Objective

To determine whether the costs reported by Psychotherapeutic Evaluational Programs, Inc. dba Parsons Preschool (Parsons) on its Consolidated Fiscal Reports (CFRs) were reasonable, necessary, directly related to the special education program, and sufficiently documented pursuant to the State Education Department’s (SED) Reimbursable Cost Manual (RCM) and the Consolidated Fiscal Reporting and Claiming Manual (CFR Manual). The audit focused primarily on expenses claimed on Parson’s CFR for the fiscal year ended June 30, 2015, and included certain expenses claimed on its CFRs for the two fiscal years ended June 30, 2014.

About the Program

Parsons is a New York City-based for-profit organization authorized by SED to provide full-day Special Class (SC), full-day Special Class in an Integrated Setting (SCIS), and Special Education Itinerant Teacher (SEIT) preschool special education services to disabled children who are between the ages of three and five years. For purposes of this report, these programs are collectively referred to as the SED cost-based programs. Parsons’ SEIT program was discontinued at the end of the 2012-13 fiscal year. The New York City Department of Education (DOE) refers students to Parsons based on clinical evaluations and pays for Parsons’ services using rates established by SED. The rates are based on the financial information Parsons reports to SED on its annual CFRs. SED reimburses DOE for a portion of its payments to Parsons based on statutory rates. Reimbursable costs must be reasonable, necessary, directly related to the special education program, and sufficiently documented. For the three fiscal years ended June 30, 2015, Parsons reported approximately $12.2 million in reimbursable costs for the cost-based programs under audit.

In addition to the SC, SCIS, and SEIT preschool special education programs, Parsons operated two other SED programs: Evaluations and 1:1 Aides. However, payments for services under these two programs are based on fixed fees. Parsons collaborates with the North Side School (North Side) to offer SCIS classes. In addition, North Side operates Universal Pre-Kindergarten and a Toddler-Preschool program. During the 2014-15 school year, Parsons served about 400 students.

Key Findings

For the three fiscal years ended June 30, 2015, we identified $1,782,360 in reported costs that did not comply with the requirements in the RCM and the CFR Manual, as follows:

• $612,855 in non-reimbursable personal service costs associated with paid lunch periods for employees.
• $394,811 in undocumented rental expenses for fiscal year ended June 30, 2013.
• $221,417 in rental expenses that were charged to Parsons’ cost-based programs. These expenses should have been allocated to North Side.
• $159,781 in undocumented and/or insufficiently documented expenses, including a $94,010 levy by the Department of Taxation and Finance, $31,682 for pension plan audits, and $34,089 in compensation costs.
• $125,841 in undocumented expenses for repairs and maintenance, supplies and materials, consulting, vehicle usage, and cell phones.
• $115,714 in utility, equipment, repair and maintenance, cleaning, elevator, air conditioning, telephone, and extermination expenses. These expenses should have been allocated to North Side.
• $89,989 in accrued rent expenses, including $49,781 for fiscal year ended June 30, 2014 and $40,208 for fiscal year ended June 30, 2015. Parsons officials could not provide documentation to show that the rent was paid.
• $61,952 in Unemployment Insurance contributions. Parsons failed to pay its contributions in a timely manner, thus incurring higher contribution rates.

We found that Parsons’ independent certified public accountant refrained from expressing opinions on Parsons’ financial statements because the school was suffering recurring losses from operations and had a net capital deficiency that raised substantial doubt about its ability to continue as a going concern. However, Parsons officials did not submit fiscal viability plans to SED, during the three years, as required.

Key Recommendations

To SED:

• Review the recommended disallowances resulting from our audit and make the appropriate adjustments to Parsons’ CFRs and tuition reimbursement rates, as warranted.
• Work with Parsons officials to ensure their compliance with the provisions of the RCM and the CFR Manual.
• Monitor Parsons’ operations and request fiscal viability plans, if warranted.

To Parsons:

• Ensure that all costs reported on future CFRs comply with the requirements in the RCM and CFR Manual.