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The City of New York Office of the Comptroller Bureau of Management Audit

ALAN G. HEVESI Comptroller

Audit of the Jerome Hardeman Day Care Center's Compliance with its Contract with the New York City Administration for Children's Services (ACS)
ME98-084A

September 30, 1998

Alan G. Hevesi Comptroller

First Deputy Comptroller Comptroller Steve Newman Deputy Comptroller for Audit Roger Liwer

Executive Deputy Edward Fitzpatrick

Assistant Deputy Comptroller for Audit Guy Carlsen Audit Manager Cheryl Pemberton Audit Supervisor Sekou Kamara Auditor-In-Charge Heather Mack Staff Auditor Marianne Galgano Report Editor Eric Johnson

The City of New York Office of the Comptroller Bureau of Audit Audit of the Jerome Hardeman Day Care Center's Compliance with its Contract with the New York City Administration for Children's Services (ACS)
ME98-084A EXECUTIVE SUMMARY
The Jerome Hardeman Day Care Center (the Center) is a non-profit day care center located in the East Elmhurst section of Queens. The Center was established in 1973 to serve approximately 60 pre-school children (2-1/2 to 6 years old). The Center is open Monday through Friday from 8:00 a.m. to 6:00 p.m. to provide child care services to working parents. The Center is sponsored by East Elmhurst Day Care Center, Inc. The program is designed to meet the intellectual, physical, emotional, and social needs of each child at the Center.

Objectives
Our audit objective was to determine whether the Center was in compliance with the provisions of its contract with ACS. Specifically, we wanted to determine whether the Center: ! accurately reported its expenses to the Human Resources Administration (HRA) on the

Contract Agency's Monthly Financial Reports (CAMFRs);1 ! ! conducted complete background investigations for all day care center employees; correctly reported the number of children enrolled in its day care program to ACS and ensured that all enrollees were approved by ACS; correctly reported all parent fees collected to HRA, and deposited all parent fees into a bank account maintained for the ACS program; accurately reported all private fees collected from parents whose children do not qualify for ACS-subsidized day care; deposited all checks disbursed by the City of New York and fees collected from parents in its ACS bank account; commingled day care funds with other program funds, which is prohibited in its contract with ACS; issued checks out of its ACS bank account with two signatures from the Center's officials, as recommended by ACS; spent ACS funds on legitimate expenses related to the operation of its day care program, and issued payroll checks only to bona-fide day care employees; spent petty cash funds on justified day care expenses; ensured that the food preparation and storage areas at the Center were clean and hygienic; and

! !

1 All ACS-contracted day care centers are required to submit, on a monthly basis, a report of itemized expenses. This report is referred to as the Contract Agency's Monthly Financial Report or CAMFR.

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complied with the contractual requirement of an annual audit by an independent Certified Public Accountant (CPA).

Finally, we attempted to determine whether the Center spent funds received from USDA on legitimate activities related to the day care program, and whether the Center had supporting documentation for these expenses.

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Scope and Methodology


The audit covered fiscal year 1997 (July 1, 1996, through June 30, 1997). To verify the legitimacy of the day care's OTPS expenses, we requested all supporting documentation, including invoices, bills, and receipts relating to payments from both ACS and USDA funds during fiscal year 1997. To ensure that the information reported in the Contract Agency's Monthly Financial Reports (CAMFRs) was consistent with actual expenses incurred by the Center, we compared the information reported in the CAMFRs during fiscal year 1997 to the actual expenses incurred by the Center. To determine whether the Center completed the required background checks on all employees, including substitute staff members, we examined whether the Center contacted the Department of Investigation (DOI) and the New York State Central Register of Child Abuse and Maltreatment (SCR) to conduct background checks. In order to determine whether ACS kept track of all the children attending the Center, we compared the attendance roster with the names included in the Automated Attendance and Fee Record (ACD-1) submitted by the Center to HRA's Central Claims Unit. In order to determine whether the Center collected and reported the ACS-assigned fees (parent fees), we compared the program's Monthly Fee Summary Schedule (the parent fee register) and the ACD-1 reports the Center submitted to HRA's Central Claims Unit. (It should be noted that the parent fee register only includes those children whose day care fees are partially subsidized by ACS.) We also determined whether these parent fees were all deposited in the ACS bank account, as required by the contract. Finally, we confirmed that all the employees who received payroll checks from the Center were listed in the Center's Payroll Register.

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Results in Brief
We found that the Center generally adhered to the provisions of its contract with ACS. Specifically, we found that the Center spent funds primarily on expenses related to the operation of its day care program, issued the payroll checks we reviewed to bona-fide employees, ensured that all current employees had complete background investigations, correctly reported the number of children enrolled in its day care program, correctly reported to HRA all parent fees collected, kept the kitchen, equipment, and food storage areas in clean and hygienic conditions, and complied with the contractual requirement of an annual audit by an independent Certified Public Accountant (CPA). We did, however, identify weaknesses in the Center's financial and operating procedures, as well as instances of non-compliance with ACS contract provisions. Specifically, we found: ! We found Unauthorized Telephone Expenses: the Center paid $2,127--$807 more than the $1,320 budgeted during fiscal year 1997--for telephone expenses. We also found the Center paid $159 for charges that appeared to be unnecessary. Specifically, we found the Center paid $94 for directory information requests. The Center also paid $54 for several long distance calls to Connecticut, Florida, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Virginia, and Upstate New York. Additionally, the Center paid $11 for services, such as call interrupt charges, call return, and convenience calls.

The Chairman's Compensation Violates The Conflict of Interest Clause: We found that the Chairman of the Center's Sponsoring Board received payments for repair and maintenance services he allegedly performed at the Center, which violates the conflict of interest clause in its contract with ACS. Specifically, we found that the Board issued ES-5

five checks, totaling $2,583, to its Chairman as payment for repair work he performed at the Center. These payments were made from the Board account that contains the private fees. !

The Center Did Not Enforce Its Escort Sign-In Procedure: We found that there were 111 instances where children were not signed-in on the parent/escort log sheets but were marked as "present" on the attendance rosters for May and June 1997. It is the Center's procedure that all "child(ren) must be escorted to the classroom and signed in." This illustrates that the Center does not enforce its escort sign-in procedure.

We Questionable Use of "Private Fees": reviewed the Center's Sponsoring Board's bank account to ensure that the Board spent the "private fees" in accordance with its contract with ACS. We found that the Board issued five checks totaling $685 payable to cash for expenses the Board claimed were related to the Center. However, the Board did not provide any supporting invoices from the vendors. Furthermore, we found that two of the five checks--totaling $185--were authorized and cashed by the Board's Chairman. We do not understand why the Board did not issue these checks directly to the vendors. Finally, we found questionable payments to vendors totaling $5,929. Specifically, we found ten payments--totaling $1,964--for which the Board did not have any supporting documentation. Without supporting documentation we could not determine whether these payments were for expenditures related to the operations of the Center. For the remaining questionable payments--totaling $3,965--we question how these payments benefitted the children of the Center. After ES-6

the Exit Conference, Jerome Hardeman Day Care Center provided us with documentation that was not provided to us during the course of the audit. These documents accounted for $473 of the $1,964 in questionable payments. The Center was unable to provide adequate documentation for the remaining $1,491. Therefore, we still question whether these payments were for expenditures related to the operations of the Center. !

The Center Paid Higher Annual Audit Fees Compared to Other ACS-Funded Day Care Centers: We question the Center's annual audit fees since we found that the Center spent between 31 and 53 percent more than other ACS-funded day care centers previously audited by the Comptroller's Office. Specifically, we found the Center spent $4,221 for its fiscal year 1996 ACD audit. This amount was approximately $1,300 more than the amount paid by another ACS-funded day care center, which hired the same CPAs as Jerome Hardeman. This other center also enrolled more students than Jerome Hardeman.

This report contains nine recommendations for Jerome Hardeman Day Care Center to address the discrepancies noted in the audit report.

Agency Response

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The matters covered in this report were discussed with officials from the Administration for Children's Services (ACS) during, and at the conclusion of, this audit. The preliminary draft report was sent to ACS officials on May 4, 1998, and was discussed at an exit conference held on May 29, 1998. On June 3, 1998, we submitted a draft report to ACS officials with a request for comments. We received a written response from ACS on June 19, 1998. ACS agreed with the audit's findings and recommendations. Specifically, ACS officials stated: "ACS/ACD generally agrees with the recommendations contained in the audit report and will work with the program to see that they are implemented. . .the results will be useful to ACS/ACD in its efforts to improve its monitoring practices and procedures for the child care programs under its auspices." The full text of ACS' comments is included as an addendum to this report.

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Table of Contents INTRODUCTION . . . . . . . . . . . . . . . . . .


Background . . . . . . Objectives . . . . . . Scope and Methodology Agency Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1 2 4 6 6 8

FINDINGS AND RECOMMENDATIONS


OTPS Expenses

. . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . .

Unauthorized Telephone Expenses

Not Every OTPS Expense Was Reported to HRA/ACS . . . . . . . . . . . . . PS Expenses . . . . . . . . . . . . . .. . . .

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Non-Compliance With Contractual Issues . . . . The Center Did Not Comply With All Provisions of its Contract With ACS . . . The Chairman's Compensation Violates The Conflict of Interest Clause . . . . . Unauthorized Loan Repayment . . . . . . . The Center Did Not Enforce Its Escort Sign-In Procedure . . . . . . Questionable Use of "Private Fees" . . . . Other Issue . . . . . . . . . . . . . . . . The Center Paid Higher Annual Audit Fees Compared to Other ACS-Funded Day Care Centers . . . . . . . . . . . . . . . . .

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The City Of New York Office of the Comptroller Bureau of Audit

Audit of the Jerome Hardeman Day Care Center's Compliance with its Contract with the New York City Administration for Children's Services (ACS) ME98-084A
INTRODUCTION Background
The Jerome Hardeman Day Care Center (the Center) is a nonprofit day care center located in the East Elmhurst section of Queens. The Center was established in 1973 to serve approximately 60 pre-school children (2-1/2 to 6 years old). The Center is sponsored by East Elmhurst Day Care Center, Inc. The Center is open Monday through Friday from 8:00 a.m. to 6:00 p.m. to provide child care services to working parents. In fiscal year 1997, the Center received $350,954 from the Administration for Children's Services (ACS) and $39,329 from the U.S. Department of Agriculture (USDA) to operate its day care program. The program is designed to meet the intellectual, physical, emotional, and social needs of each child at the Center.

Objectives
Our audit objective was to determine whether the Center was in compliance with the provisions of its contract with ACS. Specifically, we wanted to determine whether the Center:

accurately reported its expenses to the Human Resources Administration (HRA) on the Contract Agency's Monthly Financial Reports (CAMFRs);2 conducted complete background investigations for all day care center employees; correctly reported the number of children enrolled in its day care program to ACS and ensured that all enrollees were approved by ACS; correctly reported all parent fees to HRA, and deposited all parent fees into a bank account maintained for the ACS program; accurately reported all private fees collected from parents whose children do not qualify for ACS-subsidized day care; deposited all checks disbursed by the City of New York and fees collected from parents in its ACS bank account; commingled day care funds with other program funds, which is prohibited in its contract with ACS; issued checks out of its ACS bank account with two signatures from the Center's officials, as recommended by ACS; spent ACS funds on legitimate expenses related to the operation of its day care program, and issued payroll checks only to bona-fide day care center employees; spent petty cash funds on justified day care expenses; ensured that the food preparation and storage areas at the Center were clean and hygienic; and complied with the contractual requirement of an annual audit by an independent Certified Public Accountant (CPA).

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! ! !

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All ACS-contracted day care centers are required to submit, on a monthly basis, a report of itemized expenses. This report is referred to as the Contract Agency's Monthly Financial Report or CAMFRs.

Finally, we attempted to determine whether the Center spent funds received from USDA on legitimate activities related to the day care program, and whether the Center had supporting documentation for these expenses.

Scope and Methodology


The audit covered fiscal year 1997 (July 1, 1996, through June 30, 1997). We identified the total Other Than Personnel Services (OTPS) and Personnel Services (PS) expenses charged to the day care program. We then determined whether the total OTPS and PS costs described accounted for all the funds ACS and USDA disbursed to the Center. To determine whether the Center's expenses occurred as a result of the operation of the day care program, and were authorized by the contract with both ACS and the USDA, we obtained all original canceled checks for the ACS and USDA bank accounts. To verify the legitimacy of the day care's OTPS expenses, we requested all supporting documentation, including invoices, bills, and receipts relating to payments from both ACS and USDA funds during fiscal year 1997. To determine whether all petty cash funds were used for expenditures that were reasonable and necessary, given the Center's operations, we reviewed the records for all petty cash expenses the Center charged to its day care program. To ensure that the information reported in the Contract Agency's Monthly Financial Reports (CAMFRs) was consistent with actual expenses incurred by the center, we compared the information reported in the CAMFRs during fiscal year 1997 to the actual expenses incurred by the Center. To determine whether the Center completed the required background checks on all employees, including substitute staff members, we examined whether the Center contacted the Department of Investigation (DOI) and the New York State Central Register of Child Abuse and Maltreatment (SCR) to conduct background checks. In order to determine whether ACS kept track of all the children attending the Center, we compared the attendance roster

with the names included in the Automated Attendance and Fee Record (ACD-1) submitted by the Center to HRA's Central Claims Unit. In order to determine whether the Center collected and reported the ACS-assigned fees (parent fees), we compared the program's Monthly Fee Summary Schedule (the parent fee register) and the ACD-1 reports the Center submitted to HRA's Central Claims Unit. (It should be noted that the parent fee register only includes those children whose day care fees are partially subsidized by ACS.) We also determined whether these parent fees were all deposited in the ACS bank account, as required by the contract. Furthermore, since we were informed that the Center provided day care services to children whose parents do not qualify for ACSsubsidized day care, we requested all documents related to private fees collected for these children in fiscal year 1997. (In these cases, the entire cost of the day care services provided to these children was paid for by their parents.) To determine whether the Center deposited all the checks disbursed by the City of New York in its ACS bank account, we obtained copies of the backs and fronts of the four checks issued to the Center (during fiscal year 1997) under Contract Number 9781427 from the Check Reconciliation Unit of the New York City Comptroller's Office. We also obtained the Center's ACS bank statements for fiscal year 1997 to verify that the nine electronic fund transfers were deposited into its ACS bank account. This enabled us to calculate the total dollar amount disbursed by the City to the Center. In order to determine whether the Center operated its ACS bank account in compliance with ACS requirements, we reviewed various bank documents for the period of our review. Specifically, for its ACS bank account, we reviewed 13 bank statements, 552 canceled checks, and 100 deposits. We also reviewed the Center's USDA bank account, including 13 bank statements, 143 canceled checks, and 15 deposits. We also verified the source of non-ACS deposits into the various bank accounts to ensure the Center was not commingling day care funds with other funds. Specifically, we wanted to determine the source of all deposits into both the Center's ACS and USDA bank accounts. In order to determine whether ACS maintained records for all the Center's employees receiving payroll checks, we compared the 4

Center's Employee Payroll Register to ACS' Detailed Day Care Program Roster, a list of all day care center employees. We then confirmed that all the employees who received payroll checks from the Center were listed in the Center's Payroll Register. We inspected the Center's food preparation and storage areas to determine whether the conditions were clean and hygienic. Finally, we verified whether the Center complied with its contract with ACS requiring an annual audit by an independent Certified Public Accountant (CPA). Our audit was conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) and included tests of the records obtained. This audit was performed in accordance with the City Comptroller's audit responsibilities set forth in Chapter 5, Section 93, of the New York City Charter.

Agency Response
The matters covered in this report were discussed with officials from the Administration for Children's Services (ACS) during, and at the conclusion of, this audit. The preliminary draft report was sent to ACS officials on May 4, 1998, and was discussed at an exit conference held on May 29, 1998. On June 3, 1998, we submitted a draft report to ACS officials with a request for comments. We received a written response from ACS on June 19, 1998. ACS agreed with the audit's findings and recommendations. Specifically, ACS officials stated: "ACS/ACD generally agrees with the recommendations contained in the audit report and will work with the program to see that they are implemented. . .the results will be useful to ACS/ACD in its efforts to improve its monitoring practices and procedures for the child care programs under its auspices." The full text of ACS' comments is included as an addendum to this report.

FINDINGS AND RECOMMENDATIONS


We found that the Center generally adhered to the provisions of its contract with ACS. Specifically, we found that the Center: ! spent funds primarily on expenses related to the operation of its day care program, and issued the payroll checks we reviewed to bona-fide employees; deposited all checks received from ACS and fees collected from parents in a bank account maintained for the ACS program; ensured that all current background investigations; employees had complete

! !

correctly reported the number of children enrolled in its day care program to ACS and ensured that all enrollees were approved by ACS; correctly reported to HRA all parent fees collected, and deposited all parent fees into a bank account maintained for the ACS program; did not commingle day care funds with other non-day care program funds; kept the kitchen, equipment, and food storage areas in clean and hygienic conditions; and complied with the contractual requirement of an annual audit by an independent Certified Public Accountant (CPA).

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We did, however, identify minor weaknesses in the Center's financial and operating procedures, as well as instances of noncompliance with ACS contract provisions. These and other issues are discussed in detail in the following sections of this report. Our findings are presented under three main areas: OTPS expenses, PS expenses, and non-compliance with contractual issues.

OTPS Expenses
Our review indicated that the Center charged $56,373 as OTPS expenses during fiscal year 1997. Specifically, $20,881 was charged to the ACS account, and $35,492 was charged to the USDA 6

account. We reviewed the supporting documentation for the ACS account to determine whether these expenses were reasonable and whether they related to the Center's day care operation. Table I lists a breakdown of the $20,881 in OTPS expenses the Center charged to its ACS account as well as the number of canceled checks for each category. TABLE I Breakdown of OTPS Expenses Charged to the ACS Account Fiscal Year 1997
Expense Category Dollar Amount $9,163 2,127 1,336 1,241 1,202 934 818 813 808 701 582 379 311 189 160 70 47 Total: $20,881 Number of Canceled Checks 22 22 7 3 0 13 0 1 6 24 16 1 1 4 5 1 1 127

Services Telephone Household Supplies Teach & Play ADP Payroll Processing Fees Repairs & Maintenance ADP Analysis Fees Classroom Supplies Office Supplies Office Equipment Uniform Allowance Classroom Supplies Private Funds Child Care Equipment Petty Cash Postage Stamps Fire Department Permit Laundry

Note: Jerome Hardeman also made several OTPS-related electronic transfers during the fiscal year. Specifically, there were 33 ADP payroll processing

fees and 10 ADP analysis fees. These electronic transfers are not included in the number of canceled checks.

As indicated in Table I, the Center charged a total of $20,881 in OTPS expenses to its ACS account. Our review found the Center generally spent these day care funds on legitimate, documented expenses. However, we noted some questionable expenses, such as unnecessary telephone charges and the Center's annual audit fee. We also found that the Center understated its OTPS expenses on the CAMFRs for fiscal year 1997. These issues are discussed in the following section of this report.

Unauthorized Telephone Expenses


During fiscal year 1997 the Center paid $2,127--$807 more than the $1,320 budgeted--for telephone expenses. We also found that the Center paid $159 for charges that appeared to be unnecessary. Specifically, we found the Center paid $94 for several directory information requests. The Center also paid $54 for several long distance calls to Connecticut, Florida, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Virginia, and Upstate New York. Additionally, the Center paid $11 for services, such as call interrupt charges, call return, and convenience calls. While this amount is small, we have found from audits of other centers that such services can become costly if they are not eliminated. When we discussed these unauthorized telephone expenses with the Director of the Center, we were told that employees at the Center, the Sponsoring Board, and the Civic Association may be responsible for some of the calls and that they reimbursed the Center for the telephone charges the Center incurred. However, the Center does not maintain a log book of long distance calls to determine who is responsible for the calls. Further, it did not provide evidence that these telephone expenses were recouped from the above-mentioned parties. We did not find any additional information indicating that these unauthorized telephone charges were related to the operation of the day care program.

Recommendations
The Center should: 8

1.

Review telephone charges to identify unnecessary calls, recoup the money from the employees responsible for these non-business related calls, and document all reimbursements. Take the necessary steps to prevent its employees from incurring any unnecessary telephone charges, such as long distance telephone calls, interrupt charges, and convenience calls to the day care program.

2.

Agency Response:

"The Center submitted a budget

adjus tment reque st in April 1997 t o incre a s e t h e budge t line f o r telep hone expen s e s b y $800. W e have reque sted that a block b e place d on a l l phone s excep t for

one, f o r long dista n c e calls a n d conve nienc e servi c e s a n d that a log i s kept f o r a l l neces sary long dista n c e calls . We will verif y that this h a s been done. "

Not Every OTPS Expense Was Reported to HRA/ACS


The Center is required to report all expenses it incurs on the monthly expense report (CAMFR) to HRA's CAMFR Unit. The report contains various financial data, including all OTPS expenses. HRA shares this report with ACS.

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To determine whether the Center reported all expenses it incurred, we reviewed the CAMFRs the Center submitted during fiscal year 1997 to HRA's CAMFR Unit. We compared the amounts recorded on the CAMFRs to the actual expenses incurred by the Center. We found the Center understated its OTPS expenses on the CAMFRs by $1,466. Specifically, the Center reported a total of $19,415 in OTPS expenses on its CAMFRs. Our review of the Center's invoices revealed that actual expenses totaled $20,881. It is important that the Center accurately reports expense information on the CAMFRs. ACS uses the information on the CAMFRs to monitor the Center's compliance with its budget and to prepare future budgets.

Recommendation
The Center should: 3. Carefully review all CAMFRs before submitting them to HRA to ensure that they accurately depict all revenues and expenses for the day care programs.

Agency Response: "The program acknowledges this oversight and will henceforth carefully review all CAMFR's before submission."

PS Expenses
During fiscal year 1997, the Center charged $343,661 to its accounts as total PS expenses for the day care operation. Specifically, the Center charged $338,619 to its ACS account and $5,042 to its USDA account. We reviewed the supporting documentation for the ACS account to determine whether these expenses were reasonable and whether they were related to the Center's day care operation. Table II lists a breakdown of the $338,619 in PS expenses the Center charged to its ACS account as well as the number of canceled checks for each category.

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TABLE II Breakdown of PS Expenses Charged to the ACS Account Fiscal Year 1997
Expense Category Dollar Amount Number of Canceled Checks 422 0 0

Net Wages and Salaries Less - USDA Salaries Federal Withholding Taxes Social Security & Medicare - Employer's Portion Welfare Fund Pension State Withholding Taxes City Withholding Taxes Union Dues Unemployment Insurance Other Income Membership Dues - Welfare Agency Total:

$234,558 25,116 24,471 19,659 10,164 8,312 5,778 4,993 3,024 2,369 175

26 12 0 0 25 0 2 1

$338,619

488

Note: Jerome Hardeman also made 28 PS-related electronic transfers during the fiscal year. Specifically, an electronic transfer includes Federal withholding taxes, State withholding taxes, City withholding taxes, Social Security & Medicare, and State unemployment insurance. These electronic transfers are not included in the number of canceled checks.

As indicated in Table II, the Center charged a total of $338,619 in PS expenses to its ACS account. Our review found that the Center spent these day care funds on legitimate, documented expenses.

Non-Compliance With Contractual Issues The Center Did Not Comply With All Provisions of its Contract With ACS
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We found that the Center did not comply with all the provisions of its contract with ACS. Specifically, the Center employed the Board Chairman, and it did not obtain prior authorization for an ACS loan transaction. It also incorrectly reported the number of students at the Center to HRA/ACS. These two matters of non-compliance are discussed in greater detail below.

The Chairman's Compensation Violates The Conflict of Interest Clause


ACS' contract with the Center states: "The Contractor represents and warrants that neither it nor any of its directors, officers, members, partners or employees, has any interest nor shall they acquire any interest, directly or indirectly, which would or may conflict in any manner or degree with the performance or rendering of the services herein provided...no person having such interest or possible interest shall be employed by it." However, during the audit we found that the Chairman of the Center's Sponsoring Board received payments for repair and maintenance services he allegedly performed at the Center. Specifically, we found that the Board issued five checks, totaling $2,583, to its Chairman as payment for repair work he performed at the Center. These payments were made from the Board account that contains the private fees. The details of the payments are as follows: ! July 2, 1996, the Board issued a check for $550 to its Chairman--$300 was for labor, $100 was for supplies, and $150 was for labor performed by a third party. April 30, 1997, the Board issued a check for $500 to its Chairman--$275.16 was for labor and $224.84 was for supplies. The remaining $1,533 was for the cost of supplies allegedly purchased throughout the audit period.

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When we questioned the Board about these expenses, the Vice Chairman of the Board provided us with a memo dated March 6, 1998, which states that the Board authorized its Chairman to perform services for the Center and to receive compensation for his labor. It should be noted, however, that this memo was issued a year and half after the Board had already paid its Chairman for his services. In any case, the Board's subsequent approval does not negate this violation of the contract's conflict of interest clause.

Recommendation
The Board should: 4. Ensure that it complies with its contract, and eliminate conflict of interest, by preventing board members from being compensated for services performed at the Center.

Agency Response: "The program stated that since the landlord was without a renewed lease, he was unwilling to make the necessary repairs. The board decided to paint the center and make repairs. The Chairperson, Mr. Smith, reimbursed the ACD account for $575.16, the amount he was paid for his labor. The additional amount, was for materials. Receipts were furnished for the materials."

Unauthorized Loan Repayment


The Center did not obtain prior authorization for one loan repayment totaling $11,780. Specifically, an unauthorized loan was made as reimbursement to the USDA account for a loan made to the ACS account. We confirmed that this check was deposited into the Center's USDA bank account. However, we saw no prior authorization from ACS, as required by the contract. According to an official from ACS, the Center may transfer funds from the ACS program to the USDA program, and vice versa, but only in emergencies. The Center is required to obtain ACS' approval before transferring funds between accounts. We contacted the Director to determine whether the Center had obtained such prior approval for the loan repayment. According to 14

the Director, the Center only received verbal approval from an ACS Resource Area employee. However, we maintain that this loan repayment was unauthorized since the Center could not provide any supporting documentation indicating that it obtained a verbal approval. We reviewed the center's CAMFRs submitted to HRA for November 1996 and confirmed that the loan repayment of $11,780 was reported to ACS.

Recommendation
The Center should: 5. Obtain written authorization from ACS prior to transferring ACS funds to the USDA bank account or vice versa.

Agency Response: "The center claims that it has done this in prior years with the approval of the Resource Area Director. It is ACD's policy that inter-account loans may be done, with authorization from ACD's Office of Financial Management, and only on an emergency basis. The Resource Area Director is not the appropriate person to give the approval."

The Center Did Not Enforce Its Escort Sign-In Procedure


The Center's policies and procedures state: "Your child(ren) must be escorted to the classroom and signed in. Do not leave him/her at the door. Make sure that your child's teachers sees him/her. All escorts must be at least 16 years of age. We must be informed of the name or names of the escorts that will be responsible for bringing your child to the Day Care Center, and picking up your child from the Day Care Center. If there is a change in your child's escort, please let us know. We will not release your child(ren) to anyone that we do not know."

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To determine whether the Center was enforcing this procedure, we compared the Center's parent/escort log sheets to the attendance rosters for May and June 1997. Our review found that there were 111 instances where children were not signed-in on the parent/escort log sheets but were marked as "present" on the attendance rosters. According to the Director, this procedure is difficult to enforce since parents are sometimes in a hurry, or they simply forget to sign their children in and out. In addition, the Director stated that some children are dropped off at the Center in a school bus, and that the bus driver does not sign in all the children even though he/she is supposed to do so.

Recommendations
The Center should: 6. Enforce its policies and procedures requiring escorts to sign children in and out of the Center by having a staff person oversee this process. If the Center cannot enforce this procedure, then it should develop a new procedure that will account for all the children entering the Center.

7.

Agency Response: "The program states that a number of children arrive by bus and that the bus drivers do not sign in each child individually, which accounts for part of the problem. The other part of the problem is that parents or escorts do not always sign children in. The center states that it will take necessary steps to enforce this self-imposed policy. ACD escort guidelines state that "A written log shall be maintained, on a daily basis, indicating the time each child arrives at the day care program and the time each child is picked up from the day care program and by whom."

Questionable Use of "Private Fees"


According to Jerome Hardeman's contract with ACS, the Center is required to report all "private fees" (fees collected from 16

students who were not eligible for ACS funding) to ACS. The Center is supposed to remit the funds to ACS if requested, or use them to pay for activities and purchases not covered by ACS. Our review indicated that during fiscal year 1997 the Center collected $18,547 in "private fees", which it deposited into its Sponsoring Board's bank account. We reviewed this account to ensure that the Board spent the "private fees" in accordance with its contract with ACS. Specifically, we reviewed 58 canceled checks--totaling $18,339--that the Board spent from this account during fiscal year 1997. We question $9,197 of the $18,339 in expenses paid from the board account. We found that the Board issued five checks totaling $685 payable to cash for expenses the Board claimed were related to the Center. However, the Board did not provide any supporting invoices from the vendors. Furthermore, we found that two of the five checks--totaling $185--were authorized and cashed by the Board's Chairman. We do not understand why the Board did not issue these checks directly to the vendors. It should be noted that the independent CPA's report for fiscal year 1997 also cited Jerome Hardeman for issuing checks payable to "cash". In their report, the CPA firm advised the Center against making checks payable to "cash". Specifically, the CPA report stated: "We noted in the sponsor's account that some disbursements were made payable to 'Cash' and were charged to various expenditures. . . . all disbursements should be made to the vendor and not to issue checks payable to 'Cash'." As stated earlier, we found that the Board issued five additional checks--totaling $2,583--to its Chairman for his labor and supplies for repair work he performed at the Center. For example, on July 2, 1996, the Board issued a check for $550 to its Chairman for the following reasons: $74.83 for reimbursement for supplies; $25.17 for spray paint for the fence; $150 for labor performed by an unknown individual; and $300 payment for labor performed by the Chairman. However, the Board did not provide us with any supporting documentation that the Chairman actually purchased the supplies for the Center, or that he performed the services for the Center. To complicate matters, the Chairman purchased some of these items with 17

his own personal credit card. In addition, we do not understand why the Board paid $71.89 in sales tax on the purchases of supplies since the Center is a tax exempt organization. Finally, we found questionable payments to vendors totaling $5,929. Specifically, we found ten payments--totaling $1,964-- for which the Board did not have any supporting documentation. Without supporting documentation we could not determine whether these payments were for expenditures related to the operations of the Center. For the remaining questionable payments--totaling $3,965-we question how these payments benefitted the children of the Center. Our review indicated that these payments were for items such as catering for a Board member's funeral services, a Christmas bonus for the Director of the Center, and other expenses not related to enhancing programs for the children at the Center. After the Exit Conference, Jerome Hardeman Day Care Center provided us with documentation that was not provided to us during the course of the audit. These documents only accounted for $473 of the $1,964 in questionable payments. The Center was unable to provide adequate documentation for the remaining $1,491. Therefore, we still question whether these payments were for expenditures related to the operations of the Center.

Recommendation
The Board should: 8. Ensure that it spends the "private fees" in accordance with its contract with ACS. In addition, it should maintain adequate supporting documentation indicating how it spent the "private fees" to benefit the Center.

"The program submitted an explanation of Agency Response: the reasons for some of these expenses. ACD's policy is that, since ACD funding covers only the bare necessities, private fees should be used for program enhancements such as trips, additional educational or play equipment, etc. The center must adhere to acceptable accounting practices and maintain records of private fees collected and expended. We will follow up with the center to verify this policy is adhered to."

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Other Issue The Center Paid Higher Annual Audit Fees Compared to Other ACS-Funded Day Care Centers
We question the Center's annual audit fees since we found that the Center spent between 31 and 53 percent more than other ACSfunded day care centers previously audited by the Comptroller's Office. Specifically, we found the Center spent $4,221 for its fiscal year 1996 ACD audit. This amount was approximately $1,300 more than the amount paid by another ACS-funded day care center, which hired the same CPAs as Jerome Hardeman. This other center also enrolled more students than Jerome Hardeman. To determine why Jerome Hardeman paid a higher audit interviewed the Center's sponsoring board's chairperson and who conducted the audit. They stated that the audit fee result of a prior agreement, which contained a clause that would increase by 5 percent each year. fee, we the CPA was the the fee

We do not understand why the Center retains this CPA firm and why it pays higher audit fees while other centers are paying much less for the same services.

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Recommendation
9. The Center should review and renegotiate its agreement with its CPA firm to ensure that the Center's audit fees are comparable to the fees paid by other ACS-funded day care centers.

"The program states that it will be more Agency Response: careful about this in the future. The program should obtain three bids before engaging an audit firm to undertake the annual audit. ACD audit guidelines do not address the issue of the audit fees. Programs are expected to stay within the budget line for audit fees in their annual budget. The current budgeted amounts were determined by HRA in 1990 plus one five percent increase."

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