Desk Audit Inquiries

Desk Audit Inquiries

If you are funded by the New York State Education Department (“SED”) and your fiscal year ends on June 30th, you hopefully filed your Consolidated Fiscal Report (“CFR”) by the December 1st deadline. Now you can breathe a sense of relief that another year has gone by and all your hard work is complete … or can you? The CFR is utilized by SED to set rates and fees, reconcile grants and contracts (functioning as a final claiming report for agencies), determine cost of living increases, provide analysis and policy development, and data mine to identify potential areas of fraud and abuse.

So, what happens after your cost report is filed? After your CFR has been officially submitted to SED along with your audited financial statements, it undergoes extensive review by SED’s line accountants and supervisors. Based on experience, this typically occurs four to eight months after your CFR is filed (although SED took over a year to review the 2015 CFR’s. This review process, also known as a “desk audit,” is performed to see if the information that has been claimed on the CFR is consistent with your agency’s audited financial statements and other supporting data included in the CFR schedules such as SED-1 and SED-4. In recent years due to the findings of the Office of the State Comptroller’s (“OSC”) audits currently taking place in New York State, there has been a significant increase in the amount and type of inquires being made by SED upon desk audit. Therefore it is important for all providers to be cognizant of the type of questions being asked on recent desk audits, in order to prepare accurate and timely responses.

We are beginning to see an uptick in the amount of inquiries made by SED regarding over and under staffing within programs based on the number of classrooms and other statistics reported on schedule SED-1. For example, if your Agency runs a standard year, the program is typically running a 6 week summer and 40 week school year. Therefore, SED is expecting for each full time direct educational staff working within the program to be reported as a .885 (46 out of 52 weeks) full time equivalent (“FTE”) on schedule CFR-4. To put it in perspective, if an Agency’s program is running 2 classrooms each with one teacher in it for the entire year, upon desk audit, SED would expect for there to be a total of 1.770 (.885 x 2 classrooms) FTE’s reported on schedule CFR-4 under position title code 218. If the Agency’s reported information on CFR-4 does not materially coincide with expectations from SED-1 (either over or under staffed), this will likely prompt a desk audit inquiry for which the Agency will need to prepare a response.

We are also seeing more requests for details regarding expenses reported to direct expense Other Than Personnel Services (“OTPS”) lines on the CFR. For example, non-household supplies, expensed equipment, staff travel, etc. These are areas that the OSC has identified findings during their audits whereby Agencies have charged inappropriate or non-allowable expenses. As such, when preparing the CFR be cognizant of the expenses you are charging to your claimable programs. Self-identifying and disallowing questionable expenses upon further review internally is always better than leaving it up to the funding source to identify possible questionable costs and perceiving your Agency as not doing the due diligence necessary to properly charge expenses.

Lastly, there is an uptick in the amount of questions being asked about the financial statements being submitted with the CFR. Fiscal viability is a common question if your Agency is experiencing cash flow shortages and negative working capital. Further, does your Agency have a significant amount of debt? And if so, was it approved by SED if your Agency’s interest rate is above prime plus 1%? Related Party disclosures are another magnet for desk audit questions. Is your Agency properly disclosing all related party transactions within the footnotes of the financial statements and are they properly reported on schedule CFR-5 as well?

It is increasingly important to review your CFR prior to final issuance, this can help eliminate common pitfalls agencies fall into when costs are questioned or disallowed upon desk audit, possibly causing a decrease in rates going forward should the Agency become underspent. Educating yourself on the importance and meaning behind the data reported on your Agency’s CFR is increasingly important to understand the relationships between each claiming schedule. Having the proper knowledge will allow your Agency to plan and review throughout the year rather than at year end, when it may be too late to impact your spending. Due to the OSC audit results, there has been an increasing demand on Agencies to become more knowledgeable regarding the information reported on their cost reports and the supporting data. Remember, the OSC reports are not just an assessment of the agency audited, they are also an assessment of how well SED is monitoring agencies. As a result, with each new OSC report issued, we expect additional SED desk audit inquiries to occur.


This article was also featured in our newsletter Special Ed-ition Vol. 16

Albert Borghese, CPA

Albert Borghese, CPA

Manager

Albert is a member of Cerini & Associates’ audit and consulting practice where he focuses on serving the firm’s special education and nonprofit clients. Albert is also involved in the marketing and development of the firm, and frequently participates in recruiting efforts, and research.

 

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