School (Littles), effective November 1, 2008, as a teacher with an annual salary of $24,000. Time records and statements made by the Principal indicated that she worked between two and two-and-a-half days per week at Littles. A review of the Governing Board meeting minutes did not reveal an approval to modify the Principal s employment contract or work schedule. Any modifications of the Principal s employment terms and conditions should be approved by the Governing Board. Management s Response: We agree with the audit s findings that the Principal s pay is consistent with her agreed upon contract and the charge noted in the complaint to the Charter Schools Department is without merit. Note: As a professional courtesy, the Board was made aware of a professional engagement involving the Principal directly by her. We have no desire to hinder opportunities in this regard and respect her considered choices in this manner, particularly given her consistent support and dedication to Guided Path Academy, Inc. 12

21 The Board has further implemented procedures to ensure its minutes have an accurate account of all items discussed with clearly delineated action items, discussion points and notations of how motions are carried. Board training on Roberts Rules of Order and proper meeting conduct, with attendant recorded minutes, is being applied. Additionally, beginning July 1, 2008, the school s daily financial management function was outsourced to accounting professionals, leading to more consistent adherence to previously adopted standards and procedures. Reviews of the academy s overall operations by the Board has further served to ensure its continued viability. We welcome upcoming District reviews to confirm our progress and commitment in this regard. (Please see page 18.) End of Report 13

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23 Appendix Management s Response 15

24 Appendix Management s Response 16

25 Appendix Management s Response 17

26 Appendix Management s Response 18