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Los Angeles Unified School District Office of the Inspector General Auditing Services Internal Audit Unit Audit Report PUC Lakeview Charter Academy OA 15-529 April 23, 2015 Los Angeles Unified School District Richard A. Viadovie, Ed. D., President Office of the Inspector General ——— Dr. George J. McKenna II Ménica Ratliff ‘Steve Zimmer Monbers of the Board Ramon C. Cortines Superintendent of Schools Kenneth Bramlett, MPA, CIG April 23, 2015 Inspector General Jacqueline Elliot, Ed. D. Ref Rodriguez, Ed. D. Chief Executive Officers Partnerships to Uplift Communities 425 San Fernando Boulevard Burbank, CA 91504 Re: Audit Report of PUC Lakeview Charter Academy Audit Dear Dr. Elliot and Dr. Rodriguez: This is our report on the audit of PUC Lakeview Charter Academy. These are the report’s key sections: © The Executive Summary describes the objective and scope of the audit and provides a summary of what we audited and found. © The Findings and Recommendations section describes in detail the conditions we found. It also presents our recommendations and your comments. © Annex A contains your verbatim response to our recommendations. Annex B lists others receiving the copies of this report. Annex C lists members of the audit team. We appreciate the courtesies and cooperation extended to us during the audit. Sincerely, (pe Zs Alfred. ‘Deputy Inspector General, Internal Audit Inspector General 333 South Beaudry Avenue, 12° Floor, Los Angeles, California 90017 ‘Telephone: (213) 241-7700 "Fax: (213) 241-6826 About the Office of the Inspector General ‘The Office of the Inspector General reports directly to the Board of Education. We conduct independent audits, reviews and investigations of District operations, contracts and vendors in order to: Y Find ways to improve processes, programs, functions and activities ¥ Provide information that supports effective decision making Y Identify real or potential misuse of District resources Y Prevent and detect waste, fraud and abuse within the District Through our work, we strive to encourage a culture of accountability, transparency, collaboration and excellence and to assist the Board and the Superintendent in their efforts to provide a high quality education for the students and parents of the Los Angeles Unified School District. Why did the OIG do this audit? al Charter Schools are now an important part of the public education system in the areas served by the District. Audits of randomly selected charter schools are requested by the Charter Schools. Division to assist them in their oversight responsibilities over charter schools. The audit of selected charter schools is part of the O1G’s Annual Work Plan. What was the main objective? ‘The objective of this audit was to determine whether the PUC Lakeview Terrace Board of Trustees and the PUC Lakeview Charter Academy management were adhering to the conditions, standards and procedures outlined in the Charter Agreement of PUC Lakeview Charter Academy with the Los Angeles Unified School District (LAUSD or District). For this audit we reviewed the following areas: Governance Structure Employment Documentation Financial Audit, and Internal Controls ‘What District key strategies does this audit support? Y Provide a portfolio of high quality schools for youth, families and communities Y Operate an effective, efficient, and transparent organization in order to assure the public trust ‘What OIG goals does this audit support? Find ways to improve processes, programs, functions and activities Y Provide information that supports effective decision making “Areas requiring attention and what the District should do next are discussed briefly in the Executive Summary of this report. TABLE OF CONTENTS SSS Executive Summary . Findings and Recommendations ‘Area A— Compliance with Charter Agreement... ‘Area B ~ Internal Controls...... Appendices Appendix A - Summary of Questioned Costs. Annexes Annex A ~ Verbatim Comments... Annex B — Distribution Lis Annex C — Audit Team....... EXECUTIVE SUMMARY This report contains the results of our audit of Partnerships to Uplift Communities Lakeview Charter Academy (“Lakeview Charter Academy”). Lakeview Charter Academy opened its school operations in September, 2004 to offer a charter altemative to existing public middle schools serving the communities of the Northeast San Fernando Valley. The Board of Trustees of the Partnerships to Uplift Communities Lakeview Terrace (“PUC Lakeview Terrace”) conducts and directs the affairs of the school. The Lakeview Charter Academy operates at Valley Educational Complex together with two other Partnerships to Uplift Communities (PUC) Schools at 11465 Kagel Canyon Street, Lakeview Terrace, CA 91342. As of June 30, 2013, the PUC Lakeview Charter Academy had a population of 347 students. There are three nonprofit public benefit corporations that comprise the PUC Organization: © Partnerships to Uplift Communities Lakeview Terrace (PUC Lakeview Terrace) operates three District authorized charter schools in the Northeast San Fernando Valley. It also ‘operates the Partnerships to Uplift Communities National (“PUC National”, discussed further below) combined with the PUC Facilities LLC; a limited liability company formed {in 2008 with the sole purpose of acting as a holding company for real property of the PUC Lakeview Terrace. * Partnerships to Uplift Communities Los Angeles (PUC Los Angeles) operates six District ‘authorized charter schools in the geographic areas of Northeast Los Angeles, and © Partnerships to Uplift Communities Valley (PUC Valley) operates four District authorized charter schools in the communities of the Northeast San Femando Valley. ‘The Partnerships to Uplift Communities (“PUC National”) is a non-profit charter school management organization that operates a growing network of small, public charter schools called the “PUC Schools”. The mission of PUC National is to develop and manage high quality charter schools in densely populated urban communities with overcrowded and low achieving schools designed to significantly increase college entrance and graduation rates for underserved students in Los Angeles and the San Femando Valley.? As of June 30, 2013, the PUC National had developed and managed thirteen charter schools authorized by the Los Angeles Unified Schoo! District (“LAUSD” or “District”. ‘The organization chart below shows the composition of the Partnerships to Uplift Communities Organization as of June 30, 2013. * partnerships to Uplift Communities Independent Auditoe's Report on Conslidsted Financial Statements for the FY ended June 30, 2013; Note to the Financial Statements * purmerships to Uplift Communities (PUC) website: tp:Jivw.pueschools.org; Home tab, Downloaded on 05/08/2014. 1 Partnerships to Uplift Communities ‘Organizational Structure” "AS of June 30, 2013 corer aoe) =| | aaa] age mamemes | [Pea] | eee eee] Sao] | Toaeeme ay ood Scholars COALS) | PUC Home Offce/HUC Natioria | Nincesies PUC Facies, LLG) [Lakeview Charter High Sahoo] wens) Exoal Charter Acadamy (ECA Tilapia Gharer School (GS) “Source: Dat gure ftom FY 2013 Audited Consolidated Pnancil Staiemens of Parinersips to Uplift Commaniter ‘The three entities shaded in the graph above were included in the scope of the audit work described inthis report even though the original scope of the audit was intended to focus on the activites of PUC Lakeview Charter Academy and PUC Lakeview Terrace. ‘This audit was part of the Annual Work Plan of the Office of the Inspector General and is intended to support the Charter Schools Division in monitoring the operational and financial aspects of District authorized charter schools. Objective Our audit objective was to determine whether the PUC Lakeview Terrace Board of Trustees and the PUC Lakeview Charter Academy management were adhering to the conditions, standards and procedures outlined in its Charter Agreement with the Los Angeles Unified Schoo! District (LAUSD or District). For this audit, we reviewed the following areas: Governance Structure Employment Documentation Financial Audits, and Internal Controls Summary of Key Audit Findings Areas Requiring Attention: Our audit found that the PUC Lakeview Terrace Board of Trustees and Lakeview Charter Academy management, in coordination with the PUC National management, needed to improve its compliance with the selected provisions, standards and procedures outlined in its Charter 2 Agreement, and make enhancements to the system of intemal controls and financial oversight responsibilities. Following is a list of some of the significant conditions we noted during the audit: ‘The Lakeview Charter Academy did not prepare and maintain documentation to show that itheld regular monthly meetings of its School Advisory Council. ‘The Lakeview Charter Academy did not maintain critical documentation demonstrating that certain employment procedures took place for all employees as required by the California Education Code and the Charter Agreement. Furthermore, the Lakeview Charter Academy needed to ensure that it maintained documentation that shows that all of its employees received required Child Abuse and Neglect Reporting, to provide proof of completion of the training, ‘Numerous fiscal oversight deficiencies were noted. For example, (a) five out of the nine consolidated annual independent financial audit reports of the PUC Organization were not submitted to the District and other governmental agencies by the due date, (b) some of the expenditure transactions tested were not supported by adequate documentation, (c) inadequate controls over the bank reconciliation function, and (d) proper segregation of duties was not established over various accounting functions. The Lakeview Charter Academy repeatedly failed to meet the minimum unrestricted reserves required by the Charter Agreement and the California Code of Regulations for the nine consecutive years since the Lakeview Charter Academy started its school operations. ‘The intemal controls included in the General Accounting Policies and Procedures Manual were either not properly designed or fully implemented, For example: + No clear division of responsibilities between the employees of Lakeview Charter ‘Academy and PUC National was described with regard to the areas of processing, reviewing, reconciling, authorizing and approving of financial transactions. + There was no written policy on budget administration and fund reserve. + There was inadequate segregation of duties at the school site. ‘There were questions about how diligently the PUC Lakeview Terrace Board and the PUC National monitored the budgetary problems of Lakeview Charter Academy. This observation is based on the fact that for nine straight years of school operations, the Lakeview Charter Academy had poor financial results and was fiscally insolvent. Conclusion: Our audit found that the Lakeview Charter Academy was not in compliance with some of the terms and conditions of its charter agreement. For example, our audit noted ‘weaknesses in the retention of certain governance documentation, employment documentation, financial management practices and internal controls. The PUC Lakeview Terrace Board of Trustees is encouraged to thoughtfully and carefully consider the information in this report in the interest of increasing its awareness of the terms and conditions that the school must abide by, and to adequately address the issues identified in this report. 3 In the course of discussing the findings and recommendations ofthis audit with the PUC Lakeview ‘Terrace Board of Trustees and school management, it was represented to us that corrective actions on our recommendations have been initiated. Potential Impact The conditions described above, along with their underlying causes have the effect of creating an environment where the potential for errors, improprieties or other undesirable outcomes occurring is increased. It also creates an environment where the weak financial position of the school may continue into the foreseeable future without a satisfactory resolution of the situation. ‘Summary of Key Recommendations We provided the PUC Lakeview Terrace Board of Trustees with 14 recommendations to ensure compliance with the Charter Agreement, the California Education Code and other provisions of the laws, regulations and statutes, and to further enhance the current intemal control system. A complete description of these recommendations is included in the body of the report. Some of the more significant recommendations we made included the following: © Direct the Chief Executive Officer, in coordination of the PUC-Lakeview Human Resources Department and the Principal to: © Provide training to all school employees on child abuse laws and reporting procedures, ‘The proof of such training should be retained by the school and placed in the employee files. If a different policy is adopted with regard to this area, this policy should be formally documented and evidence of its approval by the PUC Lakeview Board of Trustees must be maintained, © Ensure that documentation is retained to demonstrate that employee processes required by the California Education Code and the Charter Agreement for all ‘employees were performed. © Direct the PUC National Chief Executive Officers and the PUC National Chief Financial Officer, to take the needed actions to bring the Lakeview Charter Academy into a non- deficit position in the near term. These needed actions should include the development of a realistic action plan that should correct the school’s current fund deficit position in the near term, The plan should include a workable budget for PUC Lakeview Charter Academy for the next three years that guides the school towards the attainment and maintenance of required fund reserve levels and financial stability. Instruct the PUC National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer, to improve the General Accounting Policies and Procedures Manual to ensure that the design, implementation, and operating effectiveness of the ‘manual are updated to include (i) a clear description of roles and responsibilities. (ii) a policy on budget administration and fund reserve, (iii) monitoring of the accounting tasks by the Office Manager. ‘© Conduct specific focused oversight of the Lakeview Charter Academy through the review, discussion, and analysis of the monthly, quarterly, and annual financial reports of Lakeview Charter Academy prepared by the PUC National (i.e. Bank Reconciliations, Budget and Cash Flow Projections and Attendance Reports) in order to assess and evaluate Lakeview Charter Academy's existing fiseal condition separate and apart from other PUC entities. © Coordinate with PUC National to formulate a workable action plan to address and resolve the fiscal insolvency of Lakeview Charter Academy within a reasonable period of time, and to reduce the likelihood that Lakeview Charter Academy will experience similar financial difficulties in the future. * Instruct the PUC-Lakeview Charter Academy principal to coordinate with the PUC ‘National Chief Executive Officers and PUC National Chief Financial Officer to ensure that all policies and procedures related to the proper support and approval of PUC Lakeview Charter Academy expenditures \ disbursements are followed on a consistent basis. Charter School Comment: The PUC Lakeview Charter Academy agreed with 12 recommendations and partially agreed with two of our recommendations and stated that it has already taken steps or will take steps to address our recommendations. Inspector General Response: ‘The school provided a lengthy response to the audit and disagreed with our assessment about the severity of certain conditions discussed in the audit report. This was especially the case with regard to observations about the school’s financial condition. It is important to disclose that additional efforts, beyond what is typical, were needed by the OIG in order to secure a final and complete response from the school to the audit findings, conclusions and recommendations. We wish to state that the OIG fairly considered any and all information that the school presented to us, and that the findings, conclusions and recommendations contained in this report are the result of extensive, diligent audit efforts, and ‘based upon the conditions we observed at the school at the time of our audit. At the conclusion of this audit engagement, school management generally expressed a willingness to take the corrective actions on the recommendations in this report, and represented that action had already been taken for certain recommendations. Scope & Methodology ‘We conducted this audit in accordance with Generally Accepted Government Auditing Standards. ‘Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The audit covered the activities for the period from July 1, 2011 through June 30, 2013. In order to address the audit objectives, we performed certain 5 procedures, which included, but were not limited to the following: * ° Reviewed applicable laws and regulations pertaining to charter school operations. Reviewed and examined records to verify compliance with the provisions of the Lakeview Charter Academy's Charter Agreement with the District. Performed walkthroughs of each audit area with key personnel of Lakeview Charter ‘Academy and PUC National to obtain an understanding of the current fiscal and financial processes of the Charter School. Reviewed the existing accounting policies and procedures to assess the design and operational effectiveness of intemal controls. Examined general ledger transactions, components of the assets and liabilities, audited financial statements, and other related records and reports. Tested statistically selected samples of revenue and expenditure transactions, Assessed the adequacy of the Charter School’s governance structure. ° ° Reviewed the employment documentation for compliance with the Charter Agreements and applicable laws. Assessed the sufficiency of the available fund reserves. During the course of our audit, we also interviewed selected personnel of the Lakeview Charter ‘Academy and the PUC National with responsi ies related to our audit objectives. We performed the majority of the audit between August 2013 and July 2014 with additional verification procedures performed between February and March, 2015. — FINDING AND RECOMMENDATIONS, AREA A: Compliance with Charter Agreement For the Board of Trustees, PUC Lakeview Terrace BACKGROUND PUC Lakeview Charter Academy (Lakeview Charter Academy) Lakeview Charter Academy is an independent charter school governed by the Board of Trustees of PUC Lakeview Terrace, a non-profit public benefit corporation that operates three charter schools authorized by the District. Lakeview Charter Academy opened its school operations in September, 2004 with a mission to increase academic and personal achievement among pupils who reside in the Northeast San Femando Valley. The Lakeview Charter Academy is housed at the PUC Valley Educational Complex together with two other PUC Schools at 11465 Kagel Canyon Street, Lakeview Terrace, CA 91342. PUC Lakeview Terrace Board of Trustees ‘The PUC-Lakeview Terrace Board consists of a maximum of nine (9) regular members plus one seat for the sponsoring district. The Board is responsible for establishing broad policies that affect all PUC-Lakeview schools. The Board and its Executive Committee sets policies related to staff hhiring, benefits and compensation, conditions for student suspension or expulsion, controversial issues that affect more than one school site and teacher, and site principal and staff compensation criteria. Members of the Board, may also participate in raising funds, investing funds and increasing public awareness of PUC Lakeview Terrace’s work. Partners Office) ‘The PUC Organization is made up of three nonprofit public benefit corporations: ‘© Partnerships to Uplift Communities Lakeview Terrace (PUC Lakeview Terrace), which operates three District authorized charter schools in the Northeast San Fernando Valley. It also operates the PUC National, combined with the PUC Facilities LLC; a limited liability company formed in 2008 with the sole purpose being to act as a holding company for real property of the PUC Lakeview Terrace, (aka PUC Organi PUC National or PUC Home Partnerships to Uplift Communities Los Angeles (PUC Los Angeles), which operates six District authorized charter schools in the geographic areas of Northeast Los Angeles, and ‘Partnerships to Uplift Communities Valley (PUC Valley) which operates four District authorized charter schools in the communities of the Northeast San Fernando Valley. ‘The mission of PUC is to develop and manage high quality charter schools in densely populated urban communities with overcrowded and low achieving schools. As of June 30, 2013, the PUC had developed and managed thirteen District authorized charter schools. Exhibit 1 below shows the three nonpublic benefit corporations and its thirteen public charter schools and affiliate that make up the PUC Organization. Exhibit. Partnerships to Uplift Communities (Organizational Structure* ‘As of June 30, 2013, (GA Academy for Liberal Studies Lakeviow Charier Academy “Triumph Charter Academy rarer (CALSCAS) wen), (rea) ‘CAAcademy fibers Suis |__| [Communty Charter isd Sobol] | [Nueva Esparza Crater Early Cotloge HS OALSEGHS) | ‘cows ‘Academy (NECA) Santa Ross Cater Academy Conmaniy Gharer Ea Calege | |_[Tismeh Chao High Scho! | ocr) 6 (ooEcHs) ens) ay catego Actor teadoe) fst hae ah So San Scholae (CALS lore OPC Nato ucHs) : (includes PUC Facilities, LLC) Excel Charter Academy (ECA) agro Ghar Scho! (HES) ‘Source: Daa gutered from FY 2013 Audited Comolidto Finacial Ststoment of Parership o Uplit Communities "Tha vee enlles shaded The graph above were Tcuded The scope of he cit work dscibe in ts report even though the original scope of the audit was intended to focus on the activities of PUC Lakeview Charter Academy and PUC Lakeview Terrace. DISCUSSION This section discusses the following areas: Governance Structure Employment Documentation Financial Audit Reports Fund Reserves Governance Structure The Lakeview Charter Academy did not prepare and maintain documentation to show that it held regular monthly meetings of its School Advisory Council. The Charter Agreement, Section 4.2: Representation of Interested Parties, states that “The organizational structure of the governance of LCA [Lakeview Charter Academy] is designed in a manner that will ensure that there will be active and effective representation of interested parties, including but not limited to parents (guardians), This is accomplished in a number of ways that include the formation of School Advisory Councils at each of the PUC-Lakeview school sites”.” Section 4.2.1 states “The School Advisory Council: i, Consists of parents, students, community members, teachers and school site administrators. Each school’s council will participate in developing recommendations for school policies and share in efforts to engage the support of the community. The council will make recommendations and decisions about issues related to the school and participate in reviewing parental and community concerns. iv. The school site administrator will be responsible for communicating all Council policy meeting notes and policy recommendations to the PUC-Lakeview Board of Trustees. v. The Advisory Councils meet at least once per month and reports from the meetings and policy recommendations from the Site Advisory Councils are forwarded to the PUC- Lakeview Board of Trustees. vi, Schoo! Advisory Council members are encouraged to attend the Board meetings.” ‘The Regional Director (RD) will have primary responsibility for the strategic development, implementation, and management of all aspects of school performance and operations for the network of schools in PUC Lakeview Terrace. The Principal will be responsible for the {instructional program of the school, and ensure that all measurable pupil outcomes are met. Each year, the principal, PUC-Lakeview Regional Director and Co-CEO’s will be responsible for preparing and presenting an annual report to the Board of Trustees which will detail the school’s ‘overall progress toward meeting the measurable pupil outcomes.’ Test Work Performed ‘We performed the following procedures: (1) Assessed the Board’s composition and qualifications in terms of the Charter Agreement, (2) Reviewed PUC Lakeview articles of incorporation and bylaws, (3) Evaluated the organization’s structure, (4) Reviewed the Minutes of the Meeting of the Board of Trustees, (5) Assessed the operating principles, values, and philosophy of the school, (6) Evaluated the Charter’s requirements for School Advisory Council and (7) Reviewed the minutes of the various meetings. * PUC Lakeview Charter Academy Approved Charter Agreement dated 0601/2009; Element 4-Governance, Section 4.2 Representation of intrested Party; page’ * Lakeview Charter Agreement, pige 61 In addition to the above steps, we requested a list of School Advisory Council members and the agendas and minutes of the monthly meetings held in FY 2012 and FY 2013. ‘The purpose of this request was to corroborate the charter school management's representation that meetings of the SAC were held monthly during the audit period as required by the Charter Agreement. ‘The Lakeview Charter Academy provided various minutes of the meetings and agendas such as Board of Trustees minutes of the meeting, family nights agenda, enrollment meetings, staff ‘meetings, and-the School Advisory Council minutes of the meetings. Based upon our review of the documentation that was provided to us, the following observations were made: ‘© The Advisory Council was adequately represented by parents, students, teachers and school administrators, as required by the charter agreement. ‘There was no documentation to show that meetings of the School Advisory Council were held monthly. Documentation could only be provided to show that meetings of the Advisory Council were convened only once per school year during the audit period being reviewed; January 12, 2012 for FY 2012 and April 11, 2013 for FY 2013; rather than “at least once per month”, as stipulated in the charter agreement. * Our review of Board of Trustee meeting minutes did not disclose any instances where recommendations or concems of the School Advisory Council were discussed with the Board of Trustees. According to the charter school management, “the School Advisory Council is not a board but rather, an advisory body, and so there was an informality associated with some of their meetings.” However, the charter agreement of the schoo! is explicit about the requirement for there to be a monthly meeting of the School Advisory Council and without the retention of documentation to show that this was done, then the occurrence of these meetings cannot be independently substantiated and verbal representation by charter school officials that such meetings took place are insufficient evidence for the purposes of our audit. ‘We discuss the actions needed to correct this condition in Recommendation A-1. Employment Documentation The Lakeview Charter Academy did not maintain critical documentation demonstrating that certain employment procedures took place for all employees as required by the Califomia Education Code and the Charter Agreement. Furthermore, the Lakeview Charter Academy needed to ensure that it maintained documentation that shows that all ofits employees received required Child Abuse and Neglect Reporting, to provide proof of completion of the training. ‘The Charter Agreement states that, “The PUC-Lakeview Terrace Human Resources Department and the Principal of Lakeview Charter Academy will recruit potential employees for the Lakeview Charter Academy. A personnel committee will be formed each year and will have the responsibility of interviewing and making a recommendation to the Principal and Executive Director on hiring employees for any vacant position, The Chief Executive Officer is ultimately 10 responsible for hiring employees on behalf of the school’s Board of Trustees. The Charter Agreement also specifies the employment and other hiring documents required for each employee, such as: i) Criminal background check; as required by Education Code Section 44237. ii) Up-to-date Mantoux Tuberculosis (TB) test result; as described in Education Code Section 49406. i) Documents establishing legal employment status. iv) At will contracts renewable based on demonstration of meeting or exceeding the requirements of individual contracts and adhering to policies, procedures, and expectations outlined in the employee handbook.”> Employees will be evaluated utilizing a process and system developed by a Personnel Evaluation Committee. Documentation of the system will become part of the PUC Schools Team Member Policy Manual (aka “Employee Handbook”). The Employee Handbook sets forth the terms and conditions of employment for all employees of PUC. In the event of any employee grievance, the Labeviow Charter Academy will adhere to the policy and procedures enumerated in the Employee Handbook. Lakeview Charter Academy school faculty and staff are mandated child abuse reporters under the California Penal Code 11164. It is its policy that all employees shall comply with California state Jaw reporting procedures. Unless different procedures are developed and approved by the PUC Lakeview Terrace Board, the Lakeview Charter Academy employees will follow the protocol and procedures outlined in the LAUSD Bulletin No. BUL-1347 entitled Child Abuse and Neglect Reporting Requirements.’ The LAUSD Bulletin ensures that all employees have access to the information needed to fulfill their obligation under the law. The bulletin also provides the information and clarification of guidelines for reporting suspected child abuse and neglect, as required by law. A copy of the employee certification acknowledging the legal requirements and policy concerning Child Abuse Reporting will be retained by the school or office administrator and will be placed in the employee file. Test Work Performed We obtained the list of Lakeview Charter Academy employees for the FY 2013 and randomly selected 20 (53%) out of the 38 listed employees for review. We examined the employee files to determine whether the folders contained selected required employment documentation. In addition, for purposes of testing whether all employees were provided with child abuse and neglect reporting training, we not only reviewed employee files but also reviewed the sign-in sheets of all employees that attended child abuse and neglect reporting training in FY 2013. Table 1 below summarizes the results of our examination: SPUC Lakeview Charter Academy Approved Charter Agreement; dated 06/0/2009; Element 5— Employee Qualifications, Section 5 Calls Abuse Reporng Procedures; page 71 Bid page 75, "LAUSD Policy Bulletin No, BUL-1347 Child Abuse and Neglest Reporting Requirement; dated 11/157204isued by Office of (General Counsel page 25. uW Table 1 PUC Lakeview Charter Academy Missing Employment Documentation Sample Size: 20 Employee Files Number of Gof ‘Type of Document Beoeptions oo Up-to-date TB Test 3* 15% Employment Contract/A greement 6 30% Confirmation of Receipt of Employee Handbook 9 45% Performance Evaluation Form 13 65% Evidence of Child Abuse and Neglect Reporting a ae Training *TB tests for these 3 employees were done 4 years ago. With regard to the documentation provided to us related to the Child Abuse and Neglect Reporting Training, we noted that the sign-in sheet did not specifically indicate the exact date when the training was provided or include an attached agenda that indicated when the training was provided. ‘The Charter Agreement specifies that the PUC-Lakeview Terrace Human Resources Department is responsible for monitoring and maintaining up-to-date employee files. During the course of the audit, these deficiencies were brought to the attention of the PUC-Lakeview Terrace Human Resources Department who committed to take immediate corrective action. In addition, as previously stated, the Lakeview Charter Academy school faculty and staff are mandated child abuse reporters under the California Penal Code 11164. Unless different procedures are developed and approved by the PUC Lakeview Terrace Board, the Lakeview Charter Academy employees will follow the protocol and procedures outlined in the LAUSD Bulletin No. BUL-1347 entitled Child Abuse and Neglect Reporting Requirements. While Lakeview management maintained that they were following different procedures in this area, there ‘was no documentation to show that these different procedures had been formally developed and approved by the PUC Lakeview Terrace Board. ‘These conditions occurred because, (a) the PUC-Lakeview Human Resources Department overlooked the requirement to obtain necessary employment documentation from new hires and the current employees, (b) a lack of controls over the employee files, and (c) a lack of diligence in requiring the employees to submit proof of completion of the mandated training on child abuse reporting. As a result, there is an increased risk of non-compliance or human resource related issues occurring if employee files are incomplete and missing required employee related information, and this information is not retained in any other manner. ‘We discuss the actions needed to correct these conditions in Recommendation A-2. Financial Audit Reports Five of nine annual independent financial audit reports of Lakeview Charter Academy were not submitted to the District and other governmental agencies by the prescribed due date, ‘The Charter Agreement of Lakeview Charter Academy states, “The annual audit will be completed no later than four months after the close of the fiscal year (June 30). As required by AB1994, PUC LCA [Lakeview Charter Academy] will send a copy of its annual audited financial report to the Chief Financial Officer of the Los Angeles Unified School District, LA County and the California Department of Education by December 15 of each year”.® The financial audit is required to report on the fiscal soundness and propriety of an independent, publicly fiunded charter school. California Education Code Section 47605 (m) requires charter schools to submit a copy of their annual audit to the charter authorizing entity, the county office of education, the State Controller, and the California Department of Education by December 15 of each year. ‘The PUC Lakeview Terrace and PUC National entered into a service agreement wherein the PUC National will provide and perform the school administrative services for PUC Lakeview Terrace and its public charter schools in connection with the governance, financial administration and reporting, and similar obligations of PUC Lakeview Terrace. ‘The preparation, filing, and updating of all compliance reports required of charter schools under California law or other applicable law, including, but not limited to, audit reports, reports of financial transactions, “Roster” filings, and Secretary of State notices, is part of the governance responsibilities of PUC National pursuant to the service agreement.” “ All administrative services provided by the PUC National are subject to the control, supervision, direction, and policies of PUC National and the PUC Lakeview Terrace Board. As compensation for the school administrative services provided, the PUC Lakeview Terrace shall pay an amount equal to 7% of PUC Lakeview Terrace unrestricted operating revenue to PUC National.” The audited consolidated financial statements of PUC Organization is comprised of the consolidated statement of financial position, and the related consolidated statements of activities and cash flows, and the related notes to the financial statements of the three nonprofit organizations, namely PUC Los Angeles and its public charter schools, PUC Valley and its public charter schools, and PUC Lakeview Terrace and its public charter schools. As such, the audited financial statement of the Lakeview Charter Academy was contained within the audited consolidated financial statements of PUC Organization. ‘The Charter Schools Accounting Unit of the Revenue Accounting Branch of Accounting and Disbursement Division of the District receives the financial reports from the charter schools, coordinates the consolidation of First and Second Interim reports and un-audited actuals for submission to LACOE and reviews audited financial statements submitted by the charter schools " PUC Lakeview Charter Academy Approved Charter Agreement dated 0610/2009; Element 9 Financial Audit; page 88. ° School Administrative Services Agreement between PUC Lakeview Terrace and PUC National, Section 2) Governance Responsibilities *°Tpid, Section 5(b) ~Term of Agreement- Compensation. 13 for audit adjustments to amend the succeeding year’s beginning fund balance and maintains an efficient system of reporting in compliance with the California School Accounting Manual and an efficient communication system with the charter schools and other offices." Test Work Performed ‘We reviewed the annual consolidated financial audit reports of PUC for FY 2011 and FY 2012 to analyze the timeliness of the submission of the required financial reports to the District and other appropriate governmental agencies. We noted that for both years, the audited financial statements were not submitted on time. As such, we further analyzed the 9-year historical audited financial reports of PUC from the period when the Lakeview Charter Academy started its school operations in FY 2005 up to the most current FY 2013 to establish the trend of its financial reporting practices. ‘We performed the following procedures to validate the timeliness of submission of the audited financial reports for the period covered FY 2005 to FY 2013, as follows: + Verified the signed copies of each Independent Auditor's Reports to determine when the auditing firm signed the audited financial statements. Based on our verification, FYs 2005, 2011 and 2012 were signed after the December 15 deadlines. + Requested the Charter Schools Accounting Unit to provide the dates when the Partnerships to Uplift Communities submitted its audited financial statements to the District. Based on the electronic correspondence received from the Unit, the reports for FYs 2005, 2006, 2007, 2011, and 2012 were submitted after the December 15 deadlines. + Sent an electronic inquiry with the State Controller’s Office requesting for information when the Partnerships to Uplift Communities submitted their audited financial reports. Based on the electronic correspondence received from the Office, the reports for FYs 2011 and 2012 were submitted after the December 15 deadlines. Based on our evaluation, we noted that five out of the nine PUC consolidated financial reports ‘were submitted to the District and to other governmental agencies after the December 15 mandated deadline, as shown in Table 2 below. "LAUSD website; Accounting and Disbursement Division, Revenue Accounting Branch, Charter Schools Accounting Unit; downloaded on 03/06/2015. 14 Table2 PUC Organization Analysis of Submission of Annual Consolidated Financial Report From FY 2005 to FY 2013 Report DiteDate 2004-2005 12/15/2005, 2005-2006 | 12/18/2006 Yes 2006-2007 12/15/2007 ‘YES 2007-2008 | 12/35/2008 Yes: 2008-2009 | 12/15/2008 YES: 2009-2010 12/15/2010 YES zoso-2041 | 22/15/2014 NO) No | 2011-2012 12/15/2012 NO NO 2012-2013 12/15/2013 YES Yes "According tothe State Controller's Office, there was na record prior to FY 2010 sie was already archived. During the course of the audit, the Chief Financial Officer informed the auditor that in the prior ‘years, there was a high turnover of the accounting staff. The PUC National was constantly hiring new accounting staff to speed up the needed financial information needed by the external auditors, in an effort to improve the timeliness of the reports. We noted that the most current audited financial statements for FY 2013 was submitted on time. ‘These conditions occurred because, (a) according to management, the financial records were incomplete, unreconciled and were not in good order prior to the audit engagement due to high staff turnover, and (b) the PUC Lakeview Terrace and PUC National management did not make the submission of the audited financial statements a sufficiently high priority during certain years. Asa result, critical financial information was not made available to all key stakeholders in a timely manner, ‘We discuss the actions needed to correct this condition in Recommendation A-3, Fund Reserves ‘The Lakeview Charter Academy has repeatedly failed to meet the minimum unrestricted reserves required by the Charter Agreement and the California Code of Regulations. This has been the case for the nine consecutive years since the Lakeview Charter Academy started its school operations. ‘The Charter Agreement states, “LCA (Lakeview Charter Academy] will at all times maintain a funds balance (reserve) of its expenditures as required by section 15443, Title 5 of the California 15 Code of Regulations. Currently, the required reserve is 5% of total operational expenditures based ‘on the charter school’s ADA.” ‘The California Code of Regulations, Section 15450 states, “Available reserves for any of the budget year or two subsequent fiscal years are not less than the following percentages or amounts as applied to total expenditures and other financing uses: a) the greater of 5% or $55,000 for districts with 0-300 Average Daily Attendance (ADA); b) the greater of 4% or $55,000 for districts with 301-1,000 ADA.” ‘The Charter Schoo! Annual Performance Evaluation criteria indicate that an existing school shall hhave an ending cash reserve that exceeds 4% or more of prior audited expenses. Test Work Performed We reviewed the cash balances of Lakeview Charter Academy as reflected in the audited financial reports, and compared the balances with the required fund reserves. The analysis is shown in Table 3 below: Table 3 PUC Lakeview Charter Academy Analysis of Fund Reserve TS Be | len | niece | acta | telat _ Toa fporCb& | %afReare |. Find Funds. | Fund Resenle ‘incl Year | Expenditures! | Dataquen) | (basedon | Reverie i 404) iasie. 2004-2005 | $1,307,363 | 127 3% $65,368 | 561,640 Sars) 2005-2006 $970,513 12 me | $55,000 $0 (655.000) 20062007 | _S4219,699| 116 % $60,955 7251 (653.748) 2007-2008 |__ $1,145,537 | __120 % ss7a67 | _s20,826 (66.441) 2008-2009 | _sigoLaaa | 225 % seson | __ $43,506 Guo | 20092010 | $2,791,862 | ait *% S116 80 (111.674) 20201 | __ 92379409 | __313 % $108,177 30 (1037) 2oir2012 | 2,866,539 | __347 %% S114 662 $8,761 (105.901) 2012-2013 | ___ $3,028,508 | _345 % si] ‘80 612140) "LCA Charter Academy Charter Agreement; dated 61/2009; page 81 ® California Code of Regulations, Title 5, Division 1, Chapter 14, Subchapter 8, Article 1, Section 15850. "California School Accounting Manval (CSAM), Procedure 551-1 -Expenditures and Other Financial Uses; Re Jy 2008 “When the resouroes of fund decrease, the decrease isthe result of expenditures, expenses, or othr financing uses, including interfund transfers. Expenditures are decreases in net spendable resources, They include expenses, payments toward the retement of long ‘erm debt, and capital outlay." 16 The fund balance is an important indicator of the charter school’s financial position, In addition, maintaining reserves is considered a prudent management practice. Evidently, for the nine straight years of the school operations, the Lakeview Charter Academy did not have adequate funds and ‘sometimes even zero funds in the bank. As such, it was difficult for Lakeview Charter Academy to establish and maintain the required unrestricted fund reserve. Furthermore, the most current audited financial report for FY 2013 showed that the cash deficit'* of Lakeview Charter Academy ‘has accumulated to $413,931. These conditions occurred because the PUC Lakeview Terrace Board, in our assessment did not give sufficient attention to maintain fund reserves at required levels for PUC Lakeview Charter Academy as a stand-alone entity. In addition, the PUC Lakeview Terrace Board and PUC National also did not formulate an appropriate corrective action plan that was workable to address, resolve, or otherwise improve the financial condition of the Lakeview Charter Academy within a reasonable period of time given the critical importance of financial stability. As of the end of FY 2013, the Lakeview Charter Academy was one of the PUC Schools that consistently had negative balances or net asset deficits. ‘Asa result, the school was still in a challenged financial position at the conclusion of our audit that leaves it ill prepared to deal with severe unexpected demands on its financial resources. ‘We discuss the actions needed to correct these conditions in Recommendations A-4 through A-6. "Partnerships to Uplift Communities, Independent Auditors’ Report on Consolidated Financial Statements For the Fiscal Year “Ended June 30, 2013, PUC Lakeview Terace-Statement of Finaclal Postion-Lakeview Charter Academy (LCA), p. 41. 7 FINDING AND RECOMMENDATIONS AREA Internal Controls For the Board of Trustees, PUC Lakeview Terrace BACKGROUND The United States General Accounting Office — Standards for Intemal Control in the Federal Government states that internal control is a process affected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved. ‘These objectives and related risks can be broadly classified into one or more of the following three categories: + Operations - Effectiveness and efficiency of operations + Reporting - Reliability of reporting for intemal and extemal use + Compliance - Compliance with applicable laws and regulations Internal control comprises the plans, methods, policies, and procedures used to fulfill the mission, strategic plan, goals, and objectives of the entity. Internal control serves as the first line of defense in safeguarding assets. In short, internal control helps managers achieve desired results through effective stewardship of public resources.'® ‘The first internal control standard that relates to control environment states that “Management and employees should establish and maintain an environment throughout the organization that sets a positive and supportive attitude toward intemal control and conscientious management. There are several key factors that affect the accomplishment of this goal. Management discloses all financial, budgetary, and programmatic information needed to fully understand the operations and financial condition of the agency”.!7 ‘The California Attomey General’s Guide for Charities, Chapter 5-Fiscal Management states “The goal in establishing internal controls over the fiscal management of a charity (aka non-profit public benefit corporation) is to prevent error, fraud, theft, or mismanagement. Good internal controls safeguard charitable assets and insure reliability of financial records. Items which make up an effective contro! system include budgets, segregation of duties, policy and procedures manuals, clear definition of, and adherence to, set procedures for management authority, and periodic review of the control system...”" “Standards for Internal Control inthe Federal Government, United States Goverament Accountability Office, September 2014, 5. Fr Goverment Accounailty Ofc, Intemal Contol Mangemest an Evaluation Tol, GAO-O1-1008 , August 201, page 15 The Califomia Atomney General's Guide fr Charities, 2005 Revision; 18 Control activities are the actions established through policies and procedures that help ensure that management's directives to mitigate the risks to the achievement of objectives are cartied out. Control activities are performed at all levels of the entity, at various stages within business processes, and over the technology environment. They may be preventative or detective in nature and may encompass a range of manual and automated activities such as authorizations and approvals, verifications, reconciliations, and business performance reviews. Segregation of duties is typically built into selection and development of control activities. Where segregation of duties is not practical, management selects and develops alternative control activities. " The fulfillment of fiduciary duties should be an area of constant focus for all board members of nonprofit organizations. Though there is no magic bullet that can ensure fulfillment of these duties, characteristics of an organization that demonstrate adherence and fulfillment of all of these duties include strategic planning, oversight and accountability among the board of directors, and the maintenance of strong, clear and consistent intemal policies. And highly effective organizations frequently discuss these duties and offer training regarding these duties at the board level.”” DISCUSSION ‘This section discusses the following four areas: Policies and Procedures Manual Financial Management Practices Expenditures/Disbursements Bank Reconeiliation Statements Policies and Procedures Manual ‘The internal controls included in the General Accounting Policies and Procedures Manual were either not properly designed or fully implemented. For example: * No clear division of responsibilities between the employees of Lakeview Charter ‘Academy and PUC National was included in the manual to identify the specific roles in the areas of processing, reviewing, reconciling, authorizing and approving of financial transactions. © There was no viitten policy on budget administration and fund reserve. # There was no segregation of duties atthe school site; the Office Manager at the school site was the sole owner of the accounting tasks, as specified in the school site Standard Operating Procedures (SOP’s). No other person was assigned to ensure the validity of ° Committee of Sponsoring Organizations’ (*COSO”) Intemal Control - Integrated Framework, May 2013 — Components of | Internal Control-Coatrol Environment Resoutee material fom The Law Project an organization that provides expert legal assistance to support community evelopment effort led by entrepreneurs and nonprofit organizations. Revieved 07/15/2014, Ship www. thelawprojec.org/201O/08/legal-alert-the-fiduciary-duiesof-fp-directors>, 19 accounting transactions. © No written plan for the periodic review and update of the accounting manual. Test Work Performed We obtained a copy of the "Partnerships to Uplift Communities General Accounting Policies and Procedures Manual", which included various School Site Standard Operating Procedures (SOPS).” The manual and the SOPs were designed to provide guidance to the PUC National accounting staff, as well as all the Lakeview Charter Academy school staff who were responsible for the processing of the financial transactions of the charter school. The SOPs showed the procedures related to the following fiscal areas at the school site: (i) Cash Receipts and Deposits, (ii) Purchasing, (ii) Credit Card Usage, (iv) Replenishing Petty Cash; and (v) Payroll. We reviewed the manual and the SOPs to determine whether the school's operational processes, personnel responsibilities, and execution and recording of transactions were adequately and sufficiently described and operating effectively. Based on our review, we noted the following deficiencies in the design, implementation and operating effectiveness of the written accounting policies and procedures described in the manual. i. The policy and procedures pertaining to the review and reconciliation of month-end and year-end financial records (i.e. bank reconciliation, balance sheet accounts, and joumal entries) were not diligently performed by the PUC National accounting staff in FY 2011 and FY 2012 resulting in the delay of the issuance of the audited financial statements for the said fiscal years. ii, The accounting manual did not fully indicate the division of roles and responsibilities between the employees of the accounting/finance department of Lakeview Charter ‘Academy and PUC National. ‘The list should have clearly identified the employees who have responsibilities for the processing, reviewing, reconciling, authorizing and approving offinancial transactions. We noted that the school site SOPs designated the Office ‘Manager of Lakeview Charter Academy as the sole person responsible for the financial processes at the school site. iii, The accounting manual did not specify the policies regarding budget administration such as. the approval of the annual budget by the PUC Lakeview Terrace Board, as well as any budget amendments, and the implementation and maintenance of an operating budget. We also noted that there was no written policy on maintenance of fund reserve. iv, There was no written plan or policy for the periodic review and update of the accounting policies and procedures manual. The last update was done in October 2008. Since then, the manual had not been reviewed for its applicability, appropriateness, and effectivencss despite some changes in the policies (je. increase in number of school sites, Cash Account Codes, name of bank accounts, et.) According to the Chief Financial Officer, the former Director of Finance did not initiate a review or updating of the accounting manual. During the course of the audit, the CFO conveyed to the 20 auditor that the PUC National has started reviewing the existing manual to update and bring about an improved written accounting policies and procedures manual ‘These conditions occurred because: i. There was no specific person or role in the PUC Organization to monitor and evaluate whether policies and procedures needed to be created or revised particularly when new systems are developed and implemented, or when organizational changes occur. ii, ‘The PUC Lakeview Terrace Board, (in coordination with the PUC National) was not diligent in providing periodic reviews of the policies and procedures manual to ensure that policies were still applicable, effective, and readily available to employees who may need it, iii, There was inadequate oversight and monitoring to ensure enforcement and compliance with the policies and procedures manual. As a result, there was an increased risk of errors and irregularities. We discuss the actions needed to correct these conditions in Recommendations B-1 and B-2. Review of Financial Management Practices There were questions about how diligently the PUC Lakeview Terrace Board and the PUC National monitored the budgetary problems of Lakeview Charter Academy. This observation is ‘based on the fact that for nine straight years of school operations, the Lakeview Charter Academy had poor financial results and was fiscally insolvent. There were clear indications that Lakeview Charter Academy implemented an unrealistic budgeting process and insufficient spending controls, that resulted in (i) a significant net assets deficit, (fi) low or zero cash balance, (iii) no fund reserve, and (iv) high level of liabilities. ‘The Charter Agreement states, “The Board is responsible for financially managing the school, including budget development and monitoring, establishing fiscal controls, and causing audits of the schoo!'s books and records to be made as required by law and as otherwise prudent”.** ‘A charter school is a public school that has been given freedom from state education regulation. In exchange, the school must be accountable for student achievement and fiscal solvency. A license to operate, a “charter school,” is granted by the Local School District, County Office of Education, or State Department of Education.” According to the National Association of Charter School Authorizers (NACSA) Principles and Standard of Quality Charter Schoo! Authorizing, the purpose of charter school authorizing is to improve student achievement. A quality authorizer engages in responsible oversight of charter 2 PUC Lakeview Charter Academy, Charter Petition; Section 4.1 ~ Governance, page 130, 7 Log Angeles Unified School Disvct, Charter Schools Division - Frequently Asked Questions-201 2 schools by ensuring that schools have both the autonomy to which they are entitled and the public accountability for which they are responsible.” An approved charter petition provides specific measures of accountability for the charter school, including multiple performance outcomes for student achievement, and sound fiscal, operational, and governance practices.”* ‘The California Attomey General’s Guide for Charities states, “Efficient and accurate fiscal management is very important to all nonprofit organizations. The directors are responsible for organizing and documenting the financial affairs of the organization. In choosing a method of fiscal management, the needs of various users of the accounting information must be considered. The goal in establishing internal controls over the fiscal management of a charity is to prevent error, fraud, theft, or mismanagement. Good internal controls safeguard charitable assets and insure reliability of financial records”.> Test Work Performed ‘We analyzed the 9-year historical audited financial statements of Lakeview Charter Academy from FY 2005 to FY 2013 in order to assess the Lakeview Charter Academy's past and current financial condition, its fiscal sustainability, and the appropriateness of fiscal management practices provided by the PUC Lakeview Terrace Board. We also considered other factors that included, but are not limited to, measuring the adequacy of managing cash, debt levels, sustainability of budget operations, trends in students’ enrollment, reasonableness of revenue and expenditure projections and assessing the response of management with regard to the external auditor’s findings and recommendations. Table 4 below shows the analysis of the Lakeview Charter Academy's financial condition for the period FY 2005 through FY 2013: ® NACSA Principles and Standard of Quality Charter School Authorizing 2012 edition > LAUSD ~ Policy for Charter School Authorizing, Februsry 2012, page 12 % California Attomey General's Guide for Charities; Chapter 5 ~ Fiscal Management, page 15 Innploagca.gowstesfali files/agweb/pdfchartiespublications/auide for charities df 22 Table 4 PUC Lakeview Charter Academy Analysis of Financial Condition* From FY 2005 to FY 2013 a a @ Net Aces Tout | Tot | Copal Asses | Linhtdes | Siruere @-0) 2ooa-zoos | 127 | $1,172,833 | s1szize2 | (sis) | sisgas7 | s34ss06 | Grassy) | soysto | 71248) 205-206 | i | smooss | sotp.ie2 | swam | somrsor | stouges | sions | so | (2144) 2006207 | 116 | siagous | sizease | sists) | soutres | sxanase | (2126 | s7asi_ | (196699) 2o0r-2008 | 120 | siasias7 | sirmzo1 | $59,056 | so74e19 | sosig0 | cisssmy | sans | Ga2e 2ovaz09 | 225 | $1,995,176 | si.si0s4 | se402 | ssoize | sosozi7 | 68sa% | siasos | (428750) 2oes-2010 | 311 | sasea.is | s2.812202 | «s26sem | ssigaoa | seria | easzeiy | so | S871) amo-201 | 313 | saarasis | s2504536 | soragm | seasiv | svossss | wren | so | G7sadH zoriaoa | _s47_| sagaseas | sagrssos | seam | susavs | sasszst | coonses | sa761 ° poz | 33 | sasseeos | s3.osrss9 | serge | sooo | sizss7e6 | canotsy | so | 418931) ™ Seuree: Tadepencent Aualtors' Reports on Consolidated Financtal Statements of Pavinerhies to Uplf Conmanities Based on our review of the audited financial statements and other accounting records; such as random samples of bank reconciliation reports and bank statements, budget reports, general ledger of transactions and journal entries, and the written accounting policies and procedures, we observed the following conditions : 1. The financial performance of Lakeview Charter Academy showed poor fiscal results for nine straight years of operation. The PUC Lakeview Terrace Board and PUC National did not provide adequate oversight over the fiscal issues of Lakeview Charter Academy, as evidenced by the conditions below: a 7 The going concern principle assumes that a company will continue to exist long enough to cary out its objectives and Si nt net assets deficit: ‘The insufficient level of assets or resources for nine straight years of operation should have raised a concem for the PUC Lakeview Terrace Board and the PUC National about the future existence of Lakeview Charter Academy based on the “going concer” perspective of Generally Accepted Accounting Principles. The absence of sufficient liquid assets available to finance its current operation means that the school was fiscally insolvent to pay its debts in a timely manner, and to meet its other financial responsibilities. ccommitmens and wil not iquidate in the foreseeable future, 23 b. Low or zero cash balances: according to the audited financial statements, PUC Lakeview Charter Academy had insufficient cash for nine straight years. This was the case despite growth in student enrollment. As of June 30, 2013, the Lakeview Charter Academy’s independent auditor’s report showed a cash deficit of $413,931. The cash deficit was an indication of weak financial position and poor fiscal management practices. ‘The practice of combining all revenues and disbursements from all PUC schools ito one main bank account that showed an overall positive balance allowed the PUC National to delay taking actions that would specifically address the financial problems of the PUC Lakeview Charter Academy. Accounting Policies and Procedures ‘The written accounting policies and procedures described a main bank account that is used to process all general cash receipts and disbursements for all sites (signatories are Co-CEOs and CFO/Controller). This main bank account is called a “sweep account” because all balances maintained in this account are periodically swept into or out of the PUC National Money Market account to ensure maximum earning ability. The PUC National Money Market account is where all check disbursements are processed.”” Despite what is described in the written accounting policies and procedures as noted above, what we found during the audit was that in addition to the main or “sweep” bank account, PUC National also had another checking account which it used to make disbursements for all of the PUC schools. Checks written from this account were funded by monies in the main operating or “sweep” bank account. No fund reserve: The 4% or 5% unrestricted fund reserves required by the Charter ‘Agreement and the California Code of Regulations were not met for nine straight years. Due to continuous shortage of cash, the Lakeview Charter Academy failed to establish a fund reserve resulting in the school’s inability to meet financial obligations in a timely manner. ¢. High level of liabilities: The current liabilities of Lakeview Charter Academy were high. These current liabilities represent the amount owed to creditors for operating expenses, withdrawals from a bank line of credit, overdrawn cash in bank or cash deficit, accrued salaries and payroll taxes, and other current liabilities, which were due and expected to be paid within 12 months. 2. Although the audited financial reports were discussed annually in the PUC Lakeview Terrace Board meetings, there did not appear to be an effective response by the PUC Lakeview Terrace Board to address and resolve the nine straight years of fiscal deficits of Lakeview Charter Academy. A plan of action would have been expected since there were clear indications that Lakeview Charter Academy had implemented an unrealistic budgeting process and inadequate spending controls. » PUC General Accounting Policies and Procedures Manual, October 2008, Cash Accounts p4. 24 ‘These conditions occurred because: (@ The Lakeview Charter Academy belongs to an organizational structure that consolidates the financial activities ofall the charter schools managed by the PUC. This practice made it difficult for the financial underperformance of the Lakeview Charter Academy to be visible when the overall result of the consolidation of financial statement showed positive revenue. (b) The PUC Lakeview Terrace Board in our assessment did not pay closer attention to strong fiscal sustainability, building reserves up to the required levels by a certain period, and implementing sound fiscal management practices for PUC Lakeview Charter Academy as a stand-alone entity. (©) The PUC Lakeview Terrace Board and PUC National did not formulate an effective corrective action plan that was realistic to address, resolve, or otherwise improve the financial condition of the Lakeview Charter Academy within a reasonable period of time given the critical importance of financial stability. As of the end of FY 2013, the Lakeview Charter Academy was one of the PUC Schools that consistently had negative balances or net asset deficits. As a result, the continuous decline of the financial condition of the Lakeview Charter Academy left unabated puts the schoo!’s future operation in jeopardy. In addition, this may be perceived as a clear indication of ineffective fiscal oversight on the part of the PUC Lakeview Terrace Board that could undermine the public’s trust in charter schools and its charter authorizers. ‘We discuss the actions needed to correct these conditions in Recommendation B-3 to B-5. Review of Expenditures/Disbursements ‘The expenditures/disbursements were not adequately documented to support payments for goods or services, and were not properly controlled, ‘The written accounting policies and procedures manual under section Purchases, Cash Disbursements and Accounts Payable (A/P), states “Onders are placed directly by sites. A list of valid Vendors is provided to each site by the Home Office. Under no circumstances may an individual site establish credit with a vendor. All credit must be established and maintained by the Home Office. The Home Office processes A/P check runs weekly every Friday. Any invoices to be included in a weekly check run must be received by the A/P Representative no later than Tuesday at p.m, Inaccurate or incomplete check requests/purchase orders will be returned for correction. “Purchase orders and check requests must be approved in accordance with the Purchasing Standard Operating Procedures as summarized below: General purchases $0-$4,999 —_Site Leader, Regional Director, CFO/Controller or Co-CEO $5,000-24,999 RD, CFO/Controller or Co-CEO* 25 >$25,000 Co-CEO must approve >$49,999 Require Board approval* * Except in the case of recurring expenditures that have previously been approved via signed contract or agreement (examples include rent, utilities, service agreements, etc.) ‘The Purchasing Standard Operating Procedure will show the details of procedures.” ‘The Schoo! Site Purchasing Standard Operating Procedures is summarized below”: PURCHASE ORDER CHECKLIST TASK ~ ‘orlated cd (Comteenun brea natu a Yih camped tn) Somer | on) | 7 ig wit Purcar Orn nq ordr ands PD, Lagat 2 Gather ait infrration ffs Hor (eet Code wher purchase spouse poe in aocoutng system (608 stiches) Ione on Purchase Onder that order was play SFTE ‘nes ar ‘Ofte Nor ofc ge Fla Purchane Order na "Ponda whe ling evry ede, fe tae ice mca a a ste nn ac is Pura Or am ti cplactapy arb shot ete tie Mar _| ich Ping Sig 6 Puchne Ordre B9 NOT dnc png paw vio Bat oy _accompany ahipmants. They are our proof that goods were received. sada 1 ema Pca Pun te eon me daterate | & ABic Buiter ined cate mre cer BORSBES | NStcPattg san muchos Purctare arnt rad by esvng pron offce wae Test Work Performed ‘We obtained a statistical sample size to determine the number of FY 2011-2012 cash disbursement transactions to be analyzed for testing. The population size or Data Used for Sampling was 478 transactions; these were disbursement transactions with amounts of $1,000 and above only. Based on the sampling results, we reviewed 47 (10%) out of the 478 transactions to determine whether the amounts recorded in the general ledger were valid and authorized transactions, were classified in the correct account code, and were supported by sufficient documentation. 'PUC General Accounting Policies and Procedures Manual, October 2008, Purchases, Cash Disbursements and Accounts Payable; 6 Bsc schoo! sit Purchasing SOP, 2008-2009, Purchases, Cash Disbursements end Accounts Payable age 5. 26 During our review, we noted the following conditions, as summarized in Table 5 below: Table 5 ‘Summary of Exceptions - Expenditures/Disbursements July 1, 2011 to June 30, 2012 ‘Incomplete or missing docu: Supporting documentation such as purchase orders, invoices, receipts, or allocation ‘worksheet for shared expenses were not properly maintained. Lack of proper review and approval. 3 &% $4715.13 Payments did not indicate the appropriate review and approval of authorized signatories. In addition to the conditions noted above, we noted that all of the invoices and supporting documentation that we reviewed as part of our audit testing were not stamped “PAID” to prevent duplicate payments. ‘These conditions occurred because management needed to be more attentive to ensuring that expenditures were adequately supported and properly approved. Although Lakeview management represented to us that they use a monthly dashboard to help monitor compliance with certain control procedures, we believe that review of the monthly dashboard in and of itself is not a sufficient control mechanism fo ensure compliance with policies and procedures related to supporting documentation and proper approval for disbursements. As a result, there was an increased risk of inappropriate or unauthorized expenditures being made if controls related to adequate supporting documentation and proper payment approvals are not consistently followed. We discuss the actions needed to correct these conditions in Recommendation B-6. 2 Reconciliation of Bank Statement ‘The bank reconciliation statement tested contained inaccuracies and was not properly reviewed. Given that there is one main bank account maintained by the PUC National for all the PUC schools, as described in the “Review of Financial Management Practices” section of this report, the audit team reviewed the bank reconciliation statement for this bank account. ‘The written Accounting Policies and Procedures Manual that applies to the PUC organization states the following under the section “Month-end and Year-end procedures”: “At the end of each month, the following procedures are completed by the staff accountant: Reconcile all bank accounts Reconcile all balance sheet accounts Review all revenue and expense activities, by site, for accuracy Generate and deliver month-end financial reports to all sites/directors ‘The Home Office relies heavily on the sites to provide all relevant information in a timely manner in order to reflect the most accurate and complete financial records for each site. Please see the Calendar of Accounting Due Dates or the Director's Master Calendar for a list of items required and corresponding due dates”, *° as shown below: SSS na mune ort oectnaes SSeS ETE seeemenn meneemrrere Bene Satay ee Ten venues ont ott 2 00 00 7 CACM Rondraising Deposits with original supporting documentation 3 Gach" reccipes forme and accompanying ‘deposits for Non Fundreceing cash receipes = Any bank statements received directly at schoo! + Credit card loge with original eupporting documentation * SEESK serm wnaer riggers provisional Cow funding (ucuaiy obeatned >°PUC General Accounting Policies and Procedures Manual, Ocinber 2008, Month-end and Year-end procedures; p. 8-9 28 Good business practices suggest that reconciliations, verifications and analytical review of financial records should be performed periodically. Reconciliations involve the comparison of two sets of accounting records. Reconciliation of cash also requires the proper treatment of outstanding checks. If a check has not yet cleared the bank by the end of the month, it is considered to be an outstanding check and should not appear on the month-end bank statement, and so it should be a reconciling item in the ‘month-end bank reconciliation statement prepared by the issuing entity. An outstanding check remains a liability of the payer until such time as the payee presents the check for payment, Which then eliminates the liability. Test Work Performed ‘We selected the bank reconciliation statement for the disbursement account “9161-Main Checking Account” for June 2013 to verify whether the checks cleared in the bank statement matched the list of checks cleared in the bank reconciliation statement. Based on our examination of the bank reconciliation statements provided by the PUC National staff, we noted that: © 30 checks totaling $78,333.14 were reported as checks that had cleared, according to the bank reconciliation statement but these checks were not shown as cleared in the bank statements. ‘These checks are shown in Table 6 below. Table 6 List of Checks reported as Cleared But not reflected in the Bank Statement ‘As of end of June 30, 2013 ackisaie | Check | Wrmwumter] [ Checkiesne | cheek [amount ah Date |. Number} cheek Date | Number | “check = “raspor_|_m26a1 | 200825 | | ajas/2oi2 | ~ 25681 BIO a/zapou | —va1s3 | 207650) | 5/3/2012 | 25657, 35.49 sya/aois | 22323 | 207650] |~s/appowe | 25755. 75.00 o/sij2o1i |_23893_| 20.00] | s/e/a0i2 | 25765 00.00 ay7pou | 2390 | 1839] |s/r7faor | 25799 125.00 az/afagus [20270 | 343.29 | s/a7/2012 | 25000 5947 “ysj20i2 |_24568_| 25.00 | 6/4/01 | 25546 1618 2psajpoiz | 24998" |—as000| | ~6/4/20x2 | ~25960) 1298 2/14/2012 | 24993 16.46 6/12/2012 26031. 19.60 ‘2/2aj20i2_|” 25183 100.00 6/22/2012 26336 1,605.23 3/isppou [25361 | 1629 [6/25/20 | 26486 | e776 3/isjox2_|~25376_|__a7ase | |—7/13/20%2 | 26500 52.66 ‘4jsp2012 |_25581| 20000] | ao/i2/20i2 [27439 1738 a/ppnoin_| 25556-3000 | 11/9/2012 | 77696 | 37,620.00 4/25/2012 | 25642 100.00 4/4/2013, 29180 615.00 15 checks _[ Sub-total | $8353.42 | |a5checks | Subtowal | $579.72 “Total em number =30 checks “Total Amount of Checks | $78,333.14 29 ‘We also reviewed the list of outstanding checks listed in the bank reconciliation statement and noted the following: ‘* 47 (23%) out of the 205 checks listed were check payments that had been outstanding for 6 months or more based on the check date as of June 30, 2013. These 47 checks totaled $49,983.22 and were considered to be stale cheoks. ‘There was no indication of a periodic inquiry or investigation to determine why these checks remained as reconciling items in the bank reconciliation statements, even after a considerable period of time. If a payee never presents the check for payment, the payer can mark the check as void in its accounting system, which restores marks the original accounts payable amount as unpaid, and also increases the balance in the cash account by the same amount. The list of stale- dated checks is shown in Table 7 below. Table7 List of Stale-dated/Outstanding Checks As of end of June 30, 2013 eae | Som TOE) (reais | aes [mayne | SS Hae te | Nun cong | (Bie | Member | "ni 8 fe) wae [m0 [— ann se Tt |e i] [ayaa | ses | “apes | ao 7/20/2012 | 26517 i 8/20/2012 26932 7251 10 ‘res [aes aio] [Cafann seer | —tarom0 | —10 7/10/2012 | 26529 ii 9/27/2012 26971. 66.86 10 [soi |aear a] Fayaioos [se —| 3058) 30 iris | aes8 ii) [ase | ise —| —s00| —s Tonos ase it] [isan | ime [rae] 3 Tos a | Pama |~anas [agrees] 9 Tro asst | [aan |—aase—[—aeanrs| 8 Trios | e575 a) [aman [ma suas] 8 7/0/2012 | 26577 it ‘95f2012 | 27263 669.78 | 9 Trae [es i} [appa | ass ~saanoo[ 8 Trans ess i] [ogana|~aase—[ nas 7/23/2012 | 26650 it Tonsf2o12 | 27557 79.19 @ ‘fas [ese a) [gan | areas an Taos |e a] Figo [reer —[aser[ —7 ‘7/25/2012 | 26694 i 11/9/2012 77699 1,788.94 a "roa | 2 ai] Caagfans [ger | erso0o| —7 7/30/2012 |_ 26727 i 11/9/2012 27787 296.00 7 pis | 7 so] [uagnu| zee —| pa | —7 ‘g/20/20i2 | 26884 10. 11/9/2012 27768, 1,321.80 Ld fap | 26508 io] [aangmar|—mass—|—“as00| 7 ‘ya | 207 io——| [atone | eee [saaenes 24 items | Subtotal 47items | Grand Total | $49,983.32 | ‘These conditions occurred because (i) the checks that were outstanding for 6 months or more were not appropriately resolved by the PUC National accounting staff in a timely manner, and (ii) there ‘was a lack of management review and approval of the bank reconciliation statements. 30 As a result, the controls over the bank account were inadequate to ensure that the funds of the organization were fully accounted for and that financial records were accurate and reliable. ‘We discuss the actions needed to correct these conditions in Recommendation B-7 through B-8. 31 RECOMMENDATIONS AND COMMENTS Recommendation A-l: The PUC Lakeview Terrace Board of Trustees should direct the PUC National Chief Executive Officers to prepare and retain documentation that substantiates that meetings of the School Advisory Council are held every month. This would include the preparation and retention of monthly meeting agendas, minutes, as well as copies of reports from meetings and policy recommendations made by the School Advisory Council to the PUC Lakeview Board of Trustees. Charter School Comment: The charter school generally agreed with our findings except for a partial agreement on the issue of preparing an agenda for School Advisory Council meetings, which according to the school is the responsibility of the school principal, not of the PUC ‘National, as per the agreement with the PUC Lakeview Terrace Board of Trustees. The school agreed to coordinate with PUC National and the PUC Lakeview Terrance Board of Trustees to implement all OIG recommendations regarding the preparation of an agenda and maintaining the minutes of the meetings and any related attachments. Implementation of this recommendation is fictive immediately. Recommendation A-2: The Board of Trustees of PUC Lakeview Terrace should direct the PUC ‘National Chief Executive Officer, in coordination of the PUC-Lakeview Human Resources Department and the Principal to: * Provide training to all school employees on child abuse laws and reporting procedures. ‘The proof of such training should be retained by the school and placed in the employee files. If a different policy is adopted with regard to this area, this policy should be formally documented and evidence of its approval by the PUC Lakeview Board of Trustees must be maintained. «Ensure that documentation is retained to demonstrate that employee processes required by ‘the California Education Code and the Charter Agreement for all employees were performed, Charter School Comment: ‘The charter school agreed with our recommendation. However, it expressed reservations about our findings regarding legal requirement for providing child abuse ‘taining to the employees. It also claimed that all employment related documents were on file to show that the employee processes required by the California Education Code and the Charter Agreement were performed for all employees. Inspector General Comment: The Office of the Inspector General reiterates that our findings are based on actual testing done on selected samples and no further documentation was provided to our office that shows otherwise. In regards to providing Child Abuse and Reporting training, the Office of the Inspector General would like to emphasize upon the fact that as per California Penal Code 11164, Lakeview Charter Academy school faculty and staff are mandated child abuse reporters. They are also required to 32 follow protocol and procedures outlined in the LAUSD Bulletin No. BUL-1347 entitled Child Abuse and Neglect Reporting Requirements. Unless different procedures are developed and approved by the PUC Lakeview Terrace Board, the Lakeview Charter Academy employees will follow this protocol. At the time of the audit we noted no evidence to corroborate existence of alternative procedures. The school however, stated that per discussion with the OIG, beginning this school year the school has implemented an online mandated reporting module for all employees. According to the school, proof of completion of this module is now included in the employee file. Recommendation A-3: The PUC Lakeview Terrace Board of Trustees should direct the PUC ‘National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer, to take proactive actions to ensure timely submission of the required annual audited financial reports. This should include ensuring that the financial records needed for the annual independent audit reports are complete, reconciled, in good order, and readily available prior to the scheduled audit. Charter School Comment: The charter school agreed with our recommendation but disagreed with our finding that 5 out of 9 annual audited financial statements were not submitted to the District and other governmental agencies by the December 15 due date. The school contends that the number of late submissions was actually lower. The school however, stated that they have always placed a high priority on timely submission of the annual audited financial statements and will focus on ensuring that in the future, the audits will be finished well in advance of the December 15 deadline, Implementation of this recommendation is effective immediately. Inspector General Comment: Management’s response to our audit findings and recommendations indicate an understanding of the issues presented and is deemed acceptable and responsive to our recommendation. In regards to the disagreement with our finding, the Office of the Inspector General reiterates that our findings are based on actual testing done on selected samples and no further documentation was provided to our office that shows otherwise. Recommendation A-4: The PUC Lakeview Terrace Board of Trustees should instruct the PUC ‘National Chief Executive Officers and the PUC National Chief Financial Officer to take the needed actions to bring the Lakeview Charter Academy into a non-deficit position in the near term. ‘These needed actions should include the development of a realistic action plan that should correct the school’s current fund deficit position in the near term. The plan should include a workable ‘budget for PUC Lakeview Charter Academy for the next three years that guides the school towards the attainment and maintenance of required fund reserve levels and financial stability. Recommendation B-S also deals with the topic of an action plan in this regard. Charter School Comment: The charter school partially agreed with our finding since the school claimed that the school has net assets of $21,303.00 as of June 30, 2014. The school stated that the deficit in the prior years was due to space shortage that limited student enrollments. The school also stated that corrective measures are being taken to improve the fiscal condition and a net fund balance of $130,000.00 is expected for the 2014-15 fiscal year. 33 Inspector General Comment; The Office of the Inspector General reiterates that our findings are ‘based on actual testing done for the audit scope period ending June 30, 2013. Our review showed that the school consistently had a fund deficit positon for the prior 9 vears of operation. With regard to the school’s claim of having net assets of $21,303.00, this information must be balanced against the fact that at that same point in time, according to the audited financial statements, the school showed a $252,726 cash deficit. Accordingly, we believe that our recommendation is still ‘warranted. Notwithstanding, we commend the school for taking necessary steps to improve its fiscal condition. Recommendation A-S: The PUC Lakeview Terrace Board of Trustees should instruct the PUC ‘National Chief Executive Officers to establish effective policy and procedures to monitor and perform regular cash projections to help ensure that cash balances are accurate and available for use and that funds are not overspent. Charter School Comment; The charter school agreed with our recommendation and stated that certain controls are currently in place to monitor cash flow projections through the end of the fiscal year. Recommendation A-6: The PUC Lakeview Terrace Board of Trustees should review the financial data of the Lakeview Charter Academy on a periodic basis to monitor whether the school is meeting its budgetary projections and meeting its fiscal goal and objective. This should include reviewing the variances between the approved budget and the actual results of operation. Charter School Comment: The charter school agreed with our recommendation and stated that this practice is currently in place but will include such reviews at al! Board meetings in the future. ‘The school also stated that the accounting team produces a budget vs. actual report and a general ledger report with the expenses for the month and is submitted to the PUC National CEO and Corporate Treasurer and the Regional Superintendents for review and necessary adjustments. ‘These actions are effective immediately. Recommendation B-1: The PUC Lakeview Terrace Board of Trustees should instruct the PUC ‘National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer, ‘to improve the General Accounting Policies and Procedures Manual to ensure that the design, implementation, and operating effectiveness of the manual are updated to include the following: © A clear division of roles and responsibilities between the employees of Lakeview Charter Academy and PUC National. © A ppolicy on budget administration and fund reserve. * Crosschecking of the accounting tasks performed by the Office’ Manager or its designees, by another responsible person to ensure the check and balance of accounting transactions. This should be reflected in the school site standard operating procedures within the manual 34 * A requirement for the periodic review and update of the accounting manual and designation of a responsible person to perform the review of the manual especially ‘when new systems are developed and implemented, or when organizational changes occur. +hool Comment: The charter school agreed with our recommendation and will ensure ‘that the manual includes very clear specifications regarding roles and responsibilities of personnel involved in finances at the school site and at PUC national. ‘The school stated that the updated ‘manual will be presented to the Partnerships to Uplift Communities Board of Trustees prior to end of this current school year. Recommendation B-2: The PUC Lakeview Terrace Board of Trustees should establish and implement monitoring mechanisms at both the school and Board level to help ensure that policies and procedures are consistently followed and updated as necessary. Charter School Comment: The charter school agreed with our recommendation and stated that the policies and procedures have been established and are being implemented at both the school and Board level. In addition, the Controller and the Assistant Controller will assist in creating a pplan to improve in the areas identified as needing improvement. As a result of the audit, the school stated that they added additional layers of monitoring, which include the Controller and Assistant Controller going out to each school to evaluate the level of adherence to PUC’s fiscal policies and procedures. Recommendation B-3: The PUC Lakeview Terrace Board of Trustees should conduct specific focused oversight of the Lakeview Charter Academy through the review, discussion, and analysis of the monthly, quarterly, and annual financial reports of Lakeview Charter Academy prepared by the PUC National (ie. Bank Reconciliations, Budget and Cash Flow Projections and Attendance Reports) in order to assess and evaluate Lakeview Charter Academy's existing fiscal condition separate and apart from other PUC entities. Charter School Comment: The charter school agreed with our recommendation and will take appropriate action inthis regard. Recommendation B-4; The PUC Lakeview Terrace Board of Trustees should coordinate with PUC National to monitor the Lakeview Charter Academy’s budget, funding priorities, ‘maintenance of fund reserves and cash balances, and incurrence of debt. Charter School Comment: The charter school agreed with our recommendation and will take appropriate action in this regard. Recommendation B-5: The PUC Lakeview Terrace Board of Trustees should coordinate with PUC National to formulate a workable action plan to address and resolve the fiscal insolvency of 35 Lakeview Charter Academy within a reasonable period of time, and to reduce the likelihood that Lakeview Charter Academy will experience similar financial difficulties in the future. Recommendation A-4 above contains additional information about what this action plan should include. Charter School Comment: The charter school agreed with our recommendation but stated that the recommended actions have been in place for several years and that the underlying issues have already been addressed. Inspector General Comment: Our recommendation was made because the school’s financial condition was weak for 9 consecutive years. It is our judgment that the school’s plan for bringing, itself into a strong and stable financial condition was ineffective. The school’s response implies that our recommendation was unnecessary. However, for the reasons stated above, we believe it ‘was entirely appropriate. Recommendation B-6: The PUC Lakeview Terrace Board of Trustees should instruct the PUC- Lakeview Charter Academy principal to coordinate with the PUC National Chief Executive Officers and PUC National Chief Financial Officer to ensure that all policies and procedures related to the proper support and approval of PUC Lakeview Charter Academy expenditures \ disbursements are followed on a consistent basis. Charter School Comment: The charter school agreed with our recommendation and stated that such policies and procedures are already in place. Inspector General response: Management's response to our audit findings and recommendations indicate an understanding of the issues presented and is deemed acceptable and responsive to our recommendation. If in fact such policies and procedures are already in place, we strongly recommend that the school ensure proper adherence of such policies and procedures at all times. ion B-7: The PUC Lakeview Terrace Board of Trustees should remind the PUC National Chief Executive Officers to work with the PUC National Chief Financial Officer to ensure that (i) monthly bank reconciliation statements are properly prepared and that balances shown on these statements reconcile to both the bank statement and the general ledger, and (ii) the ‘bank reconciliation statements are reviewed for accuracy, completeness and timeliness by an appropriate supervisor. This person should be able to provide direction to the accounting staff, and make decisions about the items under review. Evidence of the supervisory review should be documented via a signature or initial. Charter School Comment: The charter school agreed with our recommendation and stated that such policies and procedures are already in place. 36 Inspector General response: Management's response to our audit findings and recommendations indicate an understanding of the issues presented and is deemed acceptable and responsive to our recommendation. If in fact such policies and procedures are already in place, we strongly recommend that the school ensure proper implementation of such policies and procedures at all times. Recommendation B-8: The PUC Lakeview Terrace Board of Trustees should remind the PUC ‘National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer to ensure that outdated checks shown as reconciling items in the bank reconciliation statements are identified, investigated and timely appropriate corrective actions are taken. Charter School Comment: The charter school agreed with our recommendation. In addition, the charter school indicated that related policies and procedures are now in place. Inspector General response: Management's response to our audit findings and recommendations indicate an understanding of the issues presented and is deemed acceptable and responsive to our recommendation. If in fact, related policies and procedures are in place, we strongly recommend that the school ensures proper adherence of such policies and procedures at all times. 37 SUMMARY OF QUESTIONABLE ACCOUNTING ITEMS APPENDIX A IDENTIFIED IN THIS AUDIT* i. Outstanding checks dated 6 months and over r $49,983.32 | Unresolved reconciling items as reconciling items even after a considerable period of time. fi, Checks cleared in the bank reconciliation statement $78,333.14 | Unable to trace 30 cleared checks ‘but were not seen in the bank statement as checks shown in the bank reconciliation presented and paid by the bank. statement vis-a-vis actual checks paid bby the bank. TOTAL QUESTIONABLE ACCOUNTING ITEMS $128,316.46 The amounis included in this appendix represent questionable acoounting fems identified in the course of the audit of the bank reconciliation process performed by the PUC National. The dollar amounts represent (i) unresolved reconciling items in the bank reconci ion statement for June 30, 2013 only, and (i) checks cleared as per bank reconciliation statement for June 30, 2013 but cannot be traced to the actual checks paid by the bank. The auditor was tunable to verify the particular PUC Schools with the questionable accounting items due to the unique accounting system and procedures ofthe PUC Organization regarding Cash Accounts 38 ave WA ONS April 20, 2015 Dear Mr. Rodas and OIG audit team members: The following is background information regarding PUC Lakeview Charter ‘Academy and our responses to the revised audit. PUC Lakeview Charter Academy opened in 2003 with 100 6" grade students and a plan to grow by one grade level each year until reaching a maximum capacity of 300 with grades 6 — 8. The majority of the students are Title 1, Latino, and live in the high need geographic communities of the NE San Fernando Valley. From the first year of its existence the school demonstrated extremely high levels of student achievement with API scores that well exceeded 800 for the majority of its years in existence. In fact, the school has consistently been in the top 10% of achieving LAUSD middle schools, including charter and non-charter schools. In addition, parent engagement has always been outstanding with an average of 90% or more of the school’s parents attending the highly interactive family meetings, which occur every 4-6 weeks. Teacher, parent, and student satisfaction has always been high, as demonstrated by annual survey results. The management of the school in the areas of both academics and operations has always been outstanding. The office manager of the school, a former parent volunteer and one of the founding parents of PUC Community Charter Early College High School in 2004, has been utilized to help train new PUC office managers because of her exemplary management skills, the founding principal went on to become a highly successful PUC Regional Director who positively influenced many subsequent PUC schools, scores of Lakeview Charter Academy graduates are now in college or have graduated from college (some of whom are now PUC employees) and the schoo! has continued to maintain an extremely vibrant, high achieving culture on alt levels. 39 ANNEX A ‘The challenge that was faced by the school was that for the first 4 years of their existence, they could not find a facility that would accommodate their intended growth. As a result, the school’s enrollment was approximately 100 for several years, which created fiscal challenges. The Board of Trustees were fully aware of the fiscal challenges faced by the schoo! but knew that they were headed into a facility that would acconimodate their intended growth thereby easing the fiscal burden. The school now has an enrollment of approximately 350 students and resides in its permanent, long-term facility. This year, the school will end the year with a positive fund balance and with the most recent renewal, the 3-year forecast is extremely positive. Recommendation A-1: Response: We partially agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should direct the PUC National Chief Executive Officers to prepare and retain documentation that substantiates that meetings of the School Advisory Council are held every month which would include the preparation and retention of monthly meeting agendas, minutes, as well as copies of reports from meetings and policy recommendations made by the School Advisory Council to the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees. We partially agree because per PUC National’s agreement with the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees, PUC National is responsible for the preparation and maintenance of the schedule of the meetings for the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees and any committees and subcommittees, and arranges for meetings of the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees and prepares minutes and maintains records of these meetings, but the agreement does not mention the School Advisory Councils or the responsibility of PUC National to design the agendas for these meetings, as the recommendation by the OIG appears to suggest. This is because the focus and intent of the School Advisory Council, as it was created and intended by the founders of the schools, is to be representative of and under the auspices of personnel and stakeholders at the local school site. This is why the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees, the PUC National Board of Trustees, and the staff that serve under both corporations view all aspects of the implementation of the Schoo! Advisory Council meetings as the 40 responsibility of the school site principal who is supervised by a Regional ‘Superintendent, who reports directly to the Partnerships to Uplift ‘Communities Lakeview Terrace Board of Trustees. In that PUC National staff members serve in an “assistance” role to the Partnerships to Uplift ‘Communities Lakeview Terrace schools, per the contract between the two entities, the PUC National staff will assist in reminding the PUC Lakeview Terrace Superintendent and Principal of PUC Lakeview Charter Academy that School Advisory Council meetings must be scheduled on a monthly basis, will request the schedule of meetings, will inform the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees if there is a compliance problem, will ensure that the meetings occur as scheduled with published agendas and minutes, and will ensure that reports from these meetings are included on the agenda for the Partnerships to Uplift Communities Board meetings and that the documents are prepared appropriately. The PUC National staff will also retain these records as an official part of the board packets. The Parmerships to Uplift Communities Lakeview Terrace Board of Trustees will also hold the Superintendent and principal accountable to ensuring that these meetings occur in accordance with the above stipulations. The PUC Lakeview Charter Academy school personnel have stated that there has not been a need for monthly meetings and stakeholders at the school site believe that meetings every other month will be sufficient. PUC National staff will assist the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees in the process of revising the PUC Lakeview Charter Academy petition in order to reflect that the School Advisory Council meetings will occur every other month rather than monthly. The level of parent engagement at PUC Lakeview Charter Academy is much more inclusive, expansive, and extraordinary than the existence and function of the School Advisory Council, which is one component of an extremely robust parent engagement model. Every 4-6 weeks 85% — 100% of the school’s parents and students meet for evening Family Meetings. This is typically done by grade level and includes interactive discussions between parents and staff about instruction, about their vision for their students, and about pertinent school issues and initiatives. These are not meetings where memos are read and parents sit quietly. Charting, pair sharing, engagement with teachers in classroom discussion, whole group discussions, student performances, question and answer sessions, and more are common in these meetings. It is in all 41 likelihood because of the all inclusive nature of the parent engagement model, the personalization that occurs in the small school setting with each family, and the attentiveness of staff to parent concerns that has resulted in stakeholders thinking that the School Advisory Council meetings need not occur on a monthly basis. At this time, the School Advisory Council is proceeding with monthly meetings and documentation will continue to be appropriately designed and retained. The Superintendent has been reporting the outcomes of these meetings at the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees meetings and did so most recently at the January and March Board meetings. Recommendation 4-2: Response: We agree with the recommendation but wish to correct and clarify a few of the assumptions and statements included by the OIG both in the report and also in the recommendation. First and foremost, we wish to clarify that there is no PUC-Lakeview Human Resources Department, as has been referenced in the recommendation. The Human Resources Department is part of PUC National, whose departments deliver services to the Partnerships to Uplift Communities Lakeview Terrace schools, which includes the Human Resources Department. The Board of ‘Trustees of PUC Lakeview Terrace already directs the PUC National Chief Executive Officer, in coordination with the PUC National Human Resources Department and the Principal to execute the above articulated bullet points. Specifically regarding child abuse laws and reporting procedures, the current charter petition for PUC Lakeview Charter Academy does not include any references to child abuse training. Nor, in fact, does the Penal Code. However, in order to ensure that our employees understand what is required of them as mandated reporters, we have always provided training for them. The training has historically been provided by our Director of Counseling Services, at the New Teacher Institute each summer and annually at the school site summer training days. Beginning this school year, based on the discussions with the OIG auditors, we implemented an online mandated reporting training module for all employees. Proof of completion of this module is now included in the employee files. Regarding the second bullet point referencing employees meeting required qualifications and related documentation in their files, the school has consistently been rated with a score of 3 (proficient) by the LAUSD Charter 42 Unit's visiting oversight committee which visits the school each year Supporting documentation regarding these visits and the scores are available upon request. Regarding the third bullet point, we have continually sought to improve our practices with regards to enhancing controls and will continue to do so. During both years of PUC National's existence (last year and this year), our Chief of Human Capital, who leads our Human Resources Department, made a presentation to the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees regarding our compliance with this matte and we will continue to vigilantly ensure compliance with the bullet points listed. Recommendation A-3: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should direct the PUC National Chief Executive Officer to take proactive actions to ensure timely submission of the required annual audited financial reports which should include ensuring that the financial records needed for the annual independent audit reports are complete, reconciled, in good order, and readily available prior to the schedule audit but disagree with the OIG’s statement that 5 out of 9 audit reports were not submitted to the District and other governmental agencies by the prescribed date. In fact, Aaron Earlywine from the finance division of the LAUSD charter office confirmed that he was only aware of one report that arrived at the district late and he recalled that we filed an extension in advance of that audit being delayed. The audit was delayed due to the auditor being overwhelmed and behind with the large number of clients he took on during that fiscal year. Aaron Earlywine from the LAUSD charter unit finance team stated that the district may have date stamped reports several days after they actually arrived at the district, depending on the desk on which they landed. After close examination, we determined that the signature on the letter that accompanies the audit occurred on 3 occasions after December 15, which leads us to believe that the audit may have been late 3 times. We are focused on ensuring that the audits will be finished well in advance of December 15 in all future years by engaging the auditors early and working diligently to provide all necessary documentation to them so that they can complete their work well in advance of the deadline. ‘We take exception to the paragraph included on page 15 of the audit which is a quote from a former employee who was interviewed by the OIG auditor, who was with us for less than a year and who made an assumption that the 8 late audits were due to high staff tumover and the Partnerships to Uplift Communities Board of Trustees and PUC National management not making the submission of the audited financial statements a sufficiently high priority during certain years. PUC National did not exist during the years of the audit period and during the years that the audits were late and the Partnerships to Uplift Communities Lakeview Terrace Board of Trustees has ahvays placed the annual financial audit as a high priority and will continue to do so, as will PUC National. In that the employee who made this statement was with us for less than one year, which was when the OIG audit was occurring, her statements regarding prior years do not have credibility. We also take exception to the statements included by the OIG on page 14 of the audit which claim that 5 out of the 9 PUC consolidated financial statements were submitted to the district and to other governmental agencies late. Only 2 late audits were substantiated in the OIG’s accompanying table with regards to the California State Controller's office, due to the fact that there was no record prior to FY 2010 because it was archived. Recommendation 4-4: Response: We partially agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should instruct the PUC National Chief Executive Officers and the PUC National Chief Financial Officer to take the needed actions to bring the Lakeview Charter Academy into a non-deficit position in the near term. These needed actions should include the development of a realistic action plan that should correct the school’s current fund deficit position in the near term. The plan should include a workable budget for PUC Lakeview Charter Academy for the next three years that guides the school towards the attainment and maintenance of required fund reserve levels and financial stability. We partially agree because the recommendation implies that the school is in a deficit position and itis not. This recommendation is outdated and no longer reflects the school’s current fiscal reality. As of June 30, 2014, Lakeview Charter Academy has $21,303 in net assets. In addition, a plan that included a workable budget for PUC Lakeview Charter Academy for the next three years that guides the school towards the attainment and maintenance of required fund reserve levels and financial stability was submitted with its renewal petition and authorized by LAUSD in 2014. To provide some context as to why the school had a deficit for several years, itis important to understand that due to an inability to secure a facility that would allow growth, the school had approximately 100 students for the first several years of its existence. This negatively impacted their finances. The board was kept informed about the school’s facility challenges and the impact on the school’s financial position. Communications included financial updates and the presentation of the annual independent financial audit. The Board of Trustees made an informed decision that the school would remain open with the knowledge that a facility that would allow growth was forthcoming which would result in the closing of the deficit. As of June 30, 2014 Lakeview Charter Academy's fund balance per the unaudited actuals is $21,303. Reducing the negative fund balance to this relatively low number is a result of effectively meeting the budgetary goals developed collaboratively by the PUC National CEO, Corporate Treasurer, and school leadership with the approval of the Board of Trustees. Furthermore, as previously stated the Board of PUC Lakeview Terrace approved a three-year budget and cash flow for Lakeview Charter Academy as part of the renewal application submitted to LAUSD last year. Lakeview Charter Academy’s fiscal condition has been communicated to the board in various ways including but not limited to financial reports, annual audited financial statements, and when presenting the LAUSD Charter Schools Division annual evaluation. At the close of 2014-15 fiscal year, we anticipate a net fund balance of $130,000. Recommendation 4-5: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should instruct the PUC National Chief Executive Officers to establish effective policy and procedures to monitor and perform regular cash projections to help ensure that cash balances are accurate and available for use and that funds are not overspent. We have been and continue to be committed to evaluating the effectiveness of our policies and procedures. This is already in place and each month, the accounting team presents financial statements and cash flow projections through the end of the fiscal year, to the PUC National CEO and Corporate Treasurer. Up to date financial reports are also presented at the Partnerships to Uplift Communities Board meetings. The controller prepares ‘a weekly statement of cash on hand. This report is used as a management too! to ensure the timely payment of payables and anticipate cash needs for payroll 45 Recommendation 4-6: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees review the financial data of the Lakeview Charter Academy on a periodic basis to monitor whether the school is meeting its budgetary projections and meeting its fiscal goal and objective. This should include reviewing the variances between the approved budget and the actual results of operation. This has historically been in practice but not necessarily at each board meeting. It is now included at each board meeting. Each month the accounting team produces a budget vs. actuals report and a general ledger report with the expenses for the month that is submitted to the PUC National CEO and Corporate Treasurer and the Regional Superintendents. The Regional Superintendents review these reports with the school leaders as these reports are issued, and make adjustments as necessary. A. change to this process we made this year is that the Controller and Assistant Controller now also make themselves available to be part of the meetings that occur between the Superintendent and the school leaders, in order to share their expertise and ensure the recording and articulating of any significant adjustments to the budgets due to unanticipated large expenses or unanticipated reductions in revenue. Recommendation B-1: Response: We apree with the recommendation that The PUC Lakeview Terrace Board of Trustees should instruct the PUC National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer, to improve the General Accounting Policies and Procedures Manual to ensure that the design, implementation, and operating effectiveness of the manual are updated to include the following: * A clear division of roles and responsibilities between the employees of Lakeview Charter Academy and PUC National. A policy on budget administration and fund reserve * Crosschecking of the accounting tasks performed by the Office Manager or its designees, by another responsible person to ensure the check and balance of accounting transactions. This should be reflected in the school site standard operating procedures within the manual. * A requirement for the periodic review and update of the accounting ‘manual and designation of a responsible person to perform the review 46 of the manual especially when new systems are developed and implemented, or when organizational changes occur. Itis customary that the accounting and finance policy and procedures manual is updated annually to ensure new or improved processes are articulated and it is due for updating now. The updated manual will be presented to the Partnerships to Uplift Communities Board of Trustees prior to end of this current school year. However, we wish to point out that we do not perceive that there is confusion among staff regarding the division of roles between the school staff and PUC National staff. We believe that perception was erroneous based on the less than optimum methods utilized by the OIG auditing staff in terms the questions they asked and of whom. Nevertheless, we acknowledge the importance of this recommendation, and will make sure that the manual includes very clear specifications regarding roles and responsibilities of personnel involved in finances at the school site and at PUC National. Recommendation B-2: Response: We agree with the recommendation that The PUC Lakeview Terrace Board of Trustees should establish and implement monitoring mechanisms at both the school and Board level to help ensure that policies and procedures are consistently followed and updated as necessary. Policies and processes have already been established and are being implemented to monitor mechanisms at both the school and Board level. Each year the charter schools unit and the independent auditors visit school sites to test the strength of our internal controls. Recommendations are made from time to time by both of these groups and adopted and implemented in a timely manner when appropriate. As a result of the audit, we added additional layers of monitoring as follows: the Controller and Assistant Controller are going out to each school to evaluate the level of adherence to PUC’s fiscal policies and procedures. The team is reporting each school’s areas of strength and areas for improvement. The Superintendent is being advised of weak areas and during his weekly meeting with each school administrator is addressing how well the polices and procedures are being followed. In addition the Controller and the Assistant Controller will assist in creating a plan to improve in the areas identified as needing improvement. Recommendation B-3: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should engage in the active 47 oversight of the fiscal operations of the Lakeview Charter Academy through the review, discussion, and analysis of the monthly, quarterly, and annual financial reports prepared by the PUC National (ie. Bank Reconciliations, Budget and Cash Flow Projections and Attendance Reports) in order to assess and evaluate its existing fiscal condition. As noted above, the Board of Trustees for Partnerships to Uplift Communities Lakeview Terrace receives financial statements at least once per quarter at a public board meeting. Financials include 1) Year to Date Budget vs. Actuals, 2) Balance ‘Sheet, 3) and Cash Flow Projections thru fiscal year-end. It is at this time that the management discusses with the Board any significant areas of concera or areas to monitor more closely. In addition the annual financial audit presented to the Board presents a thorough and transparent financial status of each corporation and each individual school. ‘Recommendation B-4: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should coordinate with PUC National to monitor the Lakeview Charter Academy’s budget, funding priorities, maintenance of fund reserves and cash balances, and incurrence of debt. Please see response to Recommendation B-3 above. 5 ‘Recommendation B-5: Response: We agree with the recommendation ‘that The PUC Lakeview Terrace Board of Trustees should coordinate with PUC National to formulate a workable action plan to address and resolve the fiscal insolvency of Lakeview Charter Academy within a reasonable period of time and to reduce the likelihood that Lakeview Charter Academy will experience the similar financial difficulties in the future, This has already been addressed and has been in process for several years. An action plan for Lakeview has been in place for Lakeview Charter Academy for the past several years, In fact, as of June 30, 2014 the unaudited actuals show that PUC Lakeview Charter Academy ended with a fund balance of -4,526. This reduction in the negative fond balance was a result of adopting a very conservative budget and regularly monitoring expenditures. The Board is aware of the school’s current financial position and it is projected that the school will end with at the end of this fiscal year. In addition, the fiscal challenges that the school developed were a direct result of the facilities challenge that kept them at 100 students for their first three years and did not allow them to grow to full capacity until their 48 Recommendation B-6: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should instruct the PUC- Lakeview Charter Academy principal to coordinate with the PUC National Chief Executive Officers and PUC National Chief Financial Officer to ensure that all policies and procedures related to the proper support and approval of PUC Lakeview Charter Academy expenditures'disbursements are followed on a consistent basis. The actions related to this recommendation are already in place as follows. Each month the Regional Superintendents receive an operations dashboard for each of the schools they supervise that is created by the IT & Data team of PUC National. The dashboard results are also reviewed by the PUC National Directors, and Chief Executive Officers and are shared with the school principal during the Superintendent's weekly meeting with him. The results are also shared with members of the school’s operations team including the office manager and others responsible for adhering to fiscal policies and procedures. The dashboard quantifies the number and types of errors and/or omissions made by school personnel on various policies and procedures including financial. The intent of the dashboard is to assist school leaders in tightening up on intemal controls and also to inform the Superintendent, school principal, and PUC National teams regarding support and training needs of school site staff in order to ensure all policies and procedures are implemented property. Training is provided accordingly based on dashboard results and dashboards continue to be reviewed in order to determine effectiveness of training provided and to monitor the occurrence of new needs as they arise. Recommendation B-7: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should remind the PUC National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer ensure that monthly bank reconciliation statements are properly prepared and that balances shown on the bank reconciliation statement reconciles to both the bank statement and the general ledger. This is already occurring. The Controller and Assistant controller are responsible for carefully monitoring that monthly bank reconciliation statements are properly prepared and that the balances shown on the bank reconciliation statement reconciles to both the bank statement and the general ledger and the work is up to date. We believe it is important to point out that the comments that were quoted on the OIG audit report were made by a former 49 CFO who was with PUC for less than one year. She was not able to produce the work needed, displayed a defensive and bitter attitude, and resigned. ‘Recommendation B-8: Response: We agree with the recommendation that the PUC Lakeview Terrace Board of Trustees should remind the PUC ‘National Chief Executive Officers, in coordination with the PUC National Chief Financial Officer to ensure that outdated checks shown as reconciling items in the bank reconciliation statements are identified, investigated and timely appropriate corrective actions are taken and in fact we already have a policy in place. Our current policy is any check that is older than 6 months will be voided and a stop payment placed with the bank. Sincerely, pave Jacqueline Elliot, Ed.D Co-founder, PUC Schools & PUC National President & CEO, PUC National 50 DISTRIBUTION LIST ‘Members, Board of Education Superintendent of Schools Chief Deputy Superintendent of Schools General Counsel Director, Charter School Division Principal, Lakeview Charter Academy 51 ANNEX B ANNEX C Audit Team Jas Ahmed, Audit Manager Dolores Mabini, Senior Intemal Auditor Emmaliza Baquir, Internal Auditor 52 Know about fraud, waste or abuse? Tell us about it. Maybe you are a School District Employee, or maybe you are a private citizen. Kither way, you are a taxpayer. Maybe you know something about fraud, or waste, or some other type of abuse in the School District. The Office of the Inspector General has a hotline for you to call. You can also write to us. If you wish, we will keep your identity confidential. You can remain anonymous, if you prefer. And you are protected by law from reprisal by your employer. Call the Hotline: (213) 241-778 Or 1-866-LAUSD-O1G Write to us: Fraud Hotline Center 333 S. Beaudry Ave., 12" Floor Los Angeles, CA 90017 53