OFFICE

OF THE

NEW YORK STATE COMPTROLLER D IVISION OF LOCAL GOVERNMENT & SCHOOL ACCOUNTABILITY

Brighter Choice Charter School For Boys

Financial Operations
Report of Examination
Period Covered: July 1, 2009 April 30, 2011 2011M-168

Thomas P. DiNapoli

Table of Contents
Page AUTHORITY LETTER 2

EXECUTIVE SUMMARY

INTRODUCTION Background Objective Scope and Methodology Comments of School Ofcials and Corrective Action

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CLAIMS PROCESSING Recommendations

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RESIDENT SCHOOL DISTRICT BILLINGS

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APPENDIX APPENDIX APPENDIX APPENDIX APPENDIX

A B C D E

Response From School Ofcials OSCs Comment on the Schools Response Audit Methodology and Standards How to Obtain Additional Copies of the Report Local Regional Ofce Listing

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State of New York Ofce of the State Comptroller

Division of Local Government and School Accountability November 2011 Dear School Ofcials: A top priority of the Ofce of the State Comptroller is to help School ofcials manage government resources efciently and effectively and, by so doing, provide accountability for tax dollars spent to support School operations. The Comptroller oversees the scal affairs of public Schools statewide, as well as compliance with relevant statutes and observance of good business practices. This scal oversight is accomplished, in part, through our audits, which identify opportunities for improving operations and School board governance. Audits also can identify strategies to reduce costs and to strengthen controls intended to safeguard School assets. Following is a report of our audit of Brighter Choice Charter School for Boys entitled Financial Operations. This audit was conducted pursuant to Article V, Section 1 of the State Constitution and the State Comptrollers authority as set forth in Section 2854 of the Education Law. This audits results and recommendations are resources for School ofcials to use in effectively managing operations and in meeting the expectations of taxpayers, students, and their parents. If you have questions about this report, please feel free to contact the local regional ofce for your county, as listed at the end of this report. Respectfully submitted,

Ofce of the State Comptroller Division of Local Government and School Accountability

OFFICE OF THE NEW YORK STATE COMPTROLLER

State of New York Ofce of the State Comptroller

EXECUTIVE SUMMARY

A charter school is a public school nanced by local, State and Federal resources that is not under the control of the local school board and is governed under Education Law Article 56. The Brighter Choice Charter School (School) is located in the City of Albany and is governed by the Board of Trustees (Board), which comprises ve members. The Board is responsible for the general management and control of the Schools nancial and educational affairs. The Principal of the School (Principal) is the chief executive ofcer of the School and is responsible, along with other administrative staff, for the day-to-day management of the School under the direction of the Board. The Director of Finance and Operations (Director) is the chief accounting ofcer and is responsible for maintaining custody of, depositing, and disbursing School funds; maintaining the nancial records; and preparing the monthly and annual nancial reports. Charter schools have fewer legal operational requirements than traditional public schools. Most of the regulations for a charter school are contained in the entitys by-laws, charter agreement, and the scal/ management plans, which are part of the charter school application. A charter school is required to set both nancial and academic goals and the renewal of the charter every ve years is dependent on the school meeting these goals. The Schools current charter was renewed in December 2010. The Schools 2010-11 scal year operating expenditures totaled approximately $3.5 million. These expenses were funded primarily with revenues derived from billing the resident school districts for resident pupils and from certain State and Federal aid attributable to these pupils. Scope and Objective Our overall goal was to assess the Schools nancial operations. To accomplish this, we evaluated selected areas by performing the following survey procedures: General governance We reviewed the Schools charter, by-laws, and Board policies and found that the Board has adopted adequate nancial policies regarding purchasing, cash receipts and disbursements, payroll, conicts of interest and/or code of ethics, investments, and appointment of Board members. Financial oversight and condition We found that generally the Board exercises sufcient oversight of school nancial operations. The Business ofce prepares and presents various nancial reports to the Board for review.

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Purchasing and cash disbursements We reviewed 51 purchases totaling $329,017 that the School made during our audit period to determine whether the purchases were properly approved by either the Principal and/or the Director, there was adequate verication that the goods and services were received, and quotes were obtained for applicable purchases. We did not nd any exceptions with the 51 purchases we reviewed, and we determined that the Schools purchasing practices effectively enabled the School to acquire goods and services in accordance with its procurement policy. Payroll and personnel services We reviewed salary payments for two payrolls during our scope period and bonus payments paid to employees during our scope period. We did not note any issues with the salary or bonus payments made to employees.

After evaluating these areas, it appears that School ofcials have put in place adequate controls and, therefore, limited risk exists in these areas. As such we determined that an audit of these areas was not necessary. We also reviewed claims processing and resident school district billings and found that, while overall the internal controls appeared adequate, risk existed in these areas. Therefore, we examined the Schools current related processes for July 1, 2009, to April 30, 2011. Our audit addressed the following related questions: Is the claim processing function designed to ensure accurate, appropriate, and timely payments? Are resident school district billings accurate and reasonable?

Audit Results We found that the School paid claims totaling $329,017 before they were audited. The failure to audit claims prior to payment resulted in the School overpaying two vendors by $8,319, and it increases the risk that the School could pay for goods that are not received, services that are not rendered, and claims that are not legitimate, reasonable, or for proper School purposes. Also, the School paid six claims totaling $85,215, of 51 claims examined, later than the 60-day time period that its purchasing policy required claims to be paid within. For example, the School paid a $15,462 invoice for health insurance 93 days after the invoice was dated. By not paying claims within the timelines outlined in the policy, the School risks missing vendor discounts associated with timely bill payment and/or risks incurring late fees for untimely payments. When a student attends a charter school, the students resident school district must pay tuition to the charter school for that student. We reviewed four resident school district bills from the 2009-10 and 2010-11 scal years that the School sent to its students resident school districts to determine whether the students included on the bills had actually attended the School and whether the four bills included the appropriate number of students. We found that the resident school district bills were accurate. We also randomly selected 13 of the approximately 250 students enrolled in the School1 and examined the Schools records to determine whether the School maintained adequate documentation of the
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As of April 30, 2011

OFFICE OF THE NEW YORK STATE COMPTROLLER

students addresses and proof of their residence in each of their resident school districts. We did not nd any discrepancies with the documentation maintained for these 13 students. Furthermore, at the end of each scal year, the Director completes a reconciliation of amounts billed and collected. We reviewed this reconciliation for the 2009-10 school year and did not note any discrepancies. Comments of School Ofcials The results of our audit and recommendations have been discussed with School ofcials and their comments, which appear in Appendix A, have been considered in preparing this report. Except as specied in Appendix A, School ofcials generally agreed with our recommendations and indicated they planned to take corrective action. Appendix B includes our comment on an issue raised in the Schools response letter.

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Introduction
Background A charter school is a public school nanced by local, State, and Federal resources that is not under the control of the local school board. Charter schools have fewer legal operational requirements than traditional public schools. Most of the regulations for charter schools are contained in the entitys by-laws, charter agreement, and scal/nancial management plans, which are part of the charter school application. The charter agreement must be completed immediately after the application is approved. Charter schools are required to set both nancial and academic goals. The renewal of its charter every ve years is dependent on the school meeting these goals. The Brighter Choice Charter School for Boys (School) current charter was renewed in December 2010. The School is located in the City of Albany. The School is governed by the Board of Trustees (Board), which comprises ve members. The Board is responsible for the general management and control of the Schools nancial and educational affairs. The Principal of the School (Principal) is the chief executive ofcer of the School and is responsible, along with other administrative staff, for the day-today management of the School under the direction of the Board. The Director of Finance and Operations (Director) is the chief accounting ofcer and is responsible for maintaining custody of, depositing, and disbursing School funds; maintaining the nancial records; and preparing the monthly and annual nancial reports. The Schools Finance Manager electronically prepares the Schools accounting records and maintains them on the accrual basis of accounting. There were approximately 250 students attending the School during the 2010-11 scal year. The School has a work force of approximately 40 full- and part-time employees, and its budgeted expenses for the 2010-11 scal year were approximately $3.5 million, which were funded primarily with Albany City School District tuition payments, State and Federal aid, and donations. Objective The objective of our audit was to examine the Schools nancial operations. Our audit addressed the areas of claims processing and resident district billings. More specically, our audit addressed the following related questions: Is the claim processing function designed to ensure accurate, appropriate, and timely payments? Are resident school district billings accurate and reasonable?

OFFICE OF THE NEW YORK STATE COMPTROLLER

Scope and Methodology

We examined the Schools nancial operations for the period July 1, 2009, to April 30, 2011. To accomplish this, we evaluated selected areas by performing the following survey procedures: General governance We reviewed the Schools charter, by-laws, and Board policies and found that the Board has adopted adequate nancial policies regarding purchasing, cash receipts and disbursements, payroll, conicts of interest and/or code of ethics, investments, and appointment of Board members. Financial oversight and condition We found that generally the Board exercises sufcient oversight of school nancial operations. The Business ofce prepares and presents various nancial reports to the Board for review. Purchasing and cash disbursements We reviewed 51 purchases totaling $329,017 that the School made during our audit period to determine whether the purchases were properly approved by either the Principal and/or the Director, there was adequate verication that the goods and services were received, and quotes were obtained for applicable purchases. We did not nd any exceptions with the 51 purchases we reviewed, and we determined that the Schools purchasing practices effectively enabled the School to acquire goods and services in accordance with its procurement policy. Payroll and personnel services We reviewed salary payments for two payrolls during our scope period and bonus payments paid to employees during our scope period. We did not note any issues with the salary or bonus payments made to employees.

After evaluating these areas, it appears that School ofcials have put in place adequate controls and, therefore, limited risk exists in these areas. As such we determined that an audit of these areas was not necessary. We also reviewed claims processing, purchasing, payroll, and resident school district billings and found that, while overall the internal controls appeared adequate, risk existed in these areas. Therefore, we examined the Schools current related processes for the period July 1, 2009, to April 30, 2011. We conducted our audit in accordance with generally accepted government auditing standards (GAGAS). More information on

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such standards and the methodology used in performing this audit is included in Appendix C of this report. Comments of School Ofcials and Corrective Action The results of our audit and recommendations have been discussed with School ofcials and their comments, which appear in Appendix A, have been considered in preparing this report. Except as specied in Appendix A, School ofcials generally agreed with our recommendations and indicated they planned to take corrective action. Appendix B includes our comment on an issue raised in the Schools response letter. The Board has the responsibility to initiate corrective action. We encourage the Board to prepare a plan of action that addresses the recommendations in this report and forward the plan to our ofce within 90 days. For more information on preparing and ling your CAP, please refer to our brochure, Responding to an OSC Audit Report, which you received with the draft audit report. We encourage the Board to make this plan available for public review in the School Secretarys ofce.

OFFICE OF THE NEW YORK STATE COMPTROLLER

Claims Processing
The claims auditing process is an integral part of the Schools internal controls because it includes procedures designed to ensure that the School pays only legal and proper vendor claims. An important aspect of this internal control function is the review and approval of claims prior to payment. An effective audit of claims helps determine whether all necessary approvals are met by checking for proper signatures; verifying the accuracy of claimed amounts; and ensuring that all necessary documentation (e.g., signed receiving slips) is attached to claims. To ensure that disbursements are for valid expenses, or for goods or services that have actually been received, claims must be audited and approved prior to payment. Also, it is important for School ofcials to ensure that claims are approved and paid by the due date to avoid late fees and to take advantage of any discounts offered for timely payment of claims. The School contracts with an external accountant to assist it in its bookkeeping function. One of the external accountants duties includes weekly and monthly reviews of claims. However, the external accountant reviews claims after the claims have already been paid, which increases the risk of that the School may make inaccurate and/or inappropriate payments. In addition, the Schools nancial policies and procedures manual states that the School, whenever practical, will pay invoices within 60 days of the date of the statement. However, the School may miss out on discounts or may incur late fees when paying invoices after 60 days. We reviewed 51 claims2 totaling $329,017 and found the following exceptions: All 51 claims were paid prior to an audit by the external accountant. The School overpaid two vendors by a total of $8,319. The School overpaid a textbook manufacturer by $5,288 due to mistakenly interpreting the amounts listed on a statement, and it overpaid a credit card company by $3,031 because claims processing staff were not aware that a prior balance listed on a credit card statement had been paid the previous month. Six claims totaling $85,215 were not paid within 60 days. For example, the School paid a $15,462 invoice for health insurance 93 days after the invoice was dated.3

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Refer to Appendix B for more information on the sample selection process. The School did not incur late fees for this late payment.

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The failure to audit claims prior to payment resulted in the School overpaying two vendors by $8,319, and it increases the risk that the School could pay for goods that are not received, services that are not rendered, and claims that are not legitimate, reasonable, or for proper School purposes. Furthermore, by not paying claims within the timelines outlined in the policy, the School risks missing vendor discounts associated with timely bill payment and/or risks incurring late fees for untimely payments. Recommendations 1. The Board should require the external accountant to perform a comprehensive audit of claims prior to the claims being paid. 2. School ofcials should ensure that claims are paid within 60 days.

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OFFICE OF THE NEW YORK STATE COMPTROLLER

Resident School District Billings

Education Law4 provides for the funding of charter schools operating budgets. The public school district in which a student resides is considered the students resident school district. A charter school derives most of its operating revenues from the school district(s) in which its students reside. Charter schools are required to keep an accurate and up-to-date attendance record of student enrollment and report these data to the students resident school districts in a timely manner. Based on enrollment, count, attendance or full-time equivalent (FTE)5 attendance, a charter school bills the resident school districts for providing services to the students enrolled in the charter school. The resident school districts reimburse the charter school based on a reimbursement amount established by the New York State Education Department (SED). The School bills the resident school districts for their students tuition in six installments during the scal year. We reviewed the nal resident school district bills and two other random resident school district bills from the 2009-10 and 2010-11 scal years to determine whether the students included on the bills had actually attended the School and whether the four bills included the appropriate number of students. We found that the resident school district bills were accurate. The following chart shows the number of students and amounts billed for each bill selected: Bill Date
February 4, 2010 May 1, 2010 September 1, 2010 May 1, 2011

Number of Students
233 251 261 212

Total Amount Billed

$471,463 $504,313 $717,501 $505,612

There were approximately 250 students enrolled in the School as of April 30, 2011. We randomly selected every 20th student6 listed on the student roster, for a total of 13 students, and reviewed the Schools records for these students to determine whether the School maintained adequate documentation of the students addresses and proof of their residence in each of their resident school districts. We did not nd any discrepancies with the documentation maintained for these 13 students. Furthermore, at the end of each scal year, the
Article 56, Section 2856 FTE is the decimal expression of the enrollment of a student in a charter school compared to the length of the annual session of the charter school. A student who is enrolled for the full school year has an FTE of 1.0, while a student who is enrolled for only half of the school year has an FTE of 0.50. 6 Refer to Appendix B for more information on the sample selection process.
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Director completes a reconciliation of amounts billed and collected. We reviewed this reconciliation for the 2009-10 school year and did not note any discrepancies.

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APPENDIX A RESPONSE FROM SCHOOL OFFICIALS

The school ofcials response to this audit can be found on the following pages.

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See Note 1 Page 17

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APPENDIX B OSCS COMMENT ON THE SCHOOLS RESPONSE

Note 1 We believe that having the external accountant review claims prior to payment would be a better safety net and improve the checks and balances described in the process. During our audit testing, we found that the School overpaid two vendors by $8,119. These errors were not discovered by the existing process and identied in a timely fashion so that the School could initiate corrective action.

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APPENDIX C AUDIT METHODOLOGY AND STANDARDS

The objective of our examination was to assess the Schools nancial operations. To accomplish this, we performed an initial assessment of the internal controls so that we could design our audit to focus on those areas most at risk. Our initial assessment included evaluations of the following areas: nancial oversight, control environment, cash receipts and disbursements, purchasing, payroll, and information technology. During the initial assessment, we interviewed appropriate School ofcials, performed limited tests of transactions and reviewed pertinent documents such as the Schools charter, nancial policies and procedures manuals, Board minutes, and nancial records and reports. In addition, we obtained information directly from the computerized nancial databases and then analyzed it electronically using computer-assisted techniques. This approach provided us with additional information about the Schools nancial transactions as recorded in its databases. Further, we reviewed the Schools internal controls and procedures over the computerized nancial databases to help ensure that the information produced by such systems was reliable. After reviewing the information gathered during our initial assessment, we determined that controls appeared to be adequate and limited risk existed in most of the nancial areas we reviewed. We then decided on the reported objective and scope by selecting for audit areas that appeared to have additional controls in place. We selected claims processing, purchasing, payroll and resident school district billings for further audit testing. To accomplish our audit objective and obtain valid audit evidence, our procedures included the following steps: We interviewed key personnel to gain an understanding of the Schools claims, purchasing, payroll, and billing processes. We selected 51 claims and purchases to review because they appeared to be high risk based on their large dollar amounts, questionable vendor names, and actual items purchased. The 51 claims and purchases included 10 purchases that we reviewed during our planning phase, 23 purchases that the School made during the 2009-10 school year, 17 purchases that the School made during the 2010-11 school year, and one additional claim that was processed on a weekend. We reviewed the 51 claims to determine if claims were audited prior to payment and whether there were any duplicate or late payments. We reviewed the 51 purchases to determine if the purchases met the Schools purchasing guidelines for competitive bidding. We reviewed two random bi-weekly payrolls, one each from the 2009-10 and 2010-11 scal years, to ensure that all full-time employees were paid in accordance with provisions in their contracts. We reviewed all employee contracts and examined the payroll register for these two pay-periods to determine if the employees were paid according to their employment contracts. OFFICE OF THE NEW YORK STATE COMPTROLLER

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We reviewed all employee bonuses paid at the end of the 2009-10 scal year using the Schools calculation rubric used to calculate bonuses and reconciled the calculated amounts with the amounts shown on the payroll register. We reviewed the nal resident school district bills (May) and two other random resident school district bills from each of the 2009-10 and 2010-11 scal years and determined that the students billed for were actually School students. We also performed an analytic review of the remaining bills to determine their reasonableness. We reviewed the year-end resident school district billing reconciliation for the 2009-10 scal year and determined its reasonableness. We randomly selected every 20th student listed on the student roster (5 percent of the approximately 250 students enrolled as of April 30, 2011) for the most recent resident school district bill and determined whether the School maintained address verication for each student to ensure that the correct resident school districts were being billed.

We conducted this performance audit in accordance with generally accepted government auditing standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufcient, appropriate evidence to provide a reasonable basis for our ndings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our ndings and conclusions based on our audit objective.

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APPENDIX D HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

To obtain copies of this report, write or visit our web page:

Ofce of the State Comptroller Public Information Ofce 110 State Street, 15th Floor Albany, New York 12236 (518) 474-4015 http://www.osc.state.ny.us/localgov/

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APPENDIX E OFFICE OF THE STATE COMPTROLLER DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY
Steven J. Hancox, Deputy Comptroller Nathaalie N. Carey, Assistant Comptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICE H. Todd Eames, Chief Examiner Ofce of the State Comptroller State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313 Email: Muni-Binghamton@osc.state.ny.us Serving: Broome, Chenango, Cortland, Delaware, Otsego, Schoharie, Sullivan, Tioga, Tompkins Counties NEWBURGH REGIONAL OFFICE Christopher Ellis, Chief Examiner Ofce of the State Comptroller 33 Airport Center Drive, Suite 103 New Windsor, New York 12553-4725 (845) 567-0858 Fax (845) 567-0080 Email: Muni-Newburgh@osc.state.ny.us Serving: Columbia, Dutchess, Greene, Orange, Putnam, Rockland, Ulster, Westchester Counties

BUFFALO REGIONAL OFFICE Robert Meller, Chief Examiner Ofce of the State Comptroller 295 Main Street, Suite 1032 Buffalo, New York 14203-2510 (716) 847-3647 Fax (716) 847-3643 Email: Muni-Buffalo@osc.state.ny.us Serving: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Niagara, Orleans, Wyoming Counties

ROCHESTER REGIONAL OFFICE Edward V. Grant, Jr., Chief Examiner Ofce of the State Comptroller The Powers Building 16 West Main Street Suite 522 Rochester, New York 14614-1608 (585) 454-2460 Fax (585) 454-3545 Email: Muni-Rochester@osc.state.ny.us Serving: Cayuga, Chemung, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wayne, Yates Counties

GLENS FALLS REGIONAL OFFICE Jeffrey P. Leonard, Chief Examiner Ofce of the State Comptroller One Broad Street Plaza Glens Falls, New York 12801-4396 (518) 793-0057 Fax (518) 793-5797 Email: Muni-GlensFalls@osc.state.ny.us Serving: Albany, Clinton, Essex, Franklin, Fulton, Hamilton, Montgomery, Rensselaer, Saratoga, Schenectady, Warren, Washington Counties

SYRACUSE REGIONAL OFFICE Rebecca Wilcox, Chief Examiner Ofce of the State Comptroller State Ofce Building, Room 409 333 E. Washington Street Syracuse, New York 13202-1428 (315) 428-4192 Fax (315) 426-2119 Email: Muni-Syracuse@osc.state.ny.us Serving: Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, St. Lawrence Counties

HAUPPAUGE REGIONAL OFFICE Ira McCracken, Chief Examiner Ofce of the State Comptroller NYS Ofce Building, Room 3A10 Veterans Memorial Highway Hauppauge, New York 11788-5533 (631) 952-6534 Fax (631) 952-6530 Email: Muni-Hauppauge@osc.state.ny.us Serving: Nassau and Suffolk Counties

STATEWIDE AND REGIONAL PROJECTS Ann C. Singer, Chief Examiner State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313

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