Audit of the Michigan Department of Education's administration of selected federal funds provided to charter schools for the period October 1, 1999, through September 30, 2000.

Published by the Department of Education, Office of Inspector General on 2002-09-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                          UNITED STATES DEPARTMENT OF EDUCATION 

                                               OFFICE OF INSPECTOR GENERAL 

                                                                     REGION V 

                                                             III NORTH CANAL. SUITE 940 

                                                               CHICAGO. ILLINOIS 60606 

                                                                   FAX: (312) 353-0244
    Audit                                                                                                                                     Investigation
                                                                                                                                             (312) 353-7891
(312) 886-6503
                                                                  SEP 062002 

          Mr. Thomas D. Watkins, Jr. 

          Superintendent of Public Instruction 

          Michigan Department of Education 

          608 West Allegan Street 

          P.O. Box 30008 

          Lansing, MI 48909 

          Dear Mr. Watkins:

          This Final Audit Report (Control Number ED-OIGIA05B0038) presents the results of our audit of
          the Michigan Department of Education's (MDE) administration of selected federal funds provided
          to charter schools for the period October 1, 1999, through September 30, 2000. This report
          incorporates the comments you provided in response to the draft audit report. The objective of our
          audit was to determine if charter schools in the State of Michigan expended federal funds for their
          intended purposes and according to applicable laws and regulations.

                                                              AUDIT RESULTS

          For the period October 1, 1999, through September 30,2000, the MDE allocated $5,611,803 in
          Public Charter Schools Program (PCSP) funds; $5,096,796 in Elementary and Secondary Education
          Act of 1965 (ESEA), as amended, Title I, Part A (Title I), funds; and $454,480 in Individuals with
          Disabilities Education Act - Part B (IDEA - Part B) funds to charter schools operating in the State
          of Michigan. The 10 charter schools selected for audit used and accounted for federal funds
          awarded by MDE in accordance with applicable federal laws and regulations. The 10 charter
          schools we audited maintained adequate documentation to support expenditures charged to the three
          federal programs. We selected these 10 charter schools as the best representation of Michigan
          charter schools as a whole. However, the results of our audit cannot be projected beyond the
          schools audited.

          All 10 schools that we audited operated on a July 1, 1999, through June 30, 2000, fiscal year and
          reported expenditures of federal funds for the same period. Representatives from each charter
          school and/or the educational service provider (ESP), hired by the charter school's board, provided
          us with a list of expenditures charged to the three federal programs for that period. Our audit work
          demonstrated that the charter schools that hired an ESP generally relied on that entity to administer
          federal funds provided to the school. The ESP would receive guidance and direction from a
          publicly appointed school board who was ultimately responsible for the federal funds that the school

                       Our mission Is to promote the efficiency, effectiveness, and Integrity of the Department's programs and oparatlons.
We judgmentally selected a sample of expenditures charged to each program and traced them to
supporting documentation such as vouchers, purchase orders, invoices, and canceled checks. We
performed these tests to ensure that the service or item was provided to the school and related to the
purpose of the program. We verified that the totals from the source documents agreed with the
accounting records. We also gained a limited understanding of each school's system of internal
controls over the administration of federal funds. We concluded that all 10 schools had sufficient
controls in place to provide reasonable, but not absolute, assurance that federal funds were being
expended according to appropriate federal laws and regulations.

Finally, we interviewed MDE personnel who provided us with information about their role in
awarding, monitoring, and accounting for federal funds granted to charter schools. We concluded
that MDE had controls in place to provide reasonable assurance that, during our audit period,
federal funds were adequately supported and properly expended.

                                        OTHER MATTERS

One charter school (of the lOwe audited) was unable to readily identify expenditures charged to the
PCSP and Title I programs during the fiscal year ended June 30, 2000. Office of Management and
Budget (OMB) Circular A-87, Attachment A (C) (I), describes general criteria for costs to be
allowable under federal awards (in this case, the PCSP and Title I programs). According to this
criterion, costs must be allocable to federal awards and adequately documented.

The charter school had not implemented an accounting system that identified and tracked costs
charged to federal programs as required by OMB Circular A-87. The charter school eventually
provided supporting documentation for expenses associated with these two federal programs. After
we brought this matter to their attention, officials from the school's ESP agreed to work with an
accounting firm to implement an accounting system that tracks costs by federal program. We
provided MDE officials with information regarding this school.

We concluded that this charter school was not indicative of charter schools in the State of Michigan.
We recommend that MDE provide guidance and assistance to charter schools to ensure they
implement accounting systems that track expenditures by federal program.

In its August 8, 2002, response to our draft audit report, MDE stated it asked that the one charter
school work closely with its accounting firm to ensure compliance with federal and state
regulations. Included in MDE's response was a letter from the accounting firm describing
improvements in the school's accounting system to better track federal expenditures. MDE also
provided assurance that it will continue to work with its charter schools that receive federal funds to
ensure their compliance with federal laws and regulations governing accounting for and tracking
federal funds. We have induded MDE's response as an Attachment to this final report.

MDE's actions indicate that it is monitoring the situation at the one charter school adequately. Its
assurance to work with its charter schools to ensure compliance with federal laws and regulations
satisfactorily addresses our recommendation above.

 Final Audit Report                                2                                  ED-OIGIA05B0038

The PCSP was authorized in October 1994, under Title X, Part C of the ESEA, as amended (20
U.S.c. Sections 8061-8067). In October 1998, the Charter School Expansion Act of 1998 amended
the program. The PCSP, which provides support for the planning, program design, and initial
implementation of charter schools, is intended to enhance parent and student choices among public
schools and give more students the opportunity to learn to challenging standards. Grants are
awarded for a period of not more than three years, including not more than 18 months for planning
and program design, and not more than two years for the initial implementation of a charter school.
Allowable activities for the planning and implementation periods are defined in the law.

Title I, Part A, of the ESEA, as amended, (20 U.S.C, Chapter 70, Sections 6301 - 6514), provides
funds for supplemental educational services for eligible public and private school children living in
high-poverty areas. The Title I, Part A program provides formula grants through state educational
agencies to local educational agencies (LEA) to assist low-achieving children meet challenging state
curriculum and student performance standards in core academic subjects.

IDEA - Part B, also known as the Grants to States Program, Section 611 (20 U.S.C. 1411-1419),
provides funding for disabled children from the ages of 3 through 21. These funds help to ensure
that all children with disabilities have available to them a free appropriate public education that
emphasizes special education and related services designed to meet their unique needs and prepare
them for employment and independent living.

There were a total of 192 charter schools approved to operate in the State of Michigan for the period
October 1, 1999, through September 30,2000. Only 146 schools received federal PCSP, Title I, or
IDEA - Part B program funding. According to MDE's records, the 146 schools, in total, were
allocated $5,611,803 in PCSP funds, $5,096,796 in Title I funds, and $454,480 in IDEA - Part B

                        OBJECTIVE, SCOPE, AND METHODOLOGY

The objective of our audit was to determine if charter schools in the State of Michigan expended
selected federal funds for their intended purposes and according to applicable laws and program
regulations. Specifically, we identified the amounts of federal PCSP, Title I, and IDEA - Part B
funding that charter schools received and determined whether a sample of charter schools had
implemented procedures to ensure adherence to applicable federal laws and program regulations or
obtained waivers from such requirements. Our original audit period was October 1, 1999, through
September 30, 2000. We expanded our audit period to the fiscal year October 1,2000, through
September 30, 2001, as necessary. We did not assess the academic performance of the charter
schools audited.

We audited 10 charter schools in the State of Michigan. We randomly selected seven schools and
judgmentally selected three. Initially, we randomly selected the schools based on the authorizing
agency that issued the school its charter. We later selected schools based on whether the school
used an ESP to perform administrative and financial duties for the school.

 Final Audit Report                               3                                 ED-OIG/A05B0038
To accomplish our objective, we reviewed

• 	 federal laws, including the ESEA, as amended, for the PCSP grant fund and Title I - Part A
    grant funds;
• 	 the law covering special education funds, as specified under the Individuals with Disabilities
    Education Act;
• 	 policies and procedures for the accounting of federal funds for these programs at the individual
• 	 accounting and payroll records, purchase orders, and cancelled checks for judgmentally selected
• 	 State of Michigan charter school budget plans;
• 	 individual school's financial audit reports;
• 	 audit working papers at independent accounting firms; and
• 	 MDE federal fund performance and expenditures reports.

We also interviewed representatives from each school, its ESP, and, if applicable, its independent
public accounting firm; officials of a major authorizing agency; and MDE officials.

We relied on computer-processed accounting data provided to us by each charter school or its ESP.
We tested the data by comparing it to MDE's records and tracing selected expenditures to source
documents. The purpose of our tests was to determine the data's suitability for use in meeting the
audit objective. We concluded that the data, when used for its intended purposes, was sufficiently
reliable to be used in meeting our audit objective.

We performed on-site field work at MDE's administrative offices in Lansing, Michigan, and at 10
charter schools. We started the school audits on December 4, 2001, and completed the last on-site
charter school audit on March 25,2002. We held a field exit discussion with MDE officials on May
13,2002. Our audit was performed in accordance with government auditing standards appropriate
to the scope described above.


As part of this audit, we did not assess the adequacy ofMDE's system of management controls
applicable to its administration of federal funding as a whole, because this step was not necessary to
achieve our audit objective. Instead, we gained an understanding ofMDE's role in awarding,
monitoring, and accounting for federal funds granted to charter schools. We also determined
whether individual charter schools had controls in place to ensure that federal funds were spent
according to federal laws and regulation. Because of inherent limitations, an assessment made for
the limited purpose described would not necessarily disclose all material weaknesses in
management's controls. However, nothing from the information that we obtained at MDE, or at the
individual charter schools, demonstrated that the controls in place were not sufficient to ensure that
federal funds were expend~d according to the applicable laws and regulations.

 Final Audit Report 	                              4                                 ED-OIGIA05B0038
                                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 officals.

If you have' any additional comments or information that you believe may have abearing on the
resolution of this audit, you should send them directly to the following Department of Education
official, who will consider them before taking final Departmental action on the audit.

                      Susan B. Neuman, Ed.D.
                      Assistant Secretary for
                      Elementary and Secondary Education
                      U.S. Department of Education 


                      400 Maryland Avenue, SW 

                      Washington, DC 20202 

Office of Management and Budget Circular A-50 directs Federal agencies to expedite resolution of
audits by initiating timely action on the findings and recommendations contained therein.
Therefore, receipt of any additional comments within 30 days would be greatly appreciated.

In accordance with the Freedom of Infonnation Act (5 U.S.C. § 552), reports issued to the
Department's grantees and contractors are made available, if requested, to members of the press and
general public to the extent information contained therein is not subject to exemptions in the Act.

If you have any questions, please call me at 312-886-6503.

                                              Regional Inspector General
                                              for Audit, Region V

Final Audit Report                                 5                                 ED-OIGIAOSB0038

                                                        STATB OF MlCHIOAN
                                                DEPARTMENT OF EDUCATION
                                                                                                         THOMAS O. WATKINS. JR.
                                                                                                             $UPEfojtfl11!NCiiiNt OF
                                                                                                             I'UIiLIC :r..S'tRUGl1ON
            AugU$t 8. 2002

            Mi'; Richard J. Ddwd 

            Regional Inspector General 

             for Audit Region V 

            U.S. Department of Education 

            Office of Inspector General 

            III N. Canal street, Suite 940 

            Chicago, TIlinois 

            Dear Mr. Dowd:

            In response to the Draft Audit Report (Control NumberBD-01GlAomo038) dated July 3I, 2002, we are
            pleased that your auditfmdings for the e~penditureoffederal funds under EsBA Title rprogram, Public
            Charter School Grantprogram andSpeciatEducation programs. for the periQd October I, 1999 tnrollgh
            September 30,2000 indicate fundsw~ expei\ded iiiaceordaneo wIth federa1 iaw and' regulation.

            As YOIl note in the Draft Report-under the section "OtberMatters," one of the ten audited charter school
            programs ~ \ffi!lbJe to readily 14~tify ~(,f~ ch!ll'ged to th~ Chuter School Grant program and
            Titlol programs during thetiscal year mdl!<! June 30,.2000. In response to thJ:ise: finding!;, wehave ;asked
            that thi$ charter school wQ'rk closely with thoit'aecoUliting fum to insure iiloteaSecl llCCOunting and
            tracking controls.that,comply with federal and state regulations. Tho charter S¢hool"s key &dtn1nlstrative
            staff is aW'arO aftho ncOdforthese ilCC9Ui1ting:procedure enharu:ementa and is currently working with the
            accounting firm to IISJ~ C\ln'elil ~!l ti$Jte compliMCC. &cloRd for YQiitm'iew'is dotter froin the
            acoounting fum engasedbythe charter school confirming their re<;Ommendatlons tQ tho sc;bool t9
            improve tracking and.acoounting proeodutei.

             We trust that you will flIid these assurances a satisfactory responle to your audit report. We WUloontinue .
             to work with the eh~r scbQol PI1i~ th!It,i,re recipients ofESEA Title I, Public CharterSchocil Grant
             program and Special Education program funds to assure contin~ current and fut!:lre compliance with
             federal laws andregulat/ons regardlng accoWltingand tracking ot'futu:ls expended.


             cc: 	      Elaine Madigan
                        Kathleen Weller
                        Dorothy VanLooy                                      :   ....   ,

                                  .KATHLEEN. N. STRAUS· PRESIDENT • SHAFlON.L C31F1E • ViCE PRES10E;NT 



                                    eoeWEsT Au,e~AN STREE;t· p.o, .sox ~ • LMlSIN~. MICHIGI'.N 48®9
                                                    wwW.mlchtgan,gOV·(617) 373'3324

Final Audit Report 	                                               6                                              ED-OIG/A05B0038

         ............   ,., •   . . . . . . . . .t'~   .;   ;-"7,""",

                                                            ..        ----0:-----__________________

             Qlante                                                                                                                     Planle.. Uoran, &.LP
                                                                                                                                                $.lit     sao
                                                                                                                                             FIle ueA71•."Q1

                                                                                                August 6, 2002

                        Mr. Greg Olszta
                        Michigan Dept of~dUt:atlon
                        Office of Eclucati 1\ Options
                        John A Hannah ultcling
                        808 West Allegari STreet
                        PO Box3000a
                        lansing MI 4890~

                        Dear Mr. Olsata:

                        I am writing to dc$cument for you the 6tatus of the acc:ountlng procedure enhancements relating
                        to federal grantpiugrams of the                                 II
                        As you are        Plante & Moran.   awa"",                       uP
                                                                has been engaged by the AcademytGprcwlde amual
                        accounting assistance, rneluding prepara1fon of the genetalledger and flnanelal statements for
                        1he Ac$iemy.                                                       •

                        Historically. the ~att of a.ccounts utiIiZecI for the Academy contaltlecl the funct10nal expense
                        c:letaU reqUlred:eMichIgan School Accounting Manual (1022 Manual). The general ledger
                        did not utilize     accounts to segregate expenditures relating to federal grant programs from
                        other a.cademy         ltUreS.                                               ....
                         For the 2001120/)2 school year.           I ''V          ~V          I 9 of the Acaclemy
                         have uti1iZed:lndlture tractcIng ayatMIS OUWlde Of the gannllid;er for ita fedlf'll grants.
                        When they exp                                 d federal dollars. they i\odfy UI Of the appllcalSle grant program 10 thet we may
                         properly lieg                               Ie the funds withIn the general ledger and financial repo~ systems.

                         We are stili In thtPRlCeSS, of finalIZIng t,fayand June accountfng mattel'li with the Academy and '
                                                                                                                                                                • I
                         expect to com •         the- general ledger. (manclal atatements and flUmmaty of federal
                         expenditures sh                                  rtJY.                                                               .         ,
                         For the 2C0212~03 school year. we Intend to expand 1M Academys chait of accounts to
                         segregate aU federal expendHuras at the time they are Initially posted to 1he generalledget•                                             I
                         . . . . . . . . .',. at the Academy, retain responslblUty for monitoring of grant 

                         .Jq)enditures an(:j notifying u.s when appiicable fadel'll funds are spent. , ,

                                                                                                                                 • _ _of_ _ _         -9

Final Audit Report                                                                               7                                           ED-OIG/A05B0038

               Mr.Grego_         .                                                                 Page 2
               MIchigan Depi of,E~eatian                                                    August B, 2002

               We discussed :E'   ' ~~IJI'8I. Mt~ Ken Obaan4 Mr. Frank Soenzi of the U,S.
               bepartment of Ed' ClticnOfflce Cf rn.ptetor GeneraJ. Mr; Oba and W. Boer'\Zi Ind~ted their'
               approval oftha      ntl'ng chllngsa fObe made..                  t-

               Wa Ire CO~dentj II'1II new procIdl,lt'ts INtIl PI'O'I\t!$ a more ml;htforwal'd   arlc!   accurate
               acc:ount1n9 Of expaAdttl.!rt. by Ippilcabls federal grarft. ~

               PJease <fo nothesllate to contact metfyC)",I'I(1U1fead~ I!iforma.tkI,.·.orhave anyquesUons.
                                                          Very wly YOUiW.


Final Audit Report                                          8                                            ED-OIG/A05BOO38