Purpose

To determine whether the costs reported by Functional MDS on its Consolidated Fiscal Reports (CFRs) were properly calculated, adequately documented, program-related, and allowable pursuant to the State Education Department’s (SED) Reimbursable Cost Manual (Manual). Our audit included all expenses claimed for the fiscal year ended June 30, 2011.

Background

Functional MDS (MDS) provided special education itinerant teacher services and integrated therapeutic preschool special education programs (collectively referred to as Programs) for about 190 disabled children between the ages of three and five who live in Queens, Brooklyn, Manhattan, and the Bronx. MDS’s Programs are funded by the New York City Department of Education (DoE), which refers students to MDS. The DoE reimburses MDS using rates established by SED that are based on the financial information reported on MDS’s annual CFRs. To qualify for reimbursement, provider costs must comply with the Manual, which provides guidance to special education providers on cost eligibility and documentation requirements. For the fiscal year ended June 30, 2011, MDS claimed approximately $3.5 million in reimbursable costs. According to SED officials, MDS ceased providing SED-funded special education programs as of September 2014.

Key Findings

For the fiscal year ended June 30, 2011, we identified $794,219 in reported costs that do not comply with Manual requirements for reimbursement. These costs include $685,032 in personal service costs and $109,187 in other than personal service costs. The disallowances include:

• $198,888 in executive compensation and $62,866 in compensation to agency administrative support employees that were improperly allocated to the Programs;
• $373,200 in compensation to personnel who did not work for the Programs;
• $31,780 for an independent consultant who provided services to an affiliated entity and not the Programs; and
• $31,478 for contracted direct care purportedly provided by six independent contractors that was not supported by documentation.

Key Recommendations

To SED: 

• Review the recommended disallowances resulting from this audit and make the appropriate adjustments to MDS’s CFRs and reimbursement rates as appropriate.
• Recover the disallowances identified in this report, as appropriate.

To MDS:

•  Ensure that costs reported on MDS’s annual CFRs comply with Manual requirements.

Other Related Audits/Reports of Interest

Bilingual SEIT & Preschool, Inc.: Compliance With the Reimbursable Cost Manual (2011-S-13)
IncludED Educational Services, Inc.: Compliance With the Reimbursable Cost Manual (2010-S-59)