oversight

Future Teachers of Chicago/Illinois' Administration of a Teacher Recruitment Grant.

Published by the Department of Education, Office of Inspector General on 2004-03-23.

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 , ILLIN OIS 60606 


                                                                   FAX: (31 2) 353-0244
    Audit                                                                                                                                     Investi gatio n
(3 12) 886-6503                                                                                                                              (312) 353-7891


                                                                                    Control Number ED-OIG/A05-D0037


                  Rutha E. Gibson, Executive Director                                                     MAR 23 2004
                  Future Teachers ofChicagolIllinois
                  513 West 72nd Street
                  Chicago, IL 60621

                  Dear Ms. Gibson,

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

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

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

                  Future Teachers stated the spreadsheet analyses supported Grant costs totaling $294,701.
                  However, Future Teachers did not provide any accounting records or other
                  documentation to support its spreadsheet analyses. Because Future Teachers did not
                  provide supporting documentation, we have questioned all unsupported costs cited in the
                  draft report. Based on additional documentation Future Teachers provided regarding its
                  partnership, we removed the Other Matters section. We summarized Future Teachers'
                  response after the finding. Due to the voluminous nature of Future Teachers' response,



                       Our missIon Is to promote the efficiency, effectiveness, and integrity of the Department's programs and operations.
Final Audit Report                                                       ED-OIG/A05-D0037


we did not include it as an appendix to this report. Instead, we sent it under separate
cover to the designated officials responsible for resolving this audit.

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

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

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

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

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

While we could not identify the transactions affected by the $109,150 in undocumented
adjustments, the $359,235 included several additional unallowable and questioned costs.


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Because Future Teachers did not have an adequate financial management system and
adequate management controls it

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

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

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

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

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

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

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

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

    ●	 did not submit two A-133 audit reports for the years ended June 30, 2001-2002 as
       required. The Federal Audit Clearinghouse has no record of receiving any A-133



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          audit reports1 even though Future Teachers received other federal funding prior to
          receiving the Grant. 34 C.F.R. § 74.26(a) (2002).

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

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

1.1 	     require Future Teachers to refund $364,235;

1.2 	     require Future Teachers to pay imputed interest of $1,061; and

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

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

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

The spreadsheet analyses identified transactions totaling $294,701 as supported for the
period October 1, 2002, through June 30, 2003. The $294,701 consists of (1) $254,714
of transactions recorded in the general ledger; (2) $5,294 for the difference between
payroll costs recorded at net instead of gross; (3) $9,143 for payroll taxes not previously
charged to the grant; (4) $13,256 for fringe benefits calculated using the percentages in
the budget; and (5) $12,294 for indirect costs calculated using an 8 percent indirect cost




1	
     The Clearinghouse records currently indicate Future Teachers has submitted its A-133 audit report for
     the year ended June 30, 2002.


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Final Audit Report                                                                      ED-OIG/A05-D0037


rate. 2 In addition, Future Teachers stated it could support Grant transactions totaling
$64,050 for the period July 1, 2003, through September 30, 2003.

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

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

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

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

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


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

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

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

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


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

The Teacher Recruitment Grant is authorized by Section 204 of Title II of the Higher
Education Act of 1965, as amended. It is subject to the provisions contained in 34 C.F.R.
Part 611, Education Department General Administrative Regulations, and OMB Circular
A-122, Cost Principles for Non-Profit Organizations. The Department of Education


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Final Audit Report	                                                      ED-OIG/A05-D0037


provides eligible applicants Grant funds (1) to award scholarships to help students pay
the costs of tuition, room, board, and other expenses of completing a teacher preparation
program; (2) to provide support services, if needed, to enable scholarship recipients to
complete postsecondary education programs; and (3) for follow-up services provided to
former scholarship recipients during the recipients’ first three years of teaching; or to
develop and implement effective mechanisms to ensure that high need local educational
agencies and schools are able to effectively recruit highly qualified teachers.

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


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

To accomplish our objective, we

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

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

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

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

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

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




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Final Audit Report	                                                       ED-OIG/A05-D0037


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

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

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

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

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


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

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

       ●   Cash Receipts

       ●   Cash Disbursements

       ●   Accounting for Disbursements

       ●   Reporting on Program Results

Because of inherent limitations, a study and evaluation made for the limited purpose
described above would not necessarily disclose all material weaknesses in the


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Final Audit Report                                                       ED-OIG/A05-D0037


management controls. However, our assessment disclosed significant management
control weaknesses that adversely affected Future Teachers' ability to administer the
Grant. These weaknesses and their effects are fully discussed in the AUDIT RESULTS
section of this report.

                         ADMINISTRATIVE MATTERS
Statements that managerial practices need improvements, as well as other conclusions
and recommendations in this report represent the opinions of the Office of Inspector
General. Determinations of corrective action to be taken will be made by the appropriate
Department of Education officials.

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

               Jack Martin, Chief Financial Officer 

               Office of the Chief Financial Officer 

               U.S. Department of Education 

               Room 4E313 

               Federal Building No. 6 

               400 Maryland Avenue, S.W.

               Washington, D.C. 20202-4300 


               Sally Stroup, Assistant Secretary 

               Office of Postsecondary Education             

               U.S. Department of Education           

               Room 7115 

               1990 K Street, N.W.

               Washington, D.C. 20006-5100               


It is the policy of the U. S. Department of Education to expedite the resolution of audits
by initiating timely action on the findings and recommendations contained therein.
Therefore, receipt of your comments within 30 days would be greatly appreciated..




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Final Audit Report                                                    ED-OIG/A05-D0037


In accordance with the Freedom ofInformation Act (5 U.S.C. § 552), reports issued by
the Office ofInspector General are available to members of the press and general public
to the extent information contained therein is not subject to exemptions in the Act.


                                     Sincerely,




                                    Regional Inspector General
                                    for Audit




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