merrick academy audit

8/14/2019 Merrick Academy Audit

1/15

Thomas P. DiNapoliCOMPTROLLER

Audit Objective...............................2

Audit Results - Summary............... 2

Background.....................................3

Audit Findings and

Recommendations....................... 3

Financial Oversight ..........................3

Recommendation .............................. 4

Disbursements and Procurement ...... 4

Recommendations............................. 7

Payroll and Personal Services........... 7

Recommendations............................. 9

Equipment and Inventory ................. 9

Recommendations...........................10

Audit Scope and Methodology.....10

Authority.......................................11

Reporting Requirements..............11

Contributors to the Report ..........11

Appendix A - Auditee

Response ....................................12

OFFICE OF THE

NEW YORK STATE COMPTROLLER

DIVISION OF STATE

GOVERNMENTACCOUNTABILITY

MERRICK ACADEMY

CHARTER SCHOOL

FINANCIAL MANAGEMENT

PRACTICES

Report 2006-S-66


2/15

AUDIT OBJECTIVE

Our objective was to determine whether theMerrick Academy Charter School (Merrick)

established and maintains an adequate systemof internal control over the following areas offinancial operations: financial oversight;disbursements and procurement; payroll andpersonal services; and equipment andinventory.

AUDIT RESULTS - SUMMARY

Merrick, an elementary school with about 500students, is located in New York City. We

identified a number of weaknesses inMerricks internal controls over financialoperations. For example, there was often nodocumentation on file to support either theamount paid or the business purpose ofdisbursements from a checking account thatwas supposed to expedite purchases of $500or less. As a result, there was no assurancethe disbursements were made for valid schoolpurposes.

We were able to determine that two of thedisbursements were not made for valid schoolpurposes, including one payment for $140that enabled a member of Merricks Board ofTrustees to attend a fundraising event for aState legislator. The other payment whichtotaled $160 allowed a Merrick staff person toattend a NAACP fundraising event. We alsofound that more than $1,800 in petty cashdisbursements could not be accounted for andwe also identified weaknesses in the controls

over procurement, payroll and personalservices, and equipment inventories.

Merrick uses a contractor to help manage andoversee its operations since the school openedin 2000. The contractor receives an annualmanagement fee for its services. We

determined that the fee for the 2004-05 schoolyear was calculated incorrectly by thecontractor, as it should have been $890,480rather than the $904,819 that was charged bythe contractor - a difference of $14,339.

Merrick is governed by a Board of Trusteesthat is supposed to meet at least five timeseach school year. However, we found that theBoard met just twice during the 2004-05school year and just three times during the

following school year. We recommend theBoard meet as frequently as it is supposed to.

Our report contains 17 recommendations forimproving internal controls over Merricksfinancial management practices. Merrickofficials generally agree with our findings andwill take steps to implement changes.

This report, dated December 21, 2007, isavailable on our website at:

http://www.osc.state.ny.us.Add or update your mailing list address bycontacting us at:(518) 474-3271 orOffice of the State ComptrollerDivision of State Government Accountability110 State Street, 11th FloorAlbany, NY 12236

Report 2006-S-66 Page 2 of 15
http://www.osc.state.ny.us/http://www.osc.state.ny.us/


3/15

BACKGROUND

In December 1998, the New York StateLegislature passed a law authorizing thecreation of charter schools in the State. This

legislation is known as the New York CharterSchools Act (Act) of 1998. It authorized theestablishment of charter schools asindependent public schools governed by not-for-profit boards of trustees and managedaccording to the terms of a performancecontract or charter. Such charters provideopportunities for teachers, parents,community members, and not-for-profitorganizations to establish and maintainschools that operate autonomously of existing

schools and school districts.

Established in February 2000, MerrickAcademy Charter School (Merrick) is one of41 charter schools currently approved by theState University of New York (SUNY) andchartered by the Regents of the State of NewYork. Located in Queens Village, the schooloffers instruction at the kindergarten throughsixth grade levels. During the school yearthat ended in June 2005, Merrick had

approximately 500 students.

Under the Act, Merrick is entitled to receivefunding from local, State and federal sources.Such funding includes per pupil payments forgeneral operating support, additional Stateresources for special education, No Child LeftBehind federal funds, and in-kind servicesfrom the New York City Department ofEducation (DoE) - the school district in whichMerrick is located.

According to Merricks financial statements,for the fiscal year ended June 30, 2006, theschools operating expenses totaled$4,869,961. Revenues for the same fiscalyear totaled about $4,901,988, of which$4,495,287 was basic school aid provided byDoE. The rest of Merricks revenues are

derived from federal funds, donations andother State aid. Merrick operates the school inrented classroom space. The annual leasecosts are about $396,000.

Merrick has used a contractor, VictorySchools, Inc. (Victory), to help manage andoversee their operations since the schoolopened. Victory is a national corporation thatmanages a number of public schools. AtMerrick, Victory provides managementoversight of the schools operations. Forexample, Victory processes and oversees allpersonnel and payroll functions, andsupervises procurement and contracting.Certain Victory staff have signatory authority

over Merricks funds. However, Merricksschool Principal is hired by the Board and thePrincipal makes all subsequent hiringdecisions. Further, basic procurementdecisions are made by school personnel.

For the school year ended June 30, 2005,Merrick paid Victory a management fee of$904,819. Prior to April 5, 2004, this fee wasset at 22 percent of the schools grossrevenues. However, at that time, the contract

was revised and the fee was changed to$2,000 per full-time equivalent studentenrolled at Merrick beginning the 2004-05school year.

AUDIT FINDINGS AND

RECOMMENDATIONS

Financial Oversight

Board Oversight

Charter schools are to be governed by a Boardof Trustees (Board). Merricks Board iscomposed of 12 members, who are elected to5-year terms. According to the Act, theBoard shall have final authority for policy,operational decisions, and fiscal managementof the school.



4/15

Section 8 of the schools charter requires theBoard to meet at least bi-monthly during theten-month school year and as appropriateduring the summer recess. Thus, the Board isrequired to meet at least five times during the

school year.

We reviewed the available minutes for theBoard meetings held during the 25-monthperiod June 2004 through June 2006, andinterviewed Victorys officials. We foundthat the Board did not meet as often asrequired in its charter. For example, theminutes indicated that the Board met justtwice during the 2004-05 school year and justthree times during the following school year.

As a result, the Board is not fulfilling itsobligation to meet at least five times perschool year.

As is described in detail throughout in thisreport, the Board needs to oversee theschools fiscal operations much more closely,as many of the schools fiscal practices arepoorly controlled and fail to comply withrequirements. It is thus critical for Boardmembers to meet at least once every two

months during the school year, as required.

Annual Independent Audit

According to Section 2854(1) (c) of the Actand Section 5.3 of Merricks charter, acertified public accountant is to conduct anannual fiscal audit of the school. The charteralso requires that the audits be conducted inaccordance with generally acceptedgovernment auditing standards, as issued by

the United States Government AccountabilityOffice.

We reviewed the audit reports issued by thecertified public accountants. We found theschool has been audited annually and theaudit reports state that the audits were

conducted in accordance with generallyaccepted government audit standards.

Recommendation

1. Develop a plan to ensure that Boardmeetings are held as often as required inthe schools charter so that needed fiscaloversight can be provided.

(School officials agree with thisrecommendation.)

Disbursements and Procurement

School-Based Checking Account

Generally, most of Merricks disbursementsare made from Victorys centralized bankaccounts. However, to provide addedflexibility, Victory created a school-basedchecking account for Merrick, thus allowingthe school to expedite purchases of $500 orless. According to the schools FinancialPolicies and Procedures (Manual), thisaccount is to be used only to replenish a pettycash fund and for minor payments to vendors

for goods and services. It should not be usedto pay employees salaries, wages or bonuses.Checks from the account may be signed with just one signature - that of either MerricksPrincipal or the Business Manager.

We examined all 154 checks written againstthe school-based checking account for thefiscal year ended June 30, 2005, andidentified a number of problems. First, for 44of the 154 checks (29 percent), the amount

paid for the item or its business purpose wasnot adequately documented. In 10 of the 44instances, there was no documentation on fileto support the payment. In the absence ofsuch documentation, there is no assurancethese checks were used for valid accountpurposes or even for valid school purposes.



5/15

We were able to determine from thedocumentation on hand that 2 of the 154disbursements were not made for validaccount purposes. One payment of $160 wasmade to the NAACP to allow Merrick staff to

attend a fundraising event. The otherpayment was for $140 and enabled a schoolemployee, who is also a member of MerricksBoard, to attend a fundraising event for amember of the State Senate.

Merricks Manual also states that allpurchases should be made using the schoolstax-exempt status. However, we found thatthe school regularly paid sales taxes whenpurchasing supplies through this account. For

example, we determined that Merrick paid atleast $97 in sales taxes to a vendor whenpurchasing supplies during the 2004-05school year. A Victory official advised usthat the school is working to ensure thatvendors accept the tax-exempt status ofMerrick.

Finally, the Business Manager is responsiblefor ensuring that sufficient funds are availablein the school-based account before issuing

checks. This can be done by keeping thecheck register up-to-date. However, theBusiness Manager does not keep the checkregister up-to-date. Instead, she contactsVictory officials before writing a check to askthem if there are sufficient funds in theaccount. This approach has not beeneffective, as the school had to pay $120 inoverdraft charges in the 2004-05 school yearbecause checks were written when the amountof funds in the account was not sufficient.

School officials agree controls over theaccount need to be strengthened and accountactivity needs to be monitored more closely.They indicated they have taken steps tostrengthen the controls and improve themonitoring.

Petty Cash

The Manual states that the Petty Cash Fund(Fund) should not exceed $250 and is to bereplenished from the school-based checking

account. The Business Manager is the Fundscustodian and is required to perform a weeklyreconciliation of the Fund balance. Alldisbursements from the Fund are to be forvalid school-related purposes.

In addition, when cash is distributed from theFund, the Business Manager is required to fillout a Petty Cash Receipt (PCR) that showsthe date, the amount, and the name of theemployee to whom the cash was distributed.

When seeking reimbursement, the employeeis required to provide the Business Managerwith a receipt and any change. The changeand the receipt should always add up to theamount on the PCR.

We reviewed Fund activity for the year endedJune 30, 2005. We found the Fund balancewas maintained at an appropriate level, as itdid not exceed $250 (in fact, it was at $200).However, the Fund was poorly maintained;

weekly reconciliations were not performedand the majority of the cash disbursementsthat were documented did not appear to be forvalid school-related purposes (They were forstaff luncheons and taxi fares.)

We also found that many of the disbursementswere not documented. During the year endedJune 30, 2005, the Business Managerdistributed $2,891 from the Fund. However,there were receipts to support only $1,859 of

those disbursements. Thus, the reason forspending $932 was unaccounted for. Thisamount was eventually reimbursed by Victorywithout documentation at the Principalsrequest.



6/15

We performed Petty Cash Fund reconciliationon August 30, 2006, and found that cash onhand and store receipts totaled $172 ratherthan $200. When questioned about thisdiscrepancy, the Business Manager told us

she had used $25 to pay for a taxi ride to herhome because she had worked late the priorevening. However, she could provide neithera PCR for the cash distribution nor a receiptfor the taxi trip. She also did not account forthe remaining $3. We recommend that a logbe used to track the running balance of theFund, periodic unannounced Fundreconciliations be performed, and Fundactivity be monitored more closely.

Procurement

The Business Manager performs most of theschools procurement activities, under thesupervision and direction of the Principal.According to Victorys procurementprocedures, the Business Manager isauthorized to make purchases of $250 or less.The Principal is authorized to commit up to$1,000 for a single purchase. Purchases inexcess of $1,000 must be approved by

officials at Victory.

Merricks Manual requires that goods andservices be purchased at the lowest possibleprices. The Manual also requires thatpurchases be initiated through a formalrequisition process and a formal purchaseorder be used. The Manual further requiresthat school officials send receiving documentsto Victory to confirm that the purchasedgoods were received.

To determine whether these procurementrequirements were being met, we randomlyselected 43 of the 596 purchase transactionsprocessed by the school during the 2004-05school year and reviewed the documentationrelating to these purchases. We found that the

procurement requirements were not met in anumber of instances, as follows:

For 11 of the purchases, there wasno documentation indicating more

than one vendor was solicited priorto making the purchase. As a result,there is no assurance the lowestavailable price was obtained forthese purchases.

For 7 of the purchases, there was nodocumentation indicating therequired approvals were obtainedbefore the purchases were made. Inaddition, for 17 of the purchases,

there were no requisition forms onfile. As a result, there is noassurance these purchases wereproperly authorized.

For 9 of the purchases, there were noreceiving reports on file. As aresult, there is no assurance theschool actually received what it paidfor in these instances.

Management Fee

Merrick pays Victory an annual managementfee. For the three years ended June 30, 2005,this fee totaled $683,504 (2002-03), $761,012(2003-04), and $904,819 (2004-05). Prior toApril 5, 2004, this fee was set at 22 percent ofthe schools gross revenues. However, at thattime, the contract was revised and the fee waschanged to $2,000 per full-time equivalentstudent beginning with the 2004-05 school

year. The fee is generally calculated byVictory and deducted directly from theschools bank accounts, which are managedby Victory.

We attempted to verify the accuracy of the feecalculation for the 2004-05 school year andfound that it was incorrect. The fee for that



7/15

year should have been $890,480. However,Merrick was charged $904,819 instead, anoverpayment of $14,339. The error was madebecause Victory calculated the fee on thebasis of the old agreement (22 percent of the

schools gross revenues) rather than therevised agreement ($2,000 per student). Werecommend school officials recover the$14,339 overpayment from Victory.

Recommendations

2. Ensure that the school-based checkingaccount is used in accordance withprocurement procedures, and alldisbursements are fully documented.

3. Ensure that school funds are not used topurchase tickets to politically-related orother fundraising events.

4. Ensure that sales taxes are not paid forschool purchases.

5. Ensure that the check register for theschool-based account is kept up-to-date toavoid overdraft charges.

6. Ensure that the Petty Cash Fund is usedonly for valid school-related purposes, allcash disbursements are properlydocumented, and weekly reconciliationsare performed.

7. Use a log to track the running balance ofthe Petty Cash Fund.

8. Conduct periodic unannouncedreconciliations of the Petty Cash Fund.

9. Ensure that documentation exists tosupport that more than one vendor issolicited, as appropriate, prior to making apurchase.

10.Ensure that purchases are properlyauthorized and receiving reports areretained.

(School officials agree with

recommendations 2 through 10.)

11. Recover the $14,339 management feeoverpayment from Victory.

(School officials contend that there wasnot an overpayment because it was neverthe intent of either party to make the newrate effective for the 2004-05 school year.Instead, the new rate was to be effectivefor the 2005-06 school year.)

Payroll and Personal Services

Controls

Under ideal conditions, the payroll functionshould be separated from the personnelfunction. In such a system, employees wouldbe hired or terminated by the personnel officeand placed on or removed from the payroll byan independent payroll office based upon the

advice of the personnel office. The payrolloffice would process the transactionsauthorized by the personnel office and thepersonnel office would monitor the work ofthe payroll office. Someone independent ofboth operations would distribute the payrollchecks.

Thus, when payroll and personnelresponsibilities are properly separated, no oneperson can control a payroll transaction from

beginning to end. When payroll transactionsare controlled from beginning to end by asingle individual, unauthorized or fraudulenttransactions may not be detected.

However, at Merrick, the personnel functionsand the payroll functions are handled almostexclusively by a single individual - the



8/15

Business Manager. Every two weeks, theBusiness Manager prepares a spreadsheetwith all the payroll changes for that payrollperiod (i.e., new hires, terminations, pay ratechanges) and submits this spreadsheet to

Victory. Victory prepares the payroll on thebasis of this spreadsheet and sends thecompleted payroll back to the BusinessManager. The Business Manager reviews andapproves the payroll, and distributes thepaychecks. Controls over payroll are thusweak; because payroll, personnel andpaycheck distribution responsibilities areconcentrated under one individual.

The Principal is supposed to review the

spreadsheet with the payroll changes andapprove it before Victory staff process thetransactions. If this were done, somecompensating control would be provided.However, Victory personnel told us they donot require the Principals explicit approvalbefore processing the payroll. Instead, theyprocess the payroll if the Principal was copiedon the email transmitting the spreadsheet toVictory. As a result, the compensatingcontrol is significantly weakened and there is

inadequate assurance that all payrolltransactions are, in fact, authorized.

We recommend the Principals explicitapproval be required for all payroll changes.We also recommend that someone other thanthe Business Manager be responsible forreviewing the completed payroll anddistributing the paychecks. We furtherrecommend new employees be required toreport to Victorys corporate headquarters

before they are placed on the schools payroll.

Attendance and Accrual Records

An adequate payroll control system requiresthat records be maintained to support thehours worked and the amount of time anindividual is absent. At Merrick, a central

Staff Absence and Lateness Record ismaintained by the Business Manager.Employees are not required to maintain theirown time and attendance records.

According to the Business Manager, teachersare allowed to take up to six days of sickleave and up to two days of personal leaveeach school year. Hourly staff does notaccrue leave time and, therefore, do not getpaid when they are absent. Salariedemployees who do not have sufficient leaveaccruals to cover their absences must receivea deduction in pay in one of their summerpayrolls. A monthly reconciliation ofabsences is performed by the Business

Manager and totaled at the end of the schoolyear to determine whether anyones pay needsto be reduced during the summer.

We examined the process used at Merrick fortracking employee absences and identifiedcertain weaknesses. First, the Staff Absenceand Lateness Record did not always clearlyindicate whether employees were absent for afull day or simply late. Second, there wereinstances in which staff were marked as

absent on the Staff Absence and LatenessRecord, but were not recorded as absent onthe monthly reconciliation record.

We compared the March 2006 Staff Absenceand Lateness Record with the monthlyreconciliation performed by the Principal andfound that 6 of the 34 absences recorded onthe daily record for the period March 1

through March 20, 2006 were not included onthe monthly report. The end result of these

errors was that two staff had been overpaid atotal of $787. One of the employees was paidfor one unearned day and the other was paidfor three unearned days.

As a result of these control weaknesses, therewas no assurance that employee absenceswere accurately recorded and fully taken into



9/15

account. We recommend the Staff Absenceand Lateness Record be modified so that itclearly indicates whether employees areabsent for a full day or simply late. We alsorecommend that the monthly reconciliation of

absences be verified periodically.

Recommendations

12. Separate payroll and personnelresponsibilities by requiring that (a) thePrincipals explicit approval be obtainedfor all payroll changes before the schoolspayroll is processed, (b) someone otherthan the Business Manager be responsiblefor reviewing the completed payroll and

distributing the paychecks, and (c) newemployees report to Victorys corporateheadquarters before they are placed on theschools payroll.

(School officials disagree with parts (a)and (c) of the recommendation. Theybelieve that there are other compensatingcontrols that mitigate these risks.Concerning part (b), school officials agreewith the recommendation and now have a

person other than the business managerdistributing the pay checks/stubs.)

13. Modify the Staff Absence and LatenessRecord so that it clearly indicates whetheremployees are absent for a full day orsimply late.

14. Verify periodically the accuracy of themonthly reconciliation of absences.

(School officials agree withrecommendations 13 and 14.)

Equipment and Inventory

Merricks Manual requires that all equipmentbe tagged or identified in accounting recordsby a control number. The Manual also

requires school officials to perform a physicalcount (inventory) of the schools fixed assetsand curriculum materials at least once a year.The inventory list must be amended as newitems are purchased and obsolete items are

discarded.

To determine whether these inventoryrequirements were being met, we conductedinterviews, examined financial and inventoryrecords, and performed a physical count ofMerricks electronic equipment (we deemedthese items to be more susceptible to theft).

The inventory records contained 224 items ofelectronic equipment with a value of $83,852.

However, we found that these records werenot accurate, as 15 recently-purchased laptopswere not included in the records. We alsowere unable to locate six items.

We also identified other control weaknesses,as the disposal of equipment was not recordedand duties were not adequately separatedamong different employees (The same personwho compiled the inventory list of electronicequipment also performed the annual physical

count and had the authority to dispose ofequipment without first obtaining approval.)In addition, the inventory records did notshow the cost of each item, the date the itemwas received, and the date of disposal (ifapplicable).

School officials agreed with our findings andtold us they would comply with theirinventory requirements. They said that aperiodic physical inventory would be

performed by someone who had no access toinventory records; an items cost, date ofacquisition, and date of disposal would berecorded; newly-acquired equipment wouldbe promptly added to the records; anddiscarded equipment would be removed fromthe records.



10/15

Recommendations

15.Ensure that newly-acquired equipment ispromptly added to the inventory recordsand discarded equipment is promptly

removed from the records.

16.Ensure that periodic physical inventorycounts are taken by someone who is notresponsible for maintaining inventoryrecords and is not authorized to dispose ofequipment without approval.

17.Include in the inventory records the costof each item, the date the item wasreceived, and the date of disposal (if

relevant).

(School officials agree withrecommendations 15 through 17.)

AUDIT SCOPE AND METHODOLOGY

We conducted our audit in accordance withgenerally accepted government auditingstandards. We audited Merricks controlsover selected financial management practices

for the period July 1, 2004 through January 3,2007. To accomplish our objective, weinterviewed officials of Merrick and Victory;and we reviewed laws, policies, andprocedures related to the financial operationsof the school. We also examined the financialoperating records of Merrick and the workperformed by the firm of certified publicaccountants engaged to audit Merricksfinancial statements. Our review includedMerricks and Victorys Financial Policies

and Procedures Manuals, which set outcriteria for the schools financial practices.

To determine whether disbursement,procurement and contracting practices were incompliance with the Manuals, we examinedall 154 checks written against the school-based checking account for the fiscal year

ended June 30, 2005. We also reviewed thePetty Cash Fund activity for the fiscal yearended June 30, 2005, and performed a PettyCash Fund reconciliation on August 30, 2006.In addition, we randomly selected 43 of the

596 purchase transactions processed by theschool during the 2004-05 school year andreviewed the documentation relating to thesepurchases. We also verified the accuracy ofthe management fee paid to Victory for thisschool year.

To determine whether payroll operations wereadequately controlled, we reviewed ajudgmental sample of payroll changes for thefiscal year ended June 30, 2005. To

determine whether equipment was beingadequately controlled, we performed aphysical count of Merricks electronicequipment and verified the accuracy of theinventory records for such equipment. Wealso reviewed the minutes for the Boardmeetings that were held between June 2004and June 2006.

In addition to being the State Auditor, theComptroller performs certain other

constitutionally and statutorily mandatedduties as the chief fiscal officer of New YorkState. These include operating the Statesaccounting system; preparing the Statesfinancial statements; and approving Statecontracts, refunds, and other payments. Inaddition, the Comptroller appoints membersto certain boards, commissions and publicauthorities, some of whom have minorityvoting rights. These duties may beconsidered management functions for

purposes of evaluating organizationalindependence under generally acceptedgovernment auditing standards. In ouropinion, these functions do not affect ourability to conduct independent audits ofprogram performance.



11/15

AUTHORITY

The audit was performed pursuant to the StateComptrollers authority under Article V,Section 1, of the State Constitution and

Section 33 of the General Municipal Law.

REPORTING REQUIREMENTS

We provided a copy of preliminary results ofthe matters presented in this report to Merrickand Victory officials for their review andcomments. Their comments were consideredin preparing this report. Merrick and Victoryofficials agree with most of ourrecommendations and have taken action to

implement those recommendations they agreewith.

Within 90 days after the final release of thisreport, we request the Chairman of theMerrick Academy Charter School Board ofTrustees to report to the State Comptrolleradvising what steps were taken to implement

the recommendations contained herein, andwhere recommendations were notimplemented, the reasons why.

CONTRIBUTORS TO THE REPORT

Major contributors to this report were StevenE. Sossei, Kenrick Sifontes, Stephen Lynch,Tom Trypuc, Altagracia Rodriguez, HectorArismendi, Mostafa Kamal, Orin Ninvalle,Irina Kovaneva, Brenda Maynard, Adele

Banks, Daphnee Sanon, and Dana Newhouse.



12/15

APPENDIX A - AUDITEE RESPONSEAPPENDIX A - AUDITEE RESPONSE

Report 2006-S-66 Page 12 of 15Report 2006-S-66 Page 12 of 15


13/15



14/15



15/15

merrick academy audit

Documents