In November 2015, the New York City Office of the Auditor General, the audit arm of the New York City Board of Education, spoke to the Coalition of Children with Special Needs regarding establishing proper controls and some of the findings that they encountered during the course of their audits. The audit protocols put in place by the OAG are very similar to those followed by the OSC, so areas of concern and findings outlined by the OAG, are similar to the types of issues you can expect from an OSC audit. In any event, whether audited by the OSC, OAG, or other municipality, it is important to understand what they are looking at, to help ensure that you are in compliance before they come to visit.
The OAG outlined the following as areas where they have had findings:
General Ledger Maintenance
The RCM requires providers to maintain their accounting records on a program by program basis throughout the year. As transactions occur they should be properly posted to the appropriate SED program contemporaneously. This helps to ensure the integrity of the accounting records throughout the year. Recording all transactions to a single general ledger account throughout the year, and then allocating them to the various programs at year-end, raises concerns about the financial data in the mind of the OAG.
Posting of Transactions
It is extremely important that costs are appropriately recorded to the correct general ledger account, as that frequently determines how such costs are allocated. If repairs and maintenance costs are erroneously recorded to supplies, that could result in expenses being misposted to the wrong program or misclassified between direct and non-direct.
Personal Service Costs
To properly support personal service costs, a provider should have:
- Attendance records showing the hours staff members worked signed by the employee’s supervisor. Electronic attendance records are fine as long as they have supervisor approval (most software provides for supervisor release after it has been reviewed). For the executive director, the attendance record should be signed by the providers controller, compliance officer, or similar position.
- Contemporaneous time records or quarterly time studies showing the program and/or the position title code where the employee spent their time. The time records should be prepared by any staff member that is charged to more than one funder, entity, or program, or by any employee charged to multiple position title codes, where a formal allocation methodology is not used in place of a time study. For example, an employee charged exclusively to program code 605 (office worker) would not need a time study, as the CFR requires 600 level staff to be allocated utilizing the ratio value method. Similarly, a speech therapist allocated to the various programs based upon RS data outlined on SED-4 would similarly not need a time study, unless a portion of their time was allocated to evaluations or early intervention, in which case the time study would be essential to determine the proper allocation of their time.
- Employment agreements and pay scales were not developed and maintained by the provider. Every employee should have in their personnel file a document signed by the employee and provider outlining the employee’s title, their status (exempt vs. non-exempt), their hours/schedule, and their compensation. Any time there is a change in any of these factors, a new agreement (payroll change form) should be signed. In addition, the RCM requires all providers to maintain a pay schedule that outlines salary ranges utilized by the provider based upon such factors as job-title, years of experience, education and training, etc. All employed staff should be in compliance with the pay scale utilized by the provider.
Other Than Personal Service Costs
Areas of concern were outlined in such areas as:
- Services provided by consultants lacked a corresponding contract, the invoice did not appropriately detail the services provided, dates and hours of service, the rates charged, etc.
- Employee expense reimbursement did not contain original invoices supporting such reimbursement
- Expenses were recorded in the wrong period. The CFR requires the accrual basis of accounting whereby expenses are paid when incurred not when the invoice is received or bill paid
- Rent costs were inappropriately charged because they were not supported by leases approved by SED or did not reflect actual space utilized (in cases of shared space)
- Related party transactions were not reflected at actual cost incurred by the related party
- Personal expenditures (such as meals and travel) were inappropriately charged to administrative costs
- Students attendance records, such as start and end dates certified on the CMR differed from internal records
- SEIT providers were not appropriately tracking student absences
- Providers were not complying with RDNA requirements
In addition to the areas of noncompliance, the OAG outlined certain other issues that they wanted to make providers aware of. The presentation discussed what should be included in employee personnel files and the need to maintain separate files for non-public information such as employee health records, investigations, etc. It also discussed a couple of other topics of interest to providers:
Providers can borrow money from insiders, less-than-arms-length, or from independent sources, arms-length. The rules are different for the two. Under an arms-length loan, the RCM limits the allowable interest to prime plus one percent. If a provider cannot obtain interest at that rate or lower, the provider must demonstrate good faith efforts through documentation supporting annual attempts to obtain the most competitive rate available by requesting quotes from at least three lending institutions. If the rates are above prime plus one, we recommend that you notify your accountant at rate setting and get pre-approval. If the debt is less-than-arms-lengths, you must get SED approval for the interest to be allowable, and the interest rate will be limited to prime. You will need to show SED that you attempted to obtain financing from arms-length sources but were unable or the interest rate is higher than that provided by the LTAL source.
Piercing the Corporate Veil
Many providers incorporate, or establish a PLLC, in order to limit their personal liability in running an agency (whether for profit or nonprofit). It should be noted that an individual can lose their corporate protection if they comingle personal and corporate resources, treating the corporation’s resources as an extension of their own. In such an instance, the City has gotten the Law Department involved to recoup funds personally from organizational owners or management and have also asked the Attorney General’s office to review findings and consider appropriate action in the case of fiscal wrongdoing.
Much of this may sound repetitive, however, these are some of the areas that keep tripping up the sector as report after report issued by regulatory agencies points out. If providers can learn from historical findings and implement strong controls and procedures regarding safeguarding of assets, documentation, and efficient operations, they will do well. If not, I guess we’ll read about it in the newspaper.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.