Audit Report on the Highbridge Advisory Councils Compliance With Certain Financial Provisions Of Its Contract with the

Administration For Childrens Services

ME04-073A

December 16, 2004

THE CITY OF NEW YORK OFFICE OF THE COMPTROLLER

1 CENTRE STREET NEW YORK, N.Y. 10007-2341
WILLIAM C. THOMPSON, JR.
COMPTROLLER

To the Citizens of the City of New York

Ladies and Gentlemen: In accordance with the Comptrollers responsibilities contained in Chapter 5, 93, of the New York City Charter, my office has examined the Highbridge Advisory Councils compliance with certain financial provisions of its contract with the Administration for Childrens Services (ACS). The results of our audit, which are presented in this report, have been discussed with ACS officials, and their comments have been considered in the preparation of this report. Audits such as this provide a means of ensuring that City resources are used effectively, efficiently, and in the best interest of the public. I trust that this report contains information that is of interest to you. If you have any questions concerning this report, please e-mail my audit bureau at [email protected] or telephone my office at 212-669-3747

Very truly yours,

William C. Thompson, Jr. WCT/fh

Report: Filed:

ME04-073A December 16, 2004

Table of Contents

AUDIT REPORT IN BRIEF .......................................................................................................... 1 Audit Findings and Conclusions................................................................................................. 1 Audit Recommendations............................................................................................................. 2 ACS Response ............................................................................................................................ 2 INTRODUCTION .......................................................................................................................... 3 Background ................................................................................................................................. 3 Objectives ................................................................................................................................... 3 Scope and Methodology ............................................................................................................. 3 Discussion of Audit Results........................................................................................................ 4 FINDINGS AND RECOMMENDATIONS................................................................................... 5 ACS Has Not Made a Decision On Highbridges Proposed Cost-Allocation Plan.................... 5 Recommendations................................................................................................................... 7 ACS Has Not Ensured That Highbridges Annual Audit Reports Meet ACS Standards........... 7 ACS Did Not Ensure That Highbridge Reported The Full Salary Support CACFP Contributed To the Child-Care Program................................................................................. 8 ACS Did Not Ensure That Highbridges Reporting and Use of Private Tuition Funds Met ACS Standards ........................................................................................................................ 9 Recommendations................................................................................................................. 10 ADDENDUM

Office of New York City Comptroller William C. Thompson, Jr.

The City of New York Office of the Comptroller Bureau of Management Audit Audit Report on the Highbridge Advisory Councils Compliance with Certain Financial Provisions of Its Contract With the Administration for Childrens Services
ME04-073A __________________________________________________________________ AUDIT REPORT IN BRIEF
This audit determined whether the New York City Administration for Childrens Services (ACS) ensured that the revenues and expenditures of the Highbridge Advisory Council Family Services, Inc. (Highbridge) were properly reported and whether Highbridges private tuition fees were calculated, reported, and used in compliance with ACS guidelines. Highbridge is a non-profit community service organization that provides educational and child-care services to infants and children in eight child-care centers and 73 family child-care homes (small facilities located in private residences) in the Bronx. In addition to the funds it receives for child-care services from ACS, Highbridge also receives funding from other sources for its Special Education, Universal Pre-Kindergarten, and Head Start programs. During Fiscal Year 2003 (July 1, 2002, to June 30, 2003), Highbridge was under contract with ACS to provide child-care services for 1,091 children in its child-care centers and for 222 children in family child-care homes. To provide those services, ACS budgeted $8,227,608 for Highbridge. In addition, Highbridge received $1,021,569 from the New York State Department of Health (NYSDOH) Child and Adult Care Food Program (CACFP) to operate the nutrition programs at the child-care centers and family child-care homes. Audit Findings and Conclusions ACS did not adequately ensure that Highbridges revenues and expenditures were properly reported or that Highbridges private tuition fees were reported and used in compliance with ACS guidelines. ACS has neither made decisions on Highbridges cost-allocation plan and administrative salary pool nor ensured that Highbridges independent auditors have complied with ACS audit guidelines concerning the schedules and information that must be included in the annual audit reports. Further, although Highbridge properly calculated the private tuition fees it charged parents, Highbridge generally did not use private tuition fees to enhance its child-care programs as required and transferred most of its private tuition funds to other accounts. These weaknesses prevent ACS from determining the appropriate level of financial support for Highbridge and increase the risk that funds may be misappropriated.

Office of New York City Comptroller William C. Thompson, Jr.

Due to a variety of management control concerns relating to a deficit of about $2.6 million as of June 30, 2002, the previous executive director of Highbridge was terminated by the Highbridge board in November 2002. In addition, several members of the Highbridge board were replaced. While there is evidence of a renewed commitment to management controls at Highbridge and of an increased ACS involvement in monitoring the financial operations of this sponsor, ACS has not resolved key cost allocation and reporting issues that would help ensure the presence of sound financial practices at Highbridge. Audit Recommendations To address these issues, the audit makes seven recommendations, among them that ACS: Expedite its review of Highbridges cost-allocation methodology. Establish a cost-allocation methodology for sponsors of multiple centers with multiple programs and funding streams. Expedite its review of Highbridges administrative salary pool. Issue guidance on the use of administrative salary pools. Ensure that the annual audit reports for Highbridge contain all the required schedules, including information relating to CACFP salary contributions and the receipt and use of private tuition fees.

ACS Response On November 8, 2004, we submitted a draft report to ACS officials with a request for comments. We received a written response from ACS officials on November 23, 2004. In their response, ACS officials generally agreed with the audits findings and recommendations. The full text of the ACS response is included as an addendum to this report.

Office of New York City Comptroller William C. Thompson, Jr.

INTRODUCTION
Background The Highbridge Advisory Council Family Services, Inc. is a non-profit community service organization that provides educational and child-care services to infants and children in eight child-care centers and 73 family child-care homes in the Bronx. Founded in November 1969 with one center, Highbridge experienced rapid growth between June 1993 and September 1996, sponsoring six additional centers. Highbridge added an eighth center in July 2001. Highbridge operates with a central office administrative staff, as well as with center-based classroom and support personnel. In addition to the funds it receives for child-care services from the Administration for Childrens Services, Highbridge also receives funding from other sources for its Special Education, Universal Pre-Kindergarten, and Head Start programs. During Fiscal Year 2003 (July 1, 2002, to June 30, 2003), Highbridge was under contract with ACS to provide child-care services for 1,091 children in its child-care centers and for 222 children in family child-care homes. To provide those services, ACS budgeted $8,227,608 for Highbridge. In addition, Highbridge received $1,021,569 from the New York State Department of Health Child and Adult Care Food Program to operate the nutrition programs at the child-care centers and family child-care homes. Objectives The objectives of this audit were to determine whether ACS ensured that Highbridges revenues and expenditures were properly reported and whether Highbridges private tuition fees were calculated, reported, and used in compliance with ACS guidelines. Scope and Methodology This audit covered the period from July 1, 2002 to June 30, 2003 (Fiscal Year 2003). To understand Highbridges responsibilities, we interviewed ACS officials and reviewed ACSs administrative advisories for child-care programs and its contract with Highbridge. To understand Highbridges operations, we interviewed Highbridge officials, conducted walkthroughs, and reviewed its financial statements and related records. To determine whether Highbridge properly allocated its costs among its child-care programs, we reviewed its cost-allocation plan, its administrative salaries, and its 23 bank accounts. To determine whether Highbridge was properly reporting to ACS the CACFP funds it received for salaries, we reviewed the ACS and CACFP budgets for Highbridge, Highbridges reports to ACS, and Highbridges actual service and administrative staffing levels for this program. To determine whether Highbridge properly calculated, reported, and used the private

Office of New York City Comptroller William C. Thompson, Jr.

tuition fees it collected, we reviewed its fee schedule, cash receipts, attendance records, bank statements, and general ledger. We also reviewed its uses of private tuition fees to determine whether they were in compliance with the guidelines set forth in the ACS Administrative Advisory for Private Tuition Payments in Publicly-funded Child Care Programs. We also reviewed the last five years of annual audit reports prepared by Highbridges independent auditor to determine whether the reports contained the schedules and information required by the ACS audit guidelines. This audit was conducted in accordance with generally accepted government auditing standards (GAGAS) and included tests of the records and other auditing procedures considered necessary. This audit was performed in accordance with the audit responsibilities of the Comptroller, as set forth in Chapter 5, 93, of the New York City Charter. Discussion of Audit Results The matters covered in this report were discussed with ACS officials during and at the conclusion of this audit. A preliminary draft report was sent to ACS officials on October 8, 2004, and was discussed at an exit conference held on October 28, 2004. On November 8, 2004, we submitted a draft report to ACS officials with a request for comments. We received a written response from ACS officials on November 23, 2004. In their response, ACS officials generally agreed with the audits findings and recommendations. The full text of the ACS response is included as an addendum to this report.

Office of New York City Comptroller William C. Thompson, Jr.

FINDINGS AND RECOMMENDATIONS

ACS did not adequately ensure that Highbridges revenues and expenditures were properly reported or that Highbridges private tuition fees were reported and used in compliance with ACS guidelines. ACS has neither made decisions on Highbridges cost-allocation plan and administrative salary pool nor ensured that Highbridges independent auditors have complied with ACS audit guidelines concerning the schedules and information that must be included in the annual audit reports. Further, although Highbridge properly calculated the private tuition fees it charged parents, Highbridge generally did not use private tuition fees to enhance its child-care programs as required and transferred most of its private tuition funds to other accounts. While Highbridge maintains separate bank accounts for its different programs, it regularly transfers funds from these accounts to pay current expenses without regard for the intended use of the funds. These weaknesses prevent ACS from determining the appropriate level of financial support for Highbridge and increase the risk that funds may be misappropriated. There have been considerable changes at Highbridge over the last 10 years. Between 1993 and 2001, Highbridge expanded from sponsoring one day care center to sponsoring eight. Highbridge assumed responsibility for the additional centers at the request of ACS. Due to a variety of management control concerns relating to a deficit of about $2.6 million as of June 30, 2002, the previous executive director of Highbridge was terminated by the Highbridge board in November 2002. In addition, several members of the Highbridge board were replaced. While there is evidence of a renewed commitment to management controls at Highbridge and of an increased ACS involvement in monitoring the financial operations of this sponsor, ACS has not resolved key cost allocation and reporting issues that would help ensure the presence of sound financial practices at Highbridge. ACS Has Not Made a Decision On Highbridges Proposed Cost-Allocation Plan ACS has not made a decision on Highbridges proposed cost-allocation plan. A costallocation plan is needed for Highbridge to comply with ACSs Administrative Advisory for Allocating Costs in a Publicly-funded Child Care Program and with Section 5.3 of its contract with ACS. The plan must fairly allocate expenses among the different programs that Highbridge administers. Those programs include the ACS-funded child-care program as well as the Special Education, Universal Pre-Kindergarten, and Head Start programs that are funded by other government agencies. While ACS has reviewed the cost-allocation plan proposed by Highbridge and has met with Highbridge officials on it, ACS has still not approved a cost-allocation plan for Highbridge. As a result, ACS, as of October 28, 2004, had still not closed the Fiscal Year 2003 books for Highbridge.

Office of New York City Comptroller William C. Thompson, Jr.

Highbridges proposed cost-allocation plan uses a ratio-value method1 for its central office staff and a units-of-service method2 for certain center-based personnel. However, for teachers, assistant teachers, teacher aides, group leaders, and assistant group leaders, programs are directly charged for the actual hours worked. Occupancy costs are allocated either by using the ratio-value method or by considering the number of classrooms used by each program. Other-than-personalservices costs are charged directly to each program or are allocated based on the units-of-service or ratio-value method. ACS officials are concerned that Highbridges cost-allocation plan does not adequately track salaries or offer a clear audit trail. They state that Highbridges allocation method also does not consider relevant City regulations and guidelines (e.g., the Comptrollers Directives). ACS officials also state that Highbridge should consider using a time-allocation method for assigning program costs to administrative staff. Such an allocation would reflect either the actual hours worked or a percentage of the total hours worked that should be charged to ACS. ACS and Highbridge are meeting regularly to resolve these issues. ACS and Highbridge acknowledge that they are working on a budget prototype for sponsors of multiple child-care centers with multiple programs and funding streams. However, it is incumbent on ACS to resolve this matter in a timely manner. Because the cost-allocation issues remain unresolved, ACS cannot accurately assess Highbridges financial needs relative to the child-care services it provides. ACS must resolve the cost-allocation issue to close the books on Fiscal Year 2003 and to determine the appropriate level of financial support that it should be providing to Highbridge. On a related matter, ACS has not made a decision on the appropriateness of Highbridges administrative salary pool. Highbridge uses an administrative salary pool to fund salaries for its central administrative unit. This unit was established in 1996 when Highbridge began sponsoring its seventh center. The administrative salary pool at Highbridge consists primarily of salaries that ACS budgeted for administrative positions to be located in the child-care centers but that Highbridge uses to fund central office positions. In addition, some budgeted salaries for certain program positions, such as group aides and cooks helpers, have also been assigned to the administrative salary pool at Highbridge to help pay for central office positions. Although ACS has not issued guidance on the use of administrative salary pools, it reviews the positions that are included in these pools. ACS has not approved the positions that Highbridge has assigned to its administrative salary pool. Until ACS makes a decision on Highbridges administrative salary pool, ACS is less able to ensure that Highbridges spending on central office positions does not negatively impact administrative and program operations in the child-care centers.
The ratio-value method uses operating costs as the basis for allocating administrative costs. The expenses are allocated to programs based upon the ratio of Highbridges administrative costs to its total operating costs. Highbridge states that it adheres to the ratio-value method of allocation promulgated by the New York State Education Department. The units-of-service method is a workload measure by which programs are evaluated and proportionate shares of costs are determined. The units of service relate to the number of attendance days and care days provided by the program during the fiscal year.
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Office of New York City Comptroller William C. Thompson, Jr.

The allocation of costs among multiple programs and the use of administrative salary pools by sponsors of multiple centers are not new issues. Until ACS resolves these issues, it will continue to be unable to accurately evaluate Highbridges financial position to determine the appropriate level of funding. In addition, the lack of a resolution of these issues increases the risk that ACS funds for Highbridge could be misappropriated. Recommendations 1. ACS should expedite its review of Highbridges cost-allocation methodology.

ACS Response: ACS has completed its review of Highbridges cost allocation methodology and has accepted the cost allocation plan covering the period Fiscal Year 2003 and Fiscal Year 2004. The plan, which was developed by a reputable CPA firm, is based on GAAP standards. However, ACS is currently reviewing Child Care cost allocation guidelines. After ACS reviews and approves the guidelines it will require all sponsors to review their cost allocation plans and make modifications to insure compliance with the revised ACS cost allocation guidelines. 2. ACS should establish a cost-allocation methodology for sponsors of multiple centers with multiple programs and funding streams.

ACS Response: ACS is currently in the process of developing a cost allocation methodology that is more comprehensive and descriptive than its previous cost allocation guidelines. 3. ACS should expedite its review of Highbridges administrative salary pool.

ACS Response: Guidelines for the administrative salary pool are being developed as part of the cost allocation policy. 4. ACS should issue guidance on the use of administrative salary pools.

ACS Response: Once the cost allocation policy and guidelines are finalized, ACS will notify and distribute the plan to contractors. ACS Has Not Ensured That Highbridges Annual Audit Reports Meet ACS Standards Each year ACS distributes audit guidelines to the child-care centers. These guidelines include specific instructions on how to present certain information in the annual audit reports required by ACS. The guidelines require, among other things, that Highbridges independent auditor include in the annual audit report a schedule entitled Statement of Revenues and ExpendituresBudgeted & Actual. The guidelines show how information concerning ACS and CACFP revenue and expenditures should be presented on this schedule. The guidelines also require that the independent auditor provide information on the receipt and use of private tuition fees. However, Highbridges audit reports for Fiscal Years 1999 through 2003 neither provided

Office of New York City Comptroller William C. Thompson, Jr.

the required Statement of Revenues and ExpendituresBudgeted & Actual schedule nor reported on the receipt and use of private tuition fees. Because ACS did not ensure that these requirements were fulfilled, ACS was less able to accurately evaluate Highbridges financial position to determine the appropriate level of funding. In addition, Highbridges underreporting of this revenue increased the risk that these funds could be misappropriated. ACS Did Not Ensure That Highbridge Reported The Full Salary Support CACFP Contributed To the Child-Care Program Highbridge receives U.S. Department of Agriculture CACFP funds through the New York State Department of Health to support its nutrition program. For Fiscal Year 2003, NYSDOH budgeted $1,201,569 in CACFP funds for Highbridge. Of this amount, as shown in Table I below, CACFP budgeted $185,186 to pay a portion of the salary expenses for food service and related administrative work. However, ACSs budget for Highbridge only anticipated a CACFP salary contribution of $61,895. Because ACS did not ensure that Highbridges annual audit report provided information on CACFPs salary contributions to Highbridge, ACS was unaware that Highbridge had received more than $123,000 in additional salary support through CACFP. Table I CACFP Salary Contribution to Highbridge Not Reported to ACS (1) CACFP Budget for Salary Expenses at Highbridge Child-Care Centers Cooks/Cooks Helpers Administrative Admin. Salary Pool Sub-total Family Child-Care Homes Administrative Admin. Salary Pool Sub-total Total (2) ACS Budgeted Amount for CACFP Salary Contribution to Highbridge $61,895 0 0 $61,895 (3) CACFP Salary Contribution Not Reported to ACS (Col. 1 Col. 2) $13,780 $20,870 $60,697 $95,347

$75,675 $20,870 $60,697 $157,242

$12,781 $15,163 $27,944 $185,186

0 0 0 $61,895

$12,781 $15,163 $27,944 $123,291

When ACS prepares the budget for a child-care center, it includes a budget line for the CACFP salary supplement that NYSDOH pays. This budget line, known as the sponsors share, reduces ACSs salary reimbursement to Highbridge. When ACS completes this budget line, it only includes food service positions (cooks and cooks helpers) in the calculation. ACS officials stated that they use a formula that is applied to the budgeted amount for food service salaries to

Office of New York City Comptroller William C. Thompson, Jr.

estimate the amount of the CACFP salary contribution. However, at Highbridge, CACFP funds also support salaries for food-service-related administrative work. Because ACS did not estimate and Highbridge did not report CACFPs contribution for administrative salary expenses relating to the food service program, ACS overpaid Highbridge for these costs. Each child-care center has a bookkeeper who, among other things, performs the recordkeeping required by the CACFP program. Highbridge also maintains, at one of its centers, support staff for its family child-care homes. These employees are also funded in part by CACFP. The family child-care support staff consists of a coordinator, two assistant coordinators, and one bookkeeper. In addition, as noted above, Highbridge maintains a central administrative unit to help support its eight child-care centers. Highbridge transfers some of the administrative duties, typically done at the child-care centers, to this central unit. To pay the salaries of the central administrative unit staff, Highbridge created an administrative salary pool. However, the annual audit report for Highbridge does not inform ACS about the CACFP funds provided for either the administrative positions at the centers or those transferred from the centers to the central administrative unit. Because ACS did not ensure that Highbridges annual audit report fully informed ACS about the salary support provided by CACFP, ACS was not in a position either to accurately determine the appropriate level of financial support for Highbridge or to ensure that the funding for Highbridge was appropriately spent. ACS Did Not Ensure That Highbridges Reporting and Use of Private Tuition Funds Met ACS Standards ACS did not ensure that Highbridge reported and used private tuition funds properly. Highbridge provides child-care services to some private studentschildren whose parents do not qualify for ACS-subsidized child-care. The parents of these children pay the full cost of tuition in private fees. ACSs Administrative Advisory for Private Tuition Payments in Publicly-funded Child Care Programs requires that private tuition funds be used to enhance child-care programs (by paying, for example, for field trips or for the replacement of program equipment and supplies) and that any other use of these funds be approved in advance by ACS. In Fiscal Year 2003, Highbridge collected $20,659 in private tuition fees. However, it only expended $4,112 of those fees to enhance the child-care program. Furthermore, as of June 30, 2003, there was a cumulative ledger balance of $134,642 for the private tuition fund. However, only $1,696 of this amount was available in a separate bank account. Highbridge inappropriately transferred about $133,000 from its private tuition bank account to other accounts and therefore did not use this money to provide enhancements to its child-care program. For example, during Fiscal Year 2003, Highbridge transferred $19,500 from its private tuition bank account to its payroll account to pay regular salaries. There is no evidence that ACS approved any of these transfers. Because ACS did not ensure that Highbridges annual audit report for Highbridge provided information about its receipt and use of private tuition funds, ACS was not in a position to adequately monitor Highbridges use of these funds to ensure that they were only spent to enhance child-care programs.

Office of New York City Comptroller William C. Thompson, Jr.

Recommendations 5. ACS should ensure that the annual audit reports for Highbridge contain all the required schedules, including information relating to CACFP salary contributions and the receipt and use of private tuition fees.

ACS Response: Audit Guidelines for each fiscal year clearly delineate the schedules that are required to be included in the year-end audit. Specific Exhibits for each and every schedule are also included in the Audit Guidelines. If any audit report does not contain all the required schedules, including CACFP information, the program is notified accordingly and the audit report is classified as Incomplete/Unacceptable until the requisite schedules are provided. The Audit Guidelines require that the auditor receive written representation from the agency that they have provided to the auditor all the private tuition books of accounts. If there are no private tuition funds, a note so stating is required in the audit report. 6. ACS should routinely obtain information from NYSDOH on its CACFP contributions to ACS-sponsored day care centers. ACS should use this information to verify the accuracy of the day care centers annual audit reports.

ACS Response: ACS will contact New York State Department of Health (NYSDOH) and request CACFP salary information for Fiscal Year 2004. If NYSDOH complies with our request, ACS will make every effort to use this information to verify the accuracy of the day care centers audit reports. 7. ACS should consider withholding payments to Highbridge relating to the independent auditors fees for audit reports that do not contain all of the required schedules and information.

ACS Response: ACS Child Care Disbursement and Audit areas plan to meet to discuss a policy for the withholding of audit fees for programs with audit deficiencies.

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Office of New York City Comptroller William C. Thompson, Jr.