Purpose

To determine whether the costs reported by Kew Gardens SEP, Inc. (Kew Gardens) on its Consolidated Fiscal Reports (CFRs) were properly documented, program-related, and allowable pursuant to the State Education Department’s (SED) Reimbursable Cost Manual (Manual). The audit covered expenses claimed on Kew Gardens’ CFR for fiscal year 2012-13 and certain expenses claimed on Kew Gardens’ CFRs for the two fiscal years ended June 30, 2012.

Background

Kew Gardens is a Queens, New York-based for-profit organization that is authorized by SED to operate Preschool Special Education Itinerant Teacher (SEIT) and Related Services programs for disabled children between the ages of three and five years. During the 2012-13 fiscal year, Kew Gardens served 103 students. The New York City Department of Education (DoE) refers preschool special education students to Kew Gardens based on clinical evaluations and pays for Kew Gardens’ services using rates established by SED. The SEIT rates are based on the financial information that Kew Gardens reports to SED on its annual CFRs. The State reimburses DoE for a portion of its payments to Kew Gardens based on the SED-established rates. For the three fiscal years ended June 30, 2013, Kew Gardens reported approximately $9.8 million in reimbursable costs for the audited SEIT program.

Key Findings

For the three fiscal years ended June 30, 2013, we identified $295,997 in reported costs that did not comply with the requirements in the Manual and recommend such costs be disallowed. The ineligible costs included $283,649 in personal service costs and $12,348 in other than personal service (OTPS) costs, as follows:

• $119,906 in accrued pension plan expenses. On its CFR for the fiscal year ended June 30, 2011, Kew Gardens officials accrued $120,000 in costs for a profit-sharing plan. The plan was not established. Instead, Kew Gardens distributed $78,335 in wages to 14 employees and used the remaining $41,665 to reduce a prior period’s liability. We recommend that $119,906, the amount allocated to the SEIT program, be disallowed;
• $93,771 in accrued compensation paid to 19 employees in subsequent years. These payments were not added to the employees’ base compensation. As such, they met the Manual’s definition of bonuses. The performance evaluations for each of the 19 employees indicated they rarely met expectations during the periods for which the extra compensation was paid;
• $50,851 in excess retirement plan contributions for five employees;
• $19,120 in salary expenses paid to two individuals whose timesheets showed they worked the same 12 p.m.-2 p.m. time period at another preschool special education provider;
• $8,680 in advertising costs that were insufficiently documented; and
• $3,668 in over-allocated costs for supplies.

Key Recommendations

To SED:

• Review the recommended disallowances resulting from our audit and make the appropriate adjustments to the costs reported on Kew Gardens’ CFRs and to Kew Gardens’ tuition reimbursement rates.
• Work with Kew Gardens officials to help ensure their compliance with the Manual’s provisions.

To Kew Gardens:

• Ensure that costs reported on future CFRs comply with the requirements in the Manual.

Other Related Audits/Reports of Interest

Whitestone School for Child Development: Compliance With the Reimbursable Cost Manual (2014-S-38)
Institutes of Applied Human Dynamics: Compliance With the Reimbursable Cost Manual (2014-S-39)