Purpose

To determine whether the costs submitted by Baker Victory Services (Baker Victory) on its Consolidated Fiscal Report (CFR) were properly calculated, adequately documented, and allowable under the State Education Department’s (SED) guidelines, including the Reimbursable Cost Manual (RCM). Our audit covered the fiscal year ended June 30, 2014.

Background

Baker Victory, a not-for-profit organization located in Lackawanna, New York, provides a variety of services to the Erie County community, including preschool special education services to children with disabilities. Baker Victory is reimbursed for preschool special education services through rates set by SED. The reimbursement rates are based on financial information, including costs, that Baker Victory reports to SED on its annual CFR. For the fiscal year ended June 30, 2014, Baker Victory reported approximately $6.9 million in reimbursable costs on its CFR for the rate-based preschool special education programs it operated.

To be eligible for reimbursement, reported costs must comply with the RCM requirements. Costs reported on the CFR are considered for reimbursement if they are reasonable, necessary, and directly related to the special education program. Costs must also have adequate substantiating documentation. Expenditures that cannot be directly charged to a specific program must be allocated across all programs. The RCM requires special education providers to use fair and reasonable allocation methods, and to maintain documentation evidencing the methodologies and basis used to allocate costs

Key Findings

• We identified $155,303 in costs that were not in compliance with the RCM. These costs included:
  • $85,736 in personal service costs, which consisted of $46,526 in inappropriate bonuses; $24,820 in compensation for work that was not related to the rate-based preschool special education programs; $8,504 in excess compensation; $4,496 in unsupported costs; and $1,390 in inappropriate deferred compensation benefits; and
  • $69,567 in other than personal service costs, which consisted of $53,053 in non-allowable public relations and advertising costs; $8,756 in costs that were insufficiently documented; $4,446 in donations; $1,938 for food and entertainment; $762 in gifts; and $612 in other inappropriate expenses.
• We also determined Baker Victory did not maintain sufficient documentation to support its cost allocations. As a result, we could not confirm that all costs that Baker Victory allocated to its rate-based preschool special education programs were fair and reasonable. We comprehensively tested three of approximately 100 allocation methodologies that Baker Victory used to allocate $207,042 of approximately $782,000 in allocated costs. We found that Baker Victory lacked documentation that sufficiently described the allocation methodologies and the basis for allocating costs. Also, the allocation methodologies that officials communicated to auditors were unclear and confusing, and source documents, upon which allocations were purportedly based, either could not be located or were incomplete.
• As a result of the audit, Baker Victory hired a new CPA to review Baker Victory’s allocated costs. Further, the CPA and Baker Victory officials began taking steps to verify the propriety of allocation methodologies and properly document those methodologies going forward.

Key Recommendations

To SED:

• Review the audit findings identified by our audit and, as warranted, make the necessary adjustments to the costs reported on Baker Victory’s CFR and to Baker Victory’s tuition reimbursement rates.
• Remind Baker Victory officials of the pertinent SED guidelines that relate to the deficiencies we identified.

To Baker Victory Services:

• Take steps to improve the internal control structure within the organization. At a minimum, this should include maintaining required supporting documentation for all claimed expenses, including allocated costs, and establishing policies and procedures that will help ensure the proper levels of management and the Board of Directors have all the information they need to carry out their functional responsibilities.
• Ensure that all costs reported on annual CFRs fully comply with SED’s requirements, and communicate with SED to obtain clarification as needed.

Other Related Audits/Reports of Interest

Unity House of Troy: Compliance with the Reimbursable Cost Manual (2014-S-60)

Rivendell School: Compliance with the Reimbursable Cost Manual (2015-S-25)