Audit of. G-Star School of the Arts For Motion Pictures and Television

Transcription

1 Audit of G-Star School of the Arts For Motion Pictures and Television September 14, 2007 Report

2 Audit of G-Star School of the Arts for Motion Pictures and Television Table of Contents PURPOSE AND AUTHORITY 1 Page SCOPE AND METHODOLOGY 1 BACKGROUND 2 CONCLUSIONS 1. Use of Public Funds and Resources 3 2. Poor Record Keeping 6 3. Tenant Did Not Undergo Required Criminal Background Screening 9 4. School Maintained Required Insurance Coverages 10 APPENDICES A. Management Response Dated June 15, B. Management Response Received on September 5,

3 THE SCHOOL DISTRICT OF LUNG CHIU, CPA ARTHUR C. JOHNSON, Ph.D. PALM BEACH COUNTY, FLORIDA DISTRICT AUDITOR SUPERINTENDENT OFFICE OF THE DISTRICT AUDITOR 3346 FOREST HILL BLVD., B-302 WEST PALM BEACH, FL (561) FAX: (561) M E M O R A N D U M TO: FROM: Honorable Chair and Members of the School Board Arthur C. Johnson, Ph.D., Superintendent of Schools Chair and Members of Audit Committee Lung Chiu, CPA, District Auditor DATE: September 14, 2007 SUBJECT: Audit of G-Star School of the Arts for Motion Pictures and Television PURPOSE AND AUTHORITY In response to the request of the Charter Schools and Accounting Departments, we have audited the G-Star School of the Arts for Motion Pictures and Television (G-Star School) for the period July 1, 2005, through February 2, The primary objectives of the audit were to: (1) Determine whether expenditures were properly accounted for, and recorded. (2) Determine if revenues were recorded and deposited. (3) Determine if record keeping and the system of internal controls were adequate. (4) Determine compliance with personnel and payroll requirements. (5) Determine if fixed assets were properly tagged and accounted for. (6) Determine if the required criminal background screening of vendors and tenants was performed. (7) Determine compliance with provisions of the Charter Agreement. SCOPE AND METHODOLOGY The audit was performed in accordance with Government Auditing Standards by Robert Bliss, CIA, from February 1, 2007, through March 14, 2007, and included: 1

4 Reviewing the school s Charter Agreement, lease agreements for the use of school facilities, and other written contracts. Reviewing financial documentation including budgets and financial statements. Examining the school s general ledger, bank statements, and bank reconciliations. Reviewing cash receipts and cash disbursement records. Reviewing payroll reports and personnel records. Reviewing minutes of meetings of the charter school s Governing Board. Reviewing applicable Florida Statutory Requirements. Reviewing inventories of fixed assets. Interviewing staff of the charter school and School District. Draft findings were sent to the school s Governing Board, and the School District s Department of Charter Schools and Accounting Services Department for review and comments. Management responses are included in the Appendices. We appreciate the courtesy and cooperation extended to us by District and school staff during the audit. The final draft report was presented to the Audit Committee at its September 14, 2007, meeting. BACKGROUND Students in the Arts TV/G-Star TV, Inc. is a Florida not-for-profit corporation organized to operate the G-Star School. The school is a tax exempt organization under 501(c) (3) of the Internal Revenue Code. On April 18, 2002, the School District entered into a Charter School Charter with the school for a term of five years commencing July 1, 2002, and ending June 30, The stated mission of the charter school includes encouraging students to explore new career opportunities through the expertise they develop in writing, directing, producing, and starring in TV programs and filmmaking. G-Star attempts to provide students with hands on actual experience with professional media entities in order to fulfill the school s mission. As of February 2007, 670 students were enrolled in 9 th through 12 th grades. For the Fiscal Year Ended June 30, 2006, the school s general fund reported $3,623,526 in total revenue and $3,329,997 in total expenditures, with an excess of revenues over expenditures of $293,529. The school was accredited by the Southern Association of Colleges and Schools Council on Accreditation and School Improvement, and the Commission on International and Trans-Regional Accreditation for

5 CONCLUSIONS 1. Uses of Public Funds and Resources Our review of a sample of school expenditures revealed the following: Caribbean Cruise for students, parents, staff, and others paid for by public funds. The school expended over $17,000 for 40 persons, including approximately 22 students, two parents (chaperons), three teachers, the school founder, and 12 other individuals to go on a four-day Western Caribbean Carnival Cruise to Key West and Cozumel on December 1, through December 5, The full price of the cruise fares were paid for by the school with public funds. Cruise fares ranged from $332 per person for a shared inside stateroom to $1,323 for one person to occupy a suite with private balcony. Additionally, the school paid for expenses incurred during the cruise for purchases made in the ship s Café bar, Pool bar, and the Bar and Grille, and cruise gratuities for individuals totaling approximately $1,000. In addition, $300 was withdrawn from an Automated Teller Machine on the ship and there was no documentation for the related expenditure. The cruise was a fundraising event sponsored for the benefit of a local film industry advocating group. According to school management, the cruise expenses were incurred to provide students with hands-on educational opportunity to participate in a professional media event. On September 29, 2006, the school received $3,457 from the independent company as reimbursement for the trip for the other individuals. The reimbursement amount was based on an estimated average cost of 10 persons. The school has not provided documentation that demonstrated the reimbursement amount fully compensated the school for the expenses incurred concerning the passengers for whom the school paid. It should be noted that an account receivable related to this event was not recorded on the school s financial records, and the partial reimbursement was received more than one year after the school incurred the expenses. Management Response dated June 15, 2007: Any funds expended by G-Star were for educational purposes consistent with the mission and goal of the school and consistent with public policy. Any funds that were advanced for the benefit of the producer have been reimbursed by the producer. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: In our Policy & Procedures, we have corrected our procedure so that we will not use public funds to pay for another entity's expenses and then be reimbursed; and that the account receivables are recorded properly. (See Appendix B for full Management Response). 3

6 Governing Board awarded the Founder a $150,000 Bonus On December 19, 2005, the school s Governing Board awarded the school founder $150,000 for his role in securing a $4,955,000 government issued bond as financing for the school. According to the minutes of the meeting, the $150,000 was to be paid to the founder equally over the following three years. However, the founder indicated that he has not received any of the award. The $150,000 awarded the founder was not disclosed or recorded on any of the school s financial records. However, it was reflected in the minutes of a Governing Board meeting. As a result, the charter school s financial statements for the year ending June 30, 2006, might contain inaccuracies. The District Auditor s Office contacted the school s independent auditors to notify them of the potentially undisclosed $150,000 debt, as well as other issues identified in this report. Management Response dated June 15, 2007: The school founder is the Chief Executive Officer and Chief Financial Officer of G-Star. He provided significant time and efforts in excess of the usual course of business in obtaining bond financing for the purchase of real property and capital expenditures for the school. The failure to disclose this contingent liability was an accounting error. At this point in time, the founder is due and owing in back wages of approximately $140,923. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: (As indicated in a letter to the school from its CPA firm.) This oversight may have occurred since you made a distinction between bonus and wages being different and did not realize that the bonus which the Board granted you should have been recorded in the same back wages account as a liability to G-Star School of the Arts and an amount due to you. (See Appendix B for full Management Response). Free Use of Facilities by For-Profit Businesses The school offers free use of its studios, office space, workshops, and equipment to forprofit film production companies. According to school staff, this is done to attract companies to the school so that students can observe operations, and audition for roles. According to the Section 30.0 F. of the Charter, the school is prohibited from using any property, goods, or services purchased or leased by public funds for the private benefit of any person or entity. Additionally, providing public facilities and equipment to private for-profit companies at no charge may not serve public purpose nor be in taxpayers best interest. Supplies and Two-Year Free Use of a Building for a Private For-Profit Company. The school purchased $1,340 worth of supplies for a private for-profit film school. In return, the film school issued a check payable to the school as reimbursement. The word 4

7 Donation was written in the memo area of the company s check. The school recorded the reimbursement as a donation and deposited the check in the fundraiser bank account. The charter school also provided a two-year lease to this private for-profit film school at no charge, including free utilities. Also, this is the same company for which the school paid the cruises fares of independent movie production personnel as previously mentioned in this report. Management Response dated June 15, 2007: Any supplies that were purchased for the private for-profit film school were reimbursed to G-Star. This again is a record keeping issue and a recording error which is not material. This error has been corrected and procedures are now in place to insure that in no longer happens. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: This error has been corrected and the money has been deposited in the proper account. (See Appendix B for full Management Response). $2,700 Paid to Contractor. On February 2, 2007, the school issued a check to an independent contractor, who was also an employee of the school, without supporting documentation for disbursement. Bookkeeping staff issued the check at the direction of the school founder. The school initially recorded this expenditure as a bonus for the independent contractor. As stated by staff, the payment was to assist a staff member relocating from a house owned by the school. The word moving was noted on the check stub. Upon our further questioning of this expenditure, this transaction on financial records was later amended from bonus to labor. On February 27, 2007, the school provided us with an undated invoice which indicated that the school was billed $2,700 for renovation work on the house performed by the contractor. However, it appeared that some of the labor charges on the invoice were previously billed to, and paid for, by the school through prior invoices. On February 27, 2007, the school provided us with a newly created Check Request Form dated February 2, 2007; and on February 28, 2007, we were provided with an Amendment to the Board Meeting Minutes of January 9, 2007, that authorized the expenditure in question. Apparently, the Amendment to the Board Meeting Minutes was created after the check was written. Also, the Amendment to the Board Meeting Minutes did not appear to be officially accepted at the following meeting of the Governing Board. The date of adoption of the Amendment is unknown at this time as the date of official adoption has not been provided. School monies should be used to advance education of students, and not be used to purchase 1) cruises for staff, parents (chaperones), or persons unaffiliated with the school, 2) supplies and utility costs of other business entities, or 3) to make questionable payments to independent contractors. 5

8 Management Response dated June 15, 2007: This again is a bookkeeping issue which has been corrected through changes and policies to insure it no longer happens. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: The error has been corrected. (See Appendix B for full Management Response). 2. Poor Record Keeping Internal Controls The school had no written accounting policies and procedures; check requisitions were not consistently utilized; receipts or invoices are not always maintained; dual signatures on checks are not always required; Governing Board approval was not required on large expenditures on contracts; and key duties of the school founder were not adequately segregated. More specifically, the school founder had authority to order, receive, approve and issue payment for goods and services. Insufficient internal controls limit the school s ability to safeguard assets and increases the risk that errors or fraud, should they occur, may not be detected on a timely basis. Section 21.0 B. of the Charter requires the school to establish and implement accounting and reporting policies and procedures for maintaining complete records of all receipts and expenditures. Adherence to written policies and procedures should help detect and reduce irregularities in transactions and help ensure public monies are safeguarded. Most importantly, the Governing Board should ensure that effective internal controls are implemented. Management Response dated June 15, 2007: Additional controls have been implemented to address the comments raised. There now exists a written and extensive accounting policy and procedure manual which addresses all of the record keeping issues. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: Issues have been corrected. (See Appendix B for full Management Response). School Founder Overpaid in Error As of December 31, 2005, the school s General Ledger reported that the founder was owed $55,277 in back wages that were earned in prior years but not paid. As of December 31, 2006, the General Ledger reported that $39,353 of the $55,277 was paid during 2006, and a balance of $15, was still owed the founder. It appeared that the General Ledger account balances however, were incorrect; and that the school founder was apparently overpaid by $9,076. 6

9 This error appears to have resulted from a $25,000 payment made to the founder in January, 2006, but the transaction was not recorded in the General Ledger. As a result, the payable balance due the school founder was overstated by $25,000. As of February 28, 2007, the school founder received $9,076 more than he was due. The school should adjust the $25,000 recording error, and the school founder should reimburse the school the $9,076 overpayment he received. Additionally, the school founder is being paid an annual salary of $114,000, which is $3,000 more than the $111,000 salary stipulated in his employment agreement. Management Response dated June 15, 2007: The founder has not been overpaid, and in fact is due and owing back wages in the amount of $140,923.51(i.e. the bonus) as of March 13, (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: All bookkeeping errors in this area have been corrected. (See Appendix B for full Management Response). Incorrect IRS Form 1099 Issued to Independent Contractor A contractor who was also a parent of a student was hired to install a paging system based on a written quote of $6,760, plus labor amount. After the contracted work was complete, and after continuous un-contracted upgrades to the system were made, the school paid the contractor approximately $23,000. Our review of the contractor s IRS Form 1099-Misc. for 2006 tax year revealed that only $1, in compensation was reported. Due to the substantial discrepancy between the amount reported on the Form 1099 and the amount paid to the contractor, we requested that the school re-compute the reported compensation amount to ensure it was accurate. Subsequently, the school responded to our request in writing, inferring that the reported compensation amount was correct. We then suggested the school obtain advice on this matter from the school s bookkeeping service provider who was a certified public accountant. The school subsequently determined that $4,715 of the $22,688 paid to the contractor during tax year 2006 was for labor, and that a corrected Form 1099 would be issued. Management Response Received on September 5, 2007: G-Star is now doing this as a contractual procedure. (See Appendix B for full Management Response). Fixed Assets Not Adequately Tagged or Recorded The school s fixed asset inventory system needs substantial improvement. The Fixed Asset Inventory Forms do not contain the needed information to identify and locate individual assets. The school does not have a procedure that ensures all newly acquired assets are accounted for, and there are no periodic physical inventories. 7

10 Staff from the School District s Capital Assets was requested to perform a fixed asset inventory for the charter school. The inventory, taken on March 19, 2007, identified a number of assets, totaling approximately $100,000 in value, listed on the school s Fixed Asset Inventory Form but could not be located. The inventory also found some assets that existed but were not listed in the Fixed Asset Inventory Form. Tagging and recording assets is a basic control to safeguard property and equipment by providing a method to identify, inventory, and locate physical assets. All property and equipment owned by the school should be tagged, Fixed Asset Inventory Forms should be periodically updated when assets are acquired or disposed of, and periodic physical inventories should be performed. Discrepancies should be investigated and disposed properly. Management Response dated June 15, 2007: G-Star spent hours accounting for these items which all have been accounted for except for a computer and monitor which may have been purchased four years ago. (See Appendix A for full Management Response.) Note: As stated by the School during the September 10, 2007, meeting, most inventory discrepancies have been addressed. We will perform an updated inventory of the school, and the results will be released as a subsequent event report. Use of Facilities without Lease Agreements. The school allowed two teachers to operate a for-profit summer camp at the school without (1) charging them a fee, (2) a written lease agreement, and (3) without insurance coverage. There was no written agreement for one tenant who utilized school facilities for several months. The school allowed one staff to rent a house owned by the school for at least one month without a written lease agreement. Management Response dated June 15, 2007: The use of facilities is a policy matter which is central to the purpose, objective, and mission of the school. Any bookkeeping areas relative to record keeping criticisms have been corrected and all accounting procedures have been entered into the School Accounting Policy and Procedure Manual to insure this error will not be repeated in the future. The teachers who operate a summer camp provide a valuable recruiting service for the school, and G-Star maintains proper insurance coverage through its insurance carrier. If there are additional requirements, G-Star will certainly comply. All tenants in the future shall maintain a written contract. As to the rental of a house, this is corrected and there is no tenant currently in the premises. In the future, policies and procedures will require any 8

11 occupancy be documented in a written lease. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: G-Starr will provide a contract for this camp in the future. Errors have been corrected. (See Appendix B for full Management Response). Inadequate Backup Documentation Maintained The school failed to provide 5 of 60 (or 8%) requested invoices during the audit. Thus, we could not ascertain if these expenditures were appropriate uses of public funds. Additionally, 7 of 56, (or 12.5%) invoices reviewed did not contain sufficient detail for expenditures such as a description of the item or service purchased, the unit price, or the transaction date. Also, the school was initially unable to locate 6 of 60 (or 10%) of the requested invoices, but subsequently was able to obtain copies of the invoices from vendors. We noted two instances where bookkeeping staff issued payments at verbal direction of the school founder without having any backup documentation to support the expenditure. Both checks were made payable to individuals, one for $2,700 and another for $3,000. Section 21.0 B. of the school s Charter, as well as Generally Accepted Accounting Principles require the school to maintain complete records of all receipts and expenditures. Management Response dated June 15, 2007: This again goes to record keeping requirements. Features have been modified to insure compliance with standards. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: Errors have been corrected. (See Appendix B for full Management Response). 3. Tenant Did Not Undergo Required Criminal Background Screening One tenant did not undergo the required fingerprinting and criminal background screening before they were allowed to lease a room on campus. After we brought this matter to the school s attention, the tenant was appropriately fingerprinted, screened, and supplied a vendor badge by the School District s Police Department. It should be noted that the school does not require background screening of production company personnel that temporarily utilizes the school s studio facilities. According the school founder, access to these areas is restricted during productions, and students are required to complete a temporary learning elsewhere slip when entering the restricted areas of campus. 9

12 Florida Statute requires background screening for certain non-instructional employees and contractual personnel who are permitted access on school grounds when students are present or who have direct contact with students. Contractual personnel include any vendor, individual, or entity under contract with the school. Contracting with individuals without going thru required criminal background checks could jeopardize the safety and welfare of students. The school should ensure all persons with direct access to students are fingerprinted as required. The School District s Charter School Department should ensure that the school complies with related Florida Statute and Department of Education requirements. Management Response dated June 15, 2007: This procedure has been corrected to comply with the Jessica Lunsford Act to insure that all properly classified persons meet the requirements by statute. (See Appendix A for full Management Response.) Management Response Received on September 5, 2007: That tenant's contract was terminated and he is no longer on the premises. G-Star will have all film company personnel background checked in accordance with the volunteer/mentor procedure. (See Appendix B for full Management Response). 4. School Maintained Required Insurance Coverages Section 26. I. of the Charter requires the school to maintain the following minimum insurance coverages: General Liability: $1,000,000 per occurrence. Property: no less than 100% replacement value Automobile: $1,000,000 per occurrence. School Leader s Errors and Omissions Liability: $1,000,000 per occurrence. Fidelity/Dishonesty/Liability: $500,000 Worker s Compensation: Minimum Statutory limits. A review of the school s certificates of insurance revealed that the minimum required insurance coverages were being maintained, however, the School District was not named as an additional insured as required by Section 26.0 I.7. of the Charter. The Accounting Services Department should ensure the School District is named as an additional insured on all the school s insurance policies. Management Response dated June 15, 2007: G-Star has amended the insurance certificates to show the School Board as an additional insured. (See Appendix A for full Management Response.) End of Report 10

13 Appendix A Management Response Dated June 15,

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