VICENTI, LLOYD 8: STUTZMAN LLP Making a pusit'wc in nu: world Los ANGELEs UNIFIED DISTRICT RESPECT REPORT ON MAGNOLIA SCIENCE ACADEMY 6 8: 7 FORENSIC ACCOUNTING r. If) JUNE 12, 2014 CHENGE TRUE-ET EECELLENEE CONFIDENTIAL "1 VICENTI LLOYD STUTZMAN 7 VBUSINESS sun 1 1 1 'l September 23, 20H Ken Ersmlett, Inspeetor General Los Angela's Uni?ed School District ??ioe ofInspector General 333 s. Beaudry Ayenue, 12" Floor Los Angeles, CA Re: Final Report Forensic Accounting Project for Magnolia Soienee Aeademy 6 d: 7, Los Angeles Uni?ed School District (LAUSD) Deaer. Bmmlett: Attached is our ?nal report regarding the forensio analysis of Magnolia Science Academy - 6 and Magmo?rrSeienoeAcademy-T. Thedateofthemportislune 12, 2H14,whichis the ?eld work ended No additional review of client records was performed after this date. The only additional included Writing an executive summary, proo?ng 1116 PEPE-ling and labeling exhibits, numbering tables, organization ofreeords, binding, quality control and review. VLS was advised that LAUSD will be opening an investigation regarding these two schools and therefore any open items at the date of this report are included in the report for your consideration. Respectfully, WW Linda M. Saddlemire, ETHEFF, CFE Co?Managing Partner 331:] E. Route 65, Suite Ill-D, Glendnra, CA rs 52533.net! Fax 635.357.3312 E-Ilall I so i. ll. N. Vicenti. Hard 3: human LLP TABLE UF 1 Table of Contents 14 nu En?ement Background and .. Professional .. Scope of Engagement, Testing Sampio Size, and?eporled Findings .. . .. 15 Eerieral Disclosures Dueniew of Magnolia Educational and Research Founda?on Analytical Review of Financial Information Trend Reviewand Analysed! MEHF General . 33 3'3 .. 39 41 Hemue and Expenditure Testing 50 Accoun?nlof?euenues and of Financial i Payroll Expense Open Items - Requests Outstanding From MEHF Pusdhle Forum .. 14 15 1? 19 2? ?.30 30 . 33 33 a: 'i'E Les Amiga-is: Unified District Magnolia Science Academy 5 ii Forensic Accounting CONFIDENHAL Vicenti. Lloyd .5 Stutzmon LLP su 2 Etteurtlve Surnrnarv Hamid-Purpose, ondScope Vicenti, lJovd Er Stuternan LLP WLSJ was retained by the Office of inspector General of the los Angeles Uni?ed School District {the District} to assist in a forensic accounting analysis of the Magnolia Science Academv-? and Magnolia Science Academv-i' {Mire-i]. ntsa-s and Min-i are two of eleven charter schools that are operated in; Magnolia Educational and Research Foundation, a non-pro?t 5d1icii3} tag exempt organization. The main objective of this engagement is to provide the DIG with a forensic accounting of MEA-E and with the goal of determining the nature of disbursements and the sources of revenues. For MSA-E the scope covers the period beginning ?scal vear {Fvi zousito through Februarv Iii, 2014 and for MSAFT, the scope covers the period beginning Filtilui'll through February 23, 2.014. 'v'L'i was requested to include a detailed accounting of revenues and expenses for each school since Inception of the school. ills was also asked to perform a high level analvsis on the ?nancial activity of the charter management organization and review transactions between it and MBA-E or MBA-7. From this point forward, ant:r discussion of the management organization {the stand-alone foundation component} will be referred to as MERF. Dur scope did not include the review or anahisis of anv other schools widtin the charter organization or the organization as a whole. Additionally, ?il'LS did not request or obtain anv financial information or documentation related to any of the other Magnolia schools. Summary of Procedures Federated For the period identi?ed above, tits performed the following procedures: I Prepared a trend analvsis for each school which was used to identifv possible areas for detailed testing. . - Reviewed relevant audits, reports, reviews, and anti other relevant assessments conducted bv others related to Mitt-E, and MEHF. Performed a detailed analysis of disbursements and expenses with verification procedures applied to a sample of expenditures. I Performed a detailed analysis of sources of revenues with verification procedures applied to a sample of revenues. to: Angela: Uni?ed School District Magnolia Science dictation-n,-r 5 *Forensic Amenity i?lfl?'j?j FiilliilijLJLiLJ f? f? EXECUTIVE I 3 Performed a review of payroll amenditures and summarized payments to each employee for the ?scal years noted. verified the salaries paid appeared reasonable for the position. i Performed a forensic amounting analysis of any transactions which appeared to be: loans andfor transfers of funds to andfor from MSA-E, MSA-T or other Magnolia Science Academy Eharter Schools, as well as with MERF. Self-dealings, con?ch of interest, unexplained, unusual, or ?nancially irregular. I Perfonned a broad review of MEHF ?nancial actlety for the aforementioned periods to attempt to identify any other transactions that might affect MSA-E andfor This report presents factual data regarding the forensic accounting of funds and it is up to the appropriate body to determine if the results Indicate any noncompliance by MBA-E and MSA-T with appropriate charter regulations. v15 does not make any recommendation regarding approval or revocation of the charters of or as this is outside the purview of our services. Results of Procedures Performed This section summarizes our ?ndings from the analyses and testing perfonned. For a detailed discussion of each ?nding, refer to the body of the report. Financial Solve 5 No. 1 - 3 In three out of the last four complete fiscal years, operated In a de?cit mode with expenditures exceeding revenues. operated In a de?cit mode in two out of the last three complete ?scal years. its of June so, 2013, both schools had negative net assets, and met cash ?ow obligations by borrowing monies. The interim reports for FTZ?leiil ?led by the schools indicate a positive change with expected yea r~end results having a surplus of revenues over expenditures. Since the fiscal year was not complete as of the date of this report, and the financial statements had not been audited, it is not certain whether this change wlil come to fruition. At the end of F?r'l?llf?, MEHF had de?cit net assets of In F?fl?l??l and scum, expenditures exceeded revenues by $1,232,2or and respectively. in Fr2o12r1a, revenues exceeded expenditures by $30,539, only after a contribution of Los Angeles Uni?ed School District Uicenti, ond? Scotsman Mognoiio Science Academy i" Fore-ash: Accounting WCEHH, Hoyd Stutcmon EXECUTIVE 5U I 4 HWEID was pledged bv an outside source. This level of deficit spending raises concem about the ?nanclai stolvenc'llr and management of the ?scal affairs of HERE The cash ?ow needs have been met primarilv bv honouring monies from the Magnolia Cha rter Schools, and for the fiscal year ended June 30, 2D13, reported owing a net amount of 52,359,632 to the various schools administered bv MERE. Goin er Footnote Disclosu Findin Ho In reviewing the stand-alone audited ?nancial statements of MSA-E, and MERF, VIE identi?ed several de?ciencies in the footnote disclosures. Due to the fact that each of the entities had negative net assets, it is our opinion that the audited ?nancial statements should have addressed this fact section 5101. m5 also identified deficiencies related to the disclosures of [or lack thereof} the relationship bEtWEten and MERF, information related to the factoring of program revenues, negative net assets and Insuf?cient reserves, description of the management ices paid hv the schoois to HERE and intercompanv payables. inter- Loans Findin No. ?1.1 The cash flow needs of MBA-E, MEAJ, and MEHF have bemt primarily met bv borrowing monies from other Charter Magnolia Schools. It is commonly necessarv for schools to temporariiv borrow monies from other sources due to state deferrals and other payment schedules aftw the expenses have been incurred; however, it is unusual fur the supporting foundation to be borrowing monev from the schools. As of June SD, 2013, MERF had a net amount due to the schools of $2,391,433. MERF was unable to provide loan documents for the transactions between and MEHF that documented the repavment terms, interest rates, etc. Additionally, it: appears that the loans or transfers were not approved bv the board prior to making such transfers of funds. As of June so, 2D13, MEHF included in its books a due from Paci?c Technologv School Drangevale [131's mi} of however, this school is new dosed; therefore, it is possible that this debt is not collectible. MERF Expenditures: ACg?liiJ {Findings Ho. 12 141 From through Februarv 2B, 2D14, MEHF paid a total of $3,050,454 to Institute for Education Research The services listed In the contracts include things such as curdculum development, professional training, assessments, human resources, business and ?nancial support, teacher evaluations, and academic support services. The fees associated with the services are based on a per student amount, which started at $160 per student In and increased to $225 per student in In F?i?2D12f13, the contract listed itev projects to he completed and dId not reference a per student amount. The amounts paid to ACCORD are based on a membership fee schedule and are not In direct relation to services provided, nor are Los Angelics Uni?ed Schooi ?isb'ict Magnolia Science ricotta-mi:r i" Forensic Accounting I cxccunvt 5 they tied to hourly rates or individuals assigned to the various schools. The billings also do not tie the he to actual enrollment of students served. The payments to ACCORD constitute a high percentage of the total expenditures for MEHF. This expense was 29.1% and 25.3% of total expenditures in mama: and 2mm, respectively. MERF experienced de?cit spending In these years, which causes doubt about whether this sendce is actually affordable. This expenditure in excess of available funds can be construed as mismanagement and Iaclt of proper budget controls for MERE Additionally, the current amount of CMD fees collected from the schools does not appear to be covering this cost. There also appears to be a close relationship between MERF and ACCORD. They share the same facility in Westminster, and the services between the two organizations are closely tied. The services mentioned in the ACCDFID contract seem to overlap with the responsibilities of individuals employed by MERF. For example, MERF has accountants and a Chief ?nancial Officer on staff to handle the finances of the schools; however, the ACCORD contract includes accounting support and ?nancial audit preparation as two of the services being provided. This close relationship CEILISES concern around the ability to be independent in relationship to offering both management and educational services simultaneously. ME FE endI s: mrni on isa Related es FindIn 0.15 For FYIDDHIID through February 23, 2014, MEHF paid a total of 5206,1139 to the us. Department of Homeland Security, Department of Justice, and immigration attorneys, 'v'lj reviewed supporting documentation for a sample of these transactions totaling $43,243. Based on the documentation reviewed, these costs are related to H-IB ?ling fees, I-14i] ?ling fees, attorneys lacs, and ?ngerprinting fees. The support also shows that the cost for spouses and children were paid for by MERF. we did not compare the names Identi?ed to the payroll or personnel records of lleiiF to determine If the individuals receiving the bene?t of these senrices were actually MEHF employees or relatives of MERF employees. ms was informed by the DIE that it would perform additional review of these costs to determine their appropriateness. MEHF CMD Revenues din Ho. 5 Using the general ledger detail provided, V1.5 compared the EMU fee expenditures recorded by and to the CMD fee revenues recorded by MEHF. For fee revenue received from MSA-E, there are variances of 533,4?5 and $16,215 in F??l?r?u and respectively. For he revenue received from there is a variance of moss: in F??lti?l. In all instances, the schools show an expenditure that is greater than the revenues recorded by MEHF. Additional follow-up or inquiry should be made to deteHnine the reason for the variances. tos Angela-s ?ddled School District Weentl, Lloyd .5 Stutzrnon UP Magnolia Science Academy 5 ?Forenslc Accounting triceoti, Lloyd if: Stutrrnon lmEoper Accojj ntigg T??ggm Finding Ho. 1? 21] Revenues were overstated when refunds or returned electronic payments were recorded as revenue. A refund from a vendor shoutd be recorded as an expenditure abatement to offset the expense recorded when original payment was made. A returned payment [due to insuf?cient funds] should be recorded to Accounts Payable {to create a liability for the amount owed} or to the original expense account used [to cancel-out the original transactionj. When payments were returned due to insuf?cient funds, additional attempts were made to pay the amount due to the respective vendor. in some instances, each attempted payment was recorded to an expense account, which resulted In an overstatement of expenditures. There were two instances In which expenditures were recorded to the wrong school based on the Information provided in the supporting documentation. In some instances, employee payroll deductions were recorded as expenditures of the schools. The schools act as a third-party agent to collect and transfer certain premiums to the respective organization; therefore, when the amounts are deducted from an employee?s salary, it creates a liability for the school. Clnce the funds are paid to the orga niaation, the liability is removed. Expenditures that were related to more than one fiscal year, or were paid in the ?scal year alter they were incurred, were not accrued properly. In some instances, payment was made in advance and a portion of the cost should have been recorded as a prepaid The schools adopted Object Codes de?ned by the California School Accounting Manual, which are used to identify the type of revenue or expenditure transaction. v13 identi?ed instances in which the Object Code used did not appear appropriate considering the description provided on the support or was inconsistent widi the Object Code used for other similartransactions. These variances do not impact total revenues or expenditures reported for a particular ?scal year; however, some do impact the major categories required to be reported in the audited fina ncial statements. MSA?EEMSA?T?lnsu?icient?u itl Doc entation Fl in sNo.23?26 'v'ls identi?ed instances in which supporting documentation was not available or nut suf?cient. When supporting documentation could not be located, a request was made with MERE. in many instances, they were able to provide support,- however, there were some instances in which support was not available. For example, for the CMU fees paid by the schools to MERF, the ?les typically contalned a copy of the bank continuation of the fund can sfer; however, there was no additional support attached ie.g., caiculatlon tos Angela's Domed School Dim Magnolia Science Academy Forensic Accounting WWDW Ll: of amount paid}. There were also Instances in which a copy of a check stub was included in the ?ies, but a supporting invoice or other docu mantatlort was not included. identified instances in which the documentation provided not include suf?cient information to determine the SEMCES provided, the time period covered, andfor the school the services were for. For example, textbooks and other goods were often purchased through Amazon and shipped to one of the schools. In some instances, only a payment confirmation was Included in the ?les The payment continuation does not include the items purchased or the shipping address. This Is Insufficient information to conclude that the Items purchased had a legitimate business purpose for the school. Additionally, several deposits did not include copiea of the checks being deposited. tion Duties- Cards Findl No.2? The Principal at each school site is issued a debit card to use for purchases related to school activities. 1:15 identi?ed several ooncems related to the use of these debit cards. - Each debit card is linked to a separate account at the bank, which is funded through transfers from the primary checking account. Funds are transferred as needed and there does not appear to be a ore-established budget or guidelines for purchases made. - According to MERE, the current policy allows Principals to approve purchases up to $501}. Anything over this amount must be approved by the Accounting Manager, CPU, or CED depending upon the amount. For the period reviewed, tits identi?ed 14 purchases usl ng the debit cards that were above the 550i] limit, and there was no evidence in the support of additional review or approval by one of the parties identi?ed above. - Equipment was purchased using the debit cards. All equipment purchases should go through tho ensure proper tagging and tracking of equipment. According to discussions with MERF, typically handles equipment purchases as well as the process for taing and tracking of equipment. The supporting documents {receipts} do not indicate receipt of goods at the school sites, so it is not known whether the goods were actually delivered to and used at the schools. I The debit card accounts do not appear to be reviewed and entered into the general ledger in a timely manner. For MSA-T, the last entries into the general ledger were made in ?ctober ems; however, there was activity in the account for each su bsequent month. CDNFIDENTTAL to: Angeies Unified School Uistritt woenlt Lloyd Stutrmon tiP Magnolia Science Acadeng i" - Forensic Accounting execunvs somehow a sul uestionableTransactio ndin No.28?32 The foliowlng expenditures were identi?ed during our testing, and appear unusual or questionable. I Payments were made to the Department of Homeland Security. Department of Justice. and immigration attorneys in relation to obtaining and renewing Us. Visas. For the period reviewed, a total of $8,590 and $315 was paid by and MBA-T, respectively. Of the nine individuals that bene?ted from thEse services, sis did not appear on the payroil for the schools. Additional review and Inquiry is required to determine the relationship between these individuals and the schools to assess if these were appropriate expenditures. 1libs was informed by the BIG that it Would be performing this additional review. There were two Instances in which Principals were reimbursed for cash payments made to day laborers hired to help move furniture. In both instances, no support was provided other than an email or written note indicating that payment was made in cash and the amount. The Use of clay laborers for of?cial school business is not a recommended practice as these individuals are Iii:er not covered under the school?s general liability insurance in the event of an injury. Additionally. the schooi is unable to properly report to the IRS payments made to the individuals as there is no information for the individuals paid. - v15 identified numerous transactions in which food or meals were purchased for teachers, parents students, or business associates of the schools. Many of these purchases were paid for using the Principals? debit cards. The schools do not have an Object Code to trad: food and meal purchases, and they were typically charged to the "Other Supplies" Dbject Code. Additional inquiry should he made with MERF to determine if thEre is a budget established for these types of expenditures or if Principals are given complete discretion on spending in this A total of $2,4ss.so was pald by roses to cover the medical costs related to a student injured on campus. A portion of this amount was paid directly to the medical center that treated the student, and the remainder was paid to the parent as a reimbursement for costs already paid. The documentation supported the amount paid; however. there was no documentation of the steps taken to assess the legal responsibility of the school and whether this evpenditu re was in the best interest of the school. I- Flelocation costs totaling $2,301.52 were paid to when he was hired at MBA-E. This amount covered general relocation costs, a moving truck. and extra rent paid by: EDNHDENHAL to: Angeies Unified School District Vice-pd. Lloyd Magnolia Science Academy 6 .7 - Forensic nomenan It- --~wqu444444 Activity No. ,33 3: 341 ?v?lj selected a sample of fundraising and other events that require the collection of funds from students andfor parents {uniform sales, booir fair, ere}. UL5 compared revenues to expenditures remrded In the general ledgers to determine If revenues appeared reasonable considering the cost of the respective events. Based on the analysis performed, certain events appear to have experienced a loss, meaning expenditures exceeded revenues. Further review and Inquiry ls required to determine the reason for the losses and whether they are due to poor management of the event, lack of sales, andfor unreported income. it is possible that some of these events are not intended to make money; however, at a minimum, the costs should be covered. Additionally, In F'i'ziilli?l, MBA-E had a ?eld trip to Europe. The total cost was $15,520, and revenues amounted to only $23,100. The event appears to have cost the school $12,92li. During this ?scal year, MBA-E incurred a de?cit of almost which calls into question the reasonableness of spending resources on this type of event. Pam? (finding; Mg, 35 39! Through the review and analysis of payroll costs, 'v?L?i identi?ed instances In which payroll costs were not recorded properly In the general ledger. I The August EDIE payroll expense of MSA-E {totaling $4,915} was originally paid by MERF as part of the start-up costs. later reimbursed MEHF for these costs,- however, rather than record the cost to salary expense, it was recorded to Professional Consulting Service along with other start?up costs reimbursed from to MERF. I Several salary type payments were made to employees through Accounts Payable [by issuing a check through the checking account] rather than paying costs through the payroll company. The instances identi?ed by tits totaled SIGHT and $2,193 for MBA-E and respectively. All compensation to employees, including bonuses and stipends, should be paid through the payroll company for accurate reporting of income and to ensure all taxes, STRSIPEHS, and other deductions are properly captured and reported to the appropriate agencies. I Expenditures are misstated due to errors in recording certain payroll transactions, For example, in an electronic transfer of funds to the payroll company to cover direct deposits {$29,219} was returned by the bani: due to insuf?cient funds. A second attempt at payment was made via wire transfer, which was successful. Both the unsuccessful and successful payments were recorded to payroll expense accounts. The ?rst payment that was returned CGNFIDENTIAL ins Angeies Uni?ed School District ll'icen?, Uni-I'd 3% Magnolia Science Academy E. Fore-mic Accounting EKECUTWESUMMARYI 111 was recorded as revenue rather than an expenditure abatement to zero out the ?rst expenditure that was recorded. Additionally, the payroll clearing account was not reconciled and certain payroll costs were expensed twice rather than properly reducing the balance in the payroll clearing account. I For certain payroll periods, the STREIPEHS employee deductions were recorded as expenditures of the schools. Dnly the employer's portion of this bene?t is an expense of the organization. For example, ifemployee ?John? is paid $2,0?tl and contributes will; of his salary to ignoring all other taxes and deductions, net pay would be $1,300. The salary expense to the school is still 52min; hoyveyenr the deduction becomes a liability of the school until the amount deducted is passed on to the appropriate agency. There were some months in which the net amount of 51,3[10 was recorded as salary expense and the was recorded as a benefit expense. This is not the correct accounting treattnent. nisn related to STHSIPERS, for certain periods, tits was unable to verify that the employer?s portion listed in the payroll records matched to what 1ulias recorded as an expense in the general ledger and paid to the respective agency. Additional steps and inquiry are needed to determine the reason for the variances identified and ensure proper payment of the bility was made. - identi?ed instances in which salary costs were expensed to Dbject Codes other than the salary related accounts. Generally, these costs were expensed tn the 3m [Employee Bene?ts} or 5m {Services and Either Operating Expenses}. The costs Identi?ed amounted to $23,531 and $63,839 for MBA-E and inset?tr, respectively. ape-n items - Requests Outstanding ?nm MEHF The following information or support was requested from however, it was not received in time to Include in this report. All ?eld work was stopped as of the date of this report. in relation to intercompany borrowings; the analysis completed by ?iiLS identi?ed a discrepancy of the audited ?nancial statements in regards to the net amount owed by MEHF to other schools. tits requested bank statements for in order to verify the actual cash transfers betwaen the entities and reconcile the discrepancy. Bank statements for MERF have been requested to ensure that the cash transfers appear on the bank statements for MERE indicating the transfers 1were Diapaer tos Angeles Unh?ied School District Magnolia Science Academy 6 Forensic Accounting li'icentl, Lloyd 3; Stuicmon LLP EKEUJTWE SUMMARYI 11 made In the cash account. The transfers have been confirmed for MBA-E and but not the other side of the entry in ileiiF. {3i V15 requested a sample of bank reconciliations to review and con?rm that the bank accounts reconcile to the general ledger activltv. These documents were not raceived. {41 In mal?r'll, there is a dtlference between MEHF's audited ?nancial statements and gEneral ledger in the amount of $93,322 for total revenues and $622,302 for total expenditures. VLS requested that provide an explanation for these varia noes; however, a response was not received. Support andfor further information were requested for the foil-owing transactions and have not been provided. MSAJE atom node mum Date Horn than: Mann Debit Proladcn?nl I ?lie 11" Part 3. 53M Emsulhtg Check I In? lrrulementa?an MM EILEEN 53?? Elizabeth 55.1.5 FLITIill'illik'? Deposit 0521M ?mum Festive! 3mm C??lolnt soon I'm? cred: amnion soars 9mm 123M215 manta 21211 mm am Mm Deposlt annuals: Ammo ?st: tolciris lorr datalts 55.3? Eif?oe? ?ll] Classroom attack 1W2 EMTD James Elan: F'El'itals 551.50 MB chive Dude m?lm Tvpo Hum tune clam Milli-TI". Tdnl'tllr Lutheran stun Hti?d?lng?errt at]! in?nite Statl? march November :oto amt moo titan-r, Trh-ritv Lilian-an 551D Ell momma Status Elna-ch Deneth solo Rent moo Mm SEW Lilli 311553-92 Hm Euphr 2,553.5 Worms Joint Poster Home: Elli Compensation Ell MIME 2012-13 9.55.20 Entire-ruse? compensation Check 05233324313 roads Assoc. 1.11am Lllbi?tlr Puller soon huurance Hill 2012-13 Authva LilhliI-v insurlnoe 14521:!) Speclal Generd 5p. Ed.FIir shire saau Edv?tlon cue Journal osgrauts err Blink misshapen 2,552.11 rTMate?als it hasul codes no: can Etta-ere: Chad: MEIER 20341 Mmoshev amass 315m EDNFIDEMTMI Los Angeles Uni?ed School District Vicenti. Howl Eu Stutzmon LILP Magnolia Science .ltcoizlen'nrr 5 2- Forenslc Accounting EHEEUTWESUMMARYI 1! [ti] Additional support or explanation was requested for the following payroll transactions for - memo: Employee 1 received one payment through payroll on momma. Only payment made to this employee. ?equestedM provide employee contract. I F?I'Z?llf? Employee received one $2,850 payment through payroll on Dnly payment made to this employee. Requested MEHF provide employee contract. {if} Additional support or explanation was requested for the following payroll transactions for MSAJ: I payments made through payroll for afterschool overtime hours on payroll dated 12:31am; EBMDH and arsenals. I payments made through payroll for afterschool overtime on 2(233?2013 and systems. I I was paid 51,3?) with code ill?Health insurance on arsorzou. I I ?ll) additional salary payment on 10! 31.32011. $1,500 BTSA stipend on SENIOR. I received one 51,4523] payment through payroll an Only payment made to this employee. Requested MEHF provide employee contract. Possible Further Research The following list identi?es areas that warrant additional inquiry. research, or review, VIE was informed that the llfl?l'?ce of Inspector General will perform the additional review necessary and Vii was not required to perform additional works Consult with MEHF about whether the amounts are or will be oolleoted from PTS our for outstanding debt, totaling 515?,4100. [Ii Further research regarding whether there are relationships between the board members of ACCORD and the board members of MERF. Further research is warranted in regards to immigration fees paid and the business purpose or relationship for said fees. further review should be made of immigration fees reimbursed to by MEHF to ensure they are legitimate business enpe nses of MEHF and are not do plicattve of costs already paid by MERF. Further research could he completed in regards to why certain fundraisers, such as yea rboolt and uniform sales, are experiencing losses. Losengeles ?ooded School Dom Juummammjajmj'j i Vicentl, tioyd E: Staten-ton Magnolia Science Academy 6 El Forensic Accoume EHEEUHVE 13 Con?nn w-a reporting has been handled pmperly for employee paymenE made outside of payroll. Confirm credentials and quali?cations of employees. Further research is warranted regarding proper payments and recording of expenses. Further review is warranted to determine the reason for the variances in the t:ch fee recalculation performed by VIE, as well as the 1urariance between the EMU fee expenses recorded by MSA-E and warn and the revenues reoorded by to: Angeles Unified School District Magnolia Edens: Academy 6 E: Jr'- Forensic Accounting EUNFIDENHAL Vkenti tic-yd summon LLP CDl'il'FiDEl'I-I'Tirlt Vicentl. Lloyd uh Stotzmon morocco AND SEDPE DF ENGAGEMENT I 1? Background and Scope of Engagement A. Engagement Background and Objective Vicenti, Lloyd Stutzman LLP was retained by the Office of Inspector General of the Los Angeies Unified School District [the District) to assist In a forensic accounting analysis of the Magnolia Science Academy-E and Magnolia Science illicaden'nr-ir and are two of eleven charter schools that are operated by Magnolia Educational and Research Foundation, a non-pro?t 501lcjl3} tag enem pt organization. The main objective of this engagement is to provide the DIG with a forensic acootmting of MBA-E and MBA-T with the goal of determining the nature of disbursements and the source of revenues. The deliverable will Include a detailed accounting of revenues and expenses for each school since inception of the school. For MESA-E the scope covers the period beginning ?scal year {Fri mild through February 23, 2014- and for the scope covers the period beginning F?i?Itll??l through February 23, ton. VIE was also asked to perform a high level analysis on the ?nancial activity of the charter management organization and review transactions behnreen It and or From this point forward, any discussion of the management organization {the standalone foundation component} will be referred to as Dur scope did not include the review or analysis of any other schools within the charter organization or the organization as a whole. Additionally, V15 did not request or obtain any financial information or documentation related to any of the other Magnolia schools. B. Professional Standards V15 performed this engagement in accordance with the American Institute of Certi?ed Public Accountants Statements on Standards for Consulting Services contained In Rule 201 of the AIEPA Code of Professional Conduct. In consulting engagements, the nature and scope of work is determined solely by the agreement between the practitioner and the client lLos Angeles Uni?ed School District - Df?oe of Inspector General}. The analysis and report does not constitute an audit, compilation, or review, in accordance with Standards of the AIEPA, the objective of which would be the expression of an opinion on any speci?ed elements, accounts, or items. Accordingly, Vt; does not express such an opinion. The BIG requested VLS to assist In preparing a forensic accounting for MSA-E and Ming as well as determine the reliability of this data. V15 worked in conjunction with the ma and the Charter School Division to determine the general procedures to be performed VLS used professional judgment to select samples for testing, determine the suf?ciency of supporting documents reviewed, and to present the results of the wort. performed. Los Angeles Unwed School onset Magnolia Science Academy a I?Forenslr: Accounmg i {a 1?l UF ENGAGEMENT I 15 Although the engagement does not constitute a ?nancial statement audit, the procedures performed in regards to testing various attributes, in some instances, exceeded the standards used in doe typical external audit process. The procedures 'v?Ls performed were not designed speci?cally to Identify or detect fraud; however, had 'v?lj Identi?ed evidence that supported the existence of fraud, this information would have been disclosed. C. Scope of Engagement, Testing Sample Size, and Reported Findings For MSA-E the scope covers the period beginning 1a through February 23, 2014 and for MBA-T, the scope covers the period beginning Fremont through February EB, toss. The following procedures were performed: CUNHDENHAL Vicentl, Lloyd d" Stutamon ills performed a trend analysis for each school which was used to identify possible areas for detailed testing. 1:15 reviewed relevant audits, reports, reviews and any other relevant assessments conducted by others related to MBA-T, and MERF. ills performed a detailed analysis of disbursements and expenses with veri?cation procedures applied to a sample of expenditures. The purpose of this forensic accounting analysis was, to the extent possible, determine the appropriateness of the disbursements and expenses according to ?applicable? California Educatlon Code, other applicable laws, LAUSD and Charter School policies and procedures, and other appropriate promulgated authortties. Testing Included a review of supporting documentation, such as an Invoice or contract, proper authorizations, and whether these was clear indication that the item appeared to be an appropriate expense for charter school business. W3 performed a detailed of sources of revenues with veri?cation procedures applied to a sample of sources of revenues. identified the sources of funds by categories to the extent possible and provided a schedule of results. vii-i performed a review of payroll expenditures and summarized payments for the ?scal years noted to each employee and verified the salaries pald appeared reasonable for the position. v15 performed a forensic accounting analysis of any transactions which appearedto be: Loans andr'or transfors of funds to andl'or from him-E, IviSA-i? or other Magnolia Science Academy Charter Schools, as well as with MEHF. Los Angeies Uni?ed School Moon-tolls Science Academy 5 Sr i" Forensic Accountan vicenti, Lloyd a Stat-ohm LLP BACHERCIU BED AND SCOPE OF 16 Self?dealings, con?icts of interest, unexplained, unusual. or ?nancially irregular. I VIE performed a broad review of MEEF financial for the aforementioned periods, to attempt to identifv any other transactions that might affect MBA-E andi?or This report presents factual data regarding the forensic accounting of funds and it is up to the appropriate bodv to determine if the results indicate anyr non-compliance- by and With appropriate charter regulations. 'v?ls does not make anv recommendation regarding approval or revocation of the charters of MEA-E or as this is outside the purview of our services. D. General Disclosure we created numerous electronic files, primarilv In Excel, in order to prepare the summaries of revenues and expenditures. These were prepared directlv from the general ledger data ?les received from lv'lEliF. v15 has included in this report some of these schedules and electronic ?les are availa hie If requested. Some of the dollar values included in this report have been rounded to the nearest whole dollarr There mav be minor rounding errors, which are less than when comparing the values included in this report to the underlving details Les Angel?es Unified School Den-m Magnolia Science Academy I5 3" - Forensic Accounting .Fl?j bicenti. lloyd? Stutemon OVERVIEW OF MAENDUA EDUCATIONAL AND RESEARCH DAWEINI 1? Dverview of Magnolia Educational and Research Fomdation Magnolia Educational and Research Foundation is a non?pro?t saddle] tax EitElTIpt organization. The organitation is also known as and doing business as Magnolia Public Schools As the management organization. it currenth oversees the operations of 11 Magnolia Public Schools. The Los Angeles Uni?ed School District has authorized the operation of eight charter schools MSA-S. MSA-E. MSA- 3" and The other three schools operate outside of Los Angeies Countv. Included below Is a chart summa rising the eleven schools: Glade Estimated ?ame - location Cite 'i'r Est. Span Enrollment ?u?m?dn?m MSh-l Fieseda Reseda, CA 1010 5-12 510 has lingeles L150 iiallev 'v'an ?uvs. EA 200? 6-11 420 Los Angeles 050 MSA-S Carson Carson, CA zoos 5-12 420 Lot ?males USU l iienice 1denture. EA 2003 6-11 200 Los Angeles 1.150 MBA-5 Hollvwood Los Angela. CA 2033 6-12 133 Los Angeles U50 Palms Los EA 2009 5-3 143 Los Angeles LIED MSAJ van I'Iluvs CA 2010 2TB Los Angeles IJSD Bell Bell. CA 2010 6-0 490 Los Angeles 050 MSl'i San Diego San Diego. CA 2005 5-3 San Diego 050 MSA Santa Clara Santa Clara, CA 2010. 6-10 434 Santa lClara County FTS Santa Ana Costa Mesa. CA 2005 5?11 US State Board of Edumtion lnforrnation obtained from MFS website on June 3. 2014 i not audited} Per materials of MFS, their mission and vision is stated as follows: Mission: Magnolia Public Schools provides a college preparatory educational program emphasizing science, teohnalogy. engineering, and math (STEM) in a safe environmEnt that cultivates respect for self and others. vision is to graduate students who are scienti?c thinkers that contribute to the global community as socially responsible and educated members of society. The Magnolia Public Schools Board of Directors [aka Magnolia Educational and Research Foundation Board} is responsible for establishing policies to Implement the mission. The Board is also reapansibie for ensuring that staff carry out the school programs in compliance with Board policv and applicable state and federal laws and regulations and for making sound ?nancial decisions that are in the best interest of the public. The Board appointed the Magnolia Public Schools Eentral foioe to execute the decisions and policies set bv the Board and to manage the business operations of the [as Angeles Uni?ed School District Magnolia Science Academy 5 l" ?Farensic Astountinp Viceoli, iloyd Stutzmon GUEFWIEW EIF MAGNUUA EJUEATIDNALAHD RESEARCH FDUMDATDCIM 18 Magnolia Public Schools. The headquarters of the Magnolia Public Schools Central foice is located at 13950 Mltton Avenue, Westminster, CA 92363. The charter agreements with the District for MBA-6 and MBA-T state they are responsible for their own ?nancial services {accounting budgeting, and payroll] and personnel services. The agreement states that MERF will assist the schools in completing these savices. Additionally, the charter agreement states that MEHF will oversee and for provide services for payroll, purchasing, and ?nancial reporting and oversee the annual ?nancial audit. The Charter agreements also state that MEHF will identify staff responsible for ?nancial administrative functions and the qualifications of staff assigned to these functions, and will also provide assurance that the accounting systems adopted would adhere to Generally Accepted Accounting Principles and describe the process of internal controls, MSA-E and ruse-r shall conduct all of its ?nancial operations in a timely manner and far all programs (regular, categorical, and special education} through procedures established by the State of California and the Federal Government, as appropriate. MEA- 6 and use-r must follow generally accepted accounting principles. Per the Charter agreements, and with the support of MEHF will engage an independent public accountant with school accounting experience certi?ed by the State of Caiifornia, to audit the school's ?nancial statements in accordance with Generally Accepted Auditing standards and the audit guide issued by the Controller of the State of California. [as ?ngcies Uni?ed School count Magnolia Science Academy 5 - Forensic slimming 3:03;] W. REVIEW DF 15 Analy?cal Review of Financial Infometion A. Trend Analysis Pmceduras To gain an understa riding of the ?nancial history for both MBA-E and Malt-1', VLS prepared a trend analysis using audited ?nancial statement data for years prior to Humans, and the intenm reports were used to estimate moans} Therefore, F?i'z?13f14 data is unaudited and used only for illustration based on each school's current estimate. The ?scal year totem not completed as of the date of this report; therefore, the data for Plantain should not be relied upon as ?nal data and is provided for informational and analytical purposes only. The trend analysis for MSA-E begins in moos?o and for begins in F?i'Z?l?fll, which designate the ?rst year of of?cial operation. The following tables Include a trend analysis of the Statement of Financial Position and the Statement of Activities for both schools. A trend analysis was also prepared from the stand-alone audited ?nancial statements of MERF for ?scal years 201MB, 2011112 and [see Exhibit 1 Exhibit 1 contains the standalone audited financial statements for MSAFE for wzoosrto through Exhibit 2 contains the interim report for MSA-E for Ftl?l??-Il. Exhibit 3 contains the standalone audited ?nancial statement for for Fremont through stamens. Exhibit 4 contains an interim report for MSA-T for FTEDl?fld. has Angelcs Un?ao? School Went-I- U?il'd 3'1 Stillman HF Magnolia Science Academy 5 Si Forensic Accounting ANALYTIERL REVIEW OF FINANCIAL in Table 1 Magnolia 5eienoe Aeademy 6 Trend Analysis - statement of Fitanolal Position Amount Dessriptinn momma mourn Fvantuu 552051213 ?25132141 Assets DJrrentAsseta Cash ant:l cash 5 53,525 - 5 25,532 3 335 5 53.0125 Prepaid ewense - 5,515 Amounts reseitrelnle 155,255 135,555 135,415 52,235 122,951 Loans receivable related party 155,555 55,555 - Total wrrentassets 253,254 223,655 212,555 63,115 135,521 Propel-wand Equipment Fumtture and equipment 42,125 155,255 51,559 52,555 52,559 Less: accumlated depreciation (4,213] (25,354} [24,5521 [41,555] {42,599} lilet pl'?pEi't'li and equipment 42,415 55,551 35,142 21,511 15,013. Total assets 5 551,255 5 552,151 5 155,552 5 54,111 5 zoom-1 1m and Refuses: Current Liabilities Assume payable 5 12,511 5 51,255 5 135,395 5 155.1445 5 155,555 Advances on program revenue - - 55,355 - Achued payroll and related liabilities 4,543 2,655 2pm} interoornpaw payable - 133,555 135,155 135mm hearts payable - portion 25,555 25,505 13.435 24.555 Total ourrertt liabilities 32,521 112,253 455,441 515,525 312,? Long-Term Liabilities Loans parable net of current pot-Hon 55,555 55,555 53,335 25,555 122,501] Tutsi liabilities 112,521 122,253 443,225 435,523 435m Net Assets - Unrestricted 213,535 155,554 {155,124} {351,451} {233,529} Total net assets 213.535 155,554 {135,124} [351,451]: {233,529} Total liabilities and net assets 5 331,2 5 352,152 5 255,552 5 54,112 5 255,511 1 Estimate of 12 months as of 113125114 interim ?ling {Exhibit vsoen?, Lloyd .5. Stutamon LIP Los Angeles United School 515mg Science Academy 5 2 - Forensic Accounting REVIEW DF HHAMCML 11 Table 2 Magnolia Science Milan]! 3 Trend Analysis - Statement efActiI?ties Ant-aunt Delu'lp?m Wm WINE me: 1:1: mm: mum! ?atware: Federal support 5 333.?3? 5 34.433 3 53.133 5 33.653 3 33.635 Slate 413?.553 1.346.313 533,133 325.33? 1.133.153? Lamlsuppert 353.313 34.559 11.43? 31.543 13.09:: Total revenues 1.115.343 1.155.312 1.113.315 313.59? 133.242 ?rms Certi?cated salaries 233.444 $16,603 531,221" 435.1D2 Classi?ed salaries 35.229 53.633 51.33? H.313 45.350 Fringe bene?ts 113.335 141.513 134.135 134.151 131.554 Banks and supplies 135.113 33.130 143.151 33.233 33.353 Services 3 other operating extremes 433.313 433.313 533.333 331.533 353.35? Interest expense - 153 32? 13,530 1U.153 Depreda?an 4.713 15.531 21.133 13.145 HIDE Tulal expenses 1.332.513 1.133.953 1.391.333 1.133.333 1.122.313 in?ame [dentin] In net and: 213.533 [23.533] {313.313} {163.331} 113.332 Net nets. beginning aftrear 213.533 133.954 [133.124] [351.45l "amend affair 213.533 5 133.954 5:13.114: 5 (331.451:- 5 (133329. Estimate of 12 months as of 1131.3314? 2" lnterlm ?ling [Exhibit 21. CHNFIDENML tat Angelle: named Weenti, Lloyd 3 Human LIP Magnolia Science Academy 3 3- -Feren?t: Amunung CIF FINANCIAL INFUHMATIDH 21 Table 3 Magnalia Science Andante 1 Trend Analysis - Slaternent of Flnanclal 4mm: Descriptlen morn 511011212 Helium 2433.343 Eun'ent Assets Cash and cash equivalents 5 5,505 5 154,410 3 45,220 5 55,1011 Prepaid expense 39,134 31,053 34,525 52mm delimit - - 4,004 4&ch Acceunla receivable Lams recehr?le related party Tetal current assets Property and Equlprnent Furniture and equipment impreuement Lass: accumulated depreciatlan Net prepartv and equipment Tetal assels and mm Current Acne-unis parable Advances an pragrarn revenue hurried paws" and related liabilities payable Leans payable - related part? Tetal current Lang?Term Llabill?es beans payahte - netaf current purtlun Total Net Assets T0ta1 net assets Total and net assets 1123,234- 509.?05 30,022 320,545 510,042 Ismael 13,333 15.333 43,003 30.00:: 15,114 213114 {2,2591 [2.5001 [13,3231 23,223 33,334 31323 50,001 5 103.245 5 $4.250 5 551.033 5 T114335 5 03,099 5 240,455 5 215,525 5 52,220- - 55,500 - 5,250 42,532 - - 422,550 550,250 225,000 .1?0,550 200,000 - 222,445 251,011 522,330; 222,443 024,255 201,011 322,31 (133,200 500,515} [210,023] 550,335 {102,204} [500,515] {210,020} semi 5 HERE 5 314,230 5 551.1333 5 711,335 Estimate of 12 rn0ntl13 33 0f 123122014 lnterlm ?llng [Eahlhit 41. Vr'centt. [lewd Stutzmen LLF [.05 Angeles Uni?ed Schnal Dim-m Magnelle Science Academy 6 Ferenstc 140501100213 REVIEW DF FINANCIAL 23 Table 4 ME: Science Audemv 1 Trend Analysis Statement of Activities scum-mm mum's: W12 W13 HEWHS Fedeml suppart 5 45,049 .5 54,95? 5 350,790 5 439,354 State supper: 504,533 043,214 1,130,650 2,315,035 Luce] supper! 45,513? 33,353 52,500 50,990 Tetat memes seize 931,554 1152,35? 2,335,533 Wane: Cedf?cated salaries 353,69? 507,992 TDLIEG 593,000 Ciassl?ed salaries 33,15? 64,594 55,48? 59,336 Fringe bene?ts 94.44? 13?,1?4 153,408 234.23? Bank: and wpplies 110,345 103,335 FEES 300,922 Set?pica and emer uperatrng expenses 254,?80 444,001 699,141 050,055 Inheresl: expense 13,450 25,305 Depred?im 2,235 5,259 11.415 20.0130 Tetal expenses 359,113 1,255,535 Lamaze 2,153,255 lureese {deu'eaee} i1 net Insets [164,004] [337,311]: 201,53? 511,6?3 Net assets, of peer 000 {163,204} {500,535} {113,910} Hates-sets, endeva {153,204} 5t500,515} misses} 393.595 5 Estimate ef12 months as [If Interim filing EUNFIDEM 7141 has Angela Uni?ed Ethan! District Vicentr', new 3- Stamper: LIP Magnetic Science Academy 5 I?Farensic REVIEW EH: FINAHEML I 14 Table 5 Megnella Education El Research Foundation Trend Anahsls Statement at Financial Pneitlen M11 m1: nectt?a F7. Account We Assets Current Assets Cash and cash equivalent: 5 81110 5 55.111 5 21,4?9 receivable - - manna Eeeuritv deppelt - - 1,525 Aceeuni: receivable 1,11} 503,544 recehreble 5,252 - - Tctal current asses 93,452 59,111 1,532.9? Pinpettf and Equipment Furniture and equipment 11Lil55 114,616 114,525 Building - Less: accumulated depreciation {19.533} (431454] @3451 Net property and equipment 31,532 11,141 51,131 Tntei assels 5 1T4394 5 130.153 5 1,590,129 tinbilitiesnnd meme.- Eurrent Liabilities Acceunts payable 5 15,397 5 331.345 5 355,505 Lineemed Revenue - 225,136 Line cf credit current perticn mesa 149,693 4,?52 Lea1s payable - related party 517,113 509.54? 23611531 Tubal current liabilities 1.3435113 1,322,811 3,252,114 Lung-Term Liabilities Loans payable - net of mm particle - Tctal liabliltles 1,343,313 1,322.32? 3,152,114 Net Assets Unratricted {1.163.314} {1,552,514} {1,651,935} Tctal net assets [1,153,314] {1,591,541 {1,551,935} Tclal liabilities and net assel: .5 114,954 5 131253 5 1,590,129 Les Angelle: [1an Ethan! Weean Lloyd State-nan Megnclie Science Academy 5 45 Forensic Acmmung REVIEW CIF FINANCIAL IHFDWATIDNI 25 Table 5 Magnolh Edmtlon It Research Foundation Trend Amunt Desuiltlon H10an ?ames Management Fee 5 1,493,609 5 2,135,143 5 Contributions - 151,151 Tolal revenues 1.493.000 2.136.143 2.534530 Brpenses Certl?cated salaries - - Classi?ed salaries 11114? 853.331 853.335 Fringe bene?ts 40?,035 435.1 415,921 Boole; and sopplia 14,326 124,?90 45,414 Services and other operating Expenses 1.555.099 1,133,250 1.055.342 Interest expense 10,540 43,315 49,21? Capllal outlay 5.36? Depreciation 13.504 13,951 13.351 Total expenses 2.130.015 2.560.403 2,503,741 Increase Islam] In net asset {Li-131,101] {524.260} 30.589 Net assets, beginning of year 113,3 {1,160,314l {1,592,541 Net assets, and eryeer 5 [1,150,314] 5 [1.652341 5 I 1.651335} nesuhs Finding lilo. 1. - ?nancial Solvency Min-6 In three out of the last four completed fiscal years, operated In a de?cit mode; expenditures exceeded revenues. As of June 30, 2013, the school had negatlve net assets of $851,451}. In other words, exceed assets by $351,461. This negative net assets figure for amounted to 3596 of the total revenues for that ?scal year. This level at de?cit speeding raises concern about the ?ns ncial solvency and management of the ?scal affairs of the school. The school has met its cash flow obligations by borrowing monies. At the end of F?fl?lzflii the school had ioans payable of nearly $30,000, and as of June 30, 2014 this has rlsen to season: {estimated per Interiml. Based on the lnterlrn report filed by nurses, one trend Is expected to change, and revenues are expected to exceed expenditures by approximately However, since the fiscal year is not completed as of the date of?'lis review and .Los Angelss Un?ed School Distn?ct Month?ch Edema Academy 5 3t -Fo.rensl'c Accounth EDNFIDENNAI. Vicentl, Lloyd Er Stutamon Isl-P ANALYTICAL REVIEW UF FINANCIAL 25 the ?nancial statements have not yet hoen audited, it is not certain whe?ier this change will come to fruition. lnforrnation regarding F?i'ZlJ13f14 state rever'IUEs is not yet available. Finding No. 2 - Financial Solvency MSA-T in two out of the last three completed ?scal years. MBA-T operated in a de?cit mode; expenditures exceeded revenues. As of June 1013, the school had negative net assets of $213,333]. In other words. liabilities exceed assets by The ?scal year ended June so, 2013 resulted in an increase to net assets of $281.53? which is a positive trend for the school and helps to alleviate concern about the school's abllityto meet its ?nancial obligations; howeven the school was still In a de?cit ?nancial position at the end of June 30, NB. The school has met ils. cash ?ow obligations by borrowing monies. At the end of mourn the school had loans payable of $353,1so. Based on the Interim report filed by use-t. this trend is expected to change, and revenues are expected to exceed expenditures by approximately However. since the ?scal year is not completed as of the date of this review and the ?nancial statements have not yet been auditedr it is not certain whether this change will come to fruition. Fin?ng Ho. 3 - Financial Solvency Although the focus of the study by was on MSA-E- and an analytical trend analysis was completed of the MERF audited ?nancial statements.Er At the end of Fytourts, MEHF had de?cit net assets of $1,561,935]. Expenditures exceeded revenues in Z?l??l by $1,232,201 and in by $524,260. In EDDIE, revenues exceeded expenditures by $30,539, which was only after a contribution from an outside source of income was pledged to the entity.1r This level of de?cit spending raises concern about the ?nancial solvency and management of the ?scal affairs of MERF. The cash flow needs have been met primarily by borrowing monies from the Magnolia Charter Schools and for the fiscal year ended June SD, 2013 MEHF reported owing a net amount of 52,sso,ssz to the various schools administered by MEHF. The audit report refers to this funding as lntercompany borrowing. it is commonly necessary for schools to temporarily borrow moni from other sources due to state deferrals and other payment scheduled after the expenses '5 v15 received only stand-alone audited ?nancial statements for MERF, which were used for this anami5_ Consolidated ?nancial statements were not provided. IThe 5mm? pledged in 2012113 was collected by MERF In 2013114 WNHDENTIAL chnn'. Lioyd 3i Stutzmun Los Angeles ?amed School District Magi-mire Science Academy I- Forensic Accounting '?ljfifl??Ilfl'l l_ ANALYTICAL RENEW CIF FINANCIAL I 2? have bean incurred; l-ioiivevenr it is unusual for the management entity to be honowing money from the schools. When analyzing the revenues of MEHF, v13 identified the following sources of signi?cant donations made to MERE: I In F?i'Z?llf?, a total of $700,000 was pledged to MEI-1F by Flemzi Elton. The amount was recorded on June 30, 2013 as revenue to object code 0511 - individual Contributions. This amount'was recorded to accounts receivable as it had not yet been collected. In F?i'zolafla'i, the total pledged was collected in three sEpaiate payments from Mr. Dten: $400,000 on mmrzola, on and $119.0!? on 11f15ir'2013. I On $39,400 was contributed to MERF by ?i'ilmaz Air. The amount was collected and recorded to 3611 Individual Contributions. E. Audited Financial Shrtements Procedures vis received and reviewed the audited financial statement reports for miss-s for zoosrto, totem, town and tonne; rose-r for 2o1ort1, scum. and courts; and MERF for totem, zone: anti gonna." ofthese audits were completed by Hill, Morgan and illissociatesr LLP a Certi?ed Public Accounting firm with offices in Carson and Culver City, California. nature Finding an. ii - Going car-tern arse?s. arse-a and MEHF In accordance with Generoth Accepted Auditing Standards, section 5m], the auditor should evaluate whether there is substantial doubt about an ability to continue as a going concern for a reasonable period of time. Due to the fact that each of the above entities had insuf?cient reserves and negative net assets, it is our opinion that the audited ?nancial statements should have addressed this fact. Professional standards require that the ?nancial statements disclose all the matters related to the entities ability to continue as a going concern including management's plan that might mitigate the adverse effects of such conditions. In addition, based on the analysis of management?s plan, the auditor?s opinion may need to be modified. The tack of disclosure in regards to this consideration and Consolidated ?nancial statements were not provided. Les negates Un?t-d School District Vice-iv. Hard swam-In LLP Maanaiie science Academy 5 tartaric attauntiaa CONFIDENTHII. chnh?. Lloyd Er Stutzmon MP REVIEW OF FINANCIAL 13 in reporting managements plan is a signi?cant omission in the audited ?nancial statements in all of the above years. Finding lilo. 5 - Footnote Disclosures MBA-G, There are certain footnote disclosures that are required to be Included in audited ?nancial statemenla using generally accepted accounting principles for non-pro?t entities. The school and its management are responsible for ensurlng these disclosures are complete. There were several required disclosures that were not accurately' presented in the audited ?nancial statements for both and MBA-TI, including the following areas: The income tax disclosure does not properly describe the relationShip to MEHF and is misleading In stating that the school Is a separate non?pro?t entity on its own. {Accepted Practice]. In 2:112:13. both arses and LISA-F factored receivables bv obtaining advances on program revenues. The disclosure regarding this factoring is missing required and relevant Infon'natlon, such as interest rate, the name of the entity lending the funds, payment terms and ?nancing costs_ ASE I As mentioned in Finding No. it there was no disclosure regarding the negative net assets or managements plan. This was applicable for In 21311112 and EDIZIIB and for In 2011112 and 2?12f13. section sro]. There is Insuf?cient disclosure regarding the reporting entity and the relationship between each school and MEHF. There is no mention of the relationship with MEHF In am of the years In either MSA-E or use? audited ?nancial statements, except for the lntercornpanv note footnote. . There Is no mention or reference to being part of a consolidated report. This affiliation should be adequater identi?ed in the auditor's reports and titles, and explained in the footnotes to the financial statements. [ease as: ssaomsoet There is no disclosure in the related part-f notes that identify management fees paid by the school to MERF or the basis for these charges. This Is a signi?cant accounting transaction with a related entitv that should be properlyr disclosed. (FASH ASE Los Angeles Unified Schooi?imict Magnolia Science Academy 5 Jr? -Forensic Accoun?ng 17:13] CILJ GENHDENTML Weenir', Lide a Storm-run LIP REVIEW FINANCIAL 25 Hitting lilo. - Footnote Disclosure MEHF There are certain footnote disclosures that are required to be included in audited ?nancial statements using Generally Accepted Accounting Principles for non-profit entitles. The school and its management are responehle for assuring these disclosures are complete. There were several required disclosures that were not accurater presented in the audited ?nancial statements for MEHF, including the following areas: - As mentioned in ?nding No. 4 - there was no disclosure regarding the negative rret assets or managements plan. MEHF had significant negative net assets at the end of June 3t]. 2013. A going concern disclosure was not included in the audited ?nancial statements section There is no disclosure describing the consideration for andfor reporting of the consolidation policy with the related entities AS: 310]. Related part-Ir transactions are not sufficiently disclosed. There is no disclosure that identi?es management 1lees paid by the various schools to MEHF or the basis for these charges. This is a signi?cant accounting transaction with a related entity that should he properly disclosed. (Pose. ASE Disclosure in regards to the intercompanu payable, which totaled $2,350,632 at June 3i], 2013, was Incomplete. There is no information regarding payment terms or interest rates ASE 105 Angela Uni?ed School District Magnolia Scioncc Academy 5 3' - Forensic Accounting REVIEW OF LDAHSI in V. Review of inter-Company Loans A. Procedures tits analyzed the intercompany loan accounts for MSA-E and The loans were either between the school and MEHF or with another Magnolia school. The analysis included documenting the transfers bet'nreen these entities and their respective general ledgers as well as con?rming the amounts into the applicable banl: statements. The cash ?ow needs of the schools have been met primarily by borrowing monies between the various Magnolia lCharter Schools and MERF. For MBA-E and MBA-T, requested loan documents that describe terms of repaym ent and applicable interest ates, etc. II. Results Detail of interco mpany loan activity for each entity is summa rized below: Table 1: lntereompiany Payable {negative amount Is receivable! [To] From MEHF Payment Balance sans-1a [manual - unseen} sauna dentin [amend] 2011-12 assent! 5mm 135.000 sate-13 season 242.ch sea. son sass-14 manna - senses Current uutstanding intercompany payable at February 28, 201?! IS 531941150- Table a: BASH-1 - lntereotnpany Payable {neptlye amount ls receivable] From Payments Balance F'l!r 21110-11 5 115.? 5 40.000 5 HEDGE F?l' Inn-12 149.0lIl - sateen Freon?13 senses steam BEIEIJD ants-14 aspen sauna SBLEEHJ MSAI F't' 5 551?.) a 5 55D F't' 1011?12 550 Ft" 2012?13 - 55D 21313-141 . - 550 Current outstanding as of February 23, 2am to MERF 5 392.511] to MBA-1 550 assess ins Angela Un?ied School District Vicenti, Lloyd 5 Stutemon Magnolia Science Academy 6 S: Foreesic Accounting 73:11 REVIEW lillTEH-IZ'iJl'li'lFri-Willr LDAHSI 31 ?nding Ho. 3" - Inter-Company Borrowing to Clle The audit report refers to this funding as intercompany borrowing. It is commonly necessary for schools to temporarily borrow monies from other sources due to state deferrals and other payment sd'iedules after the expenses have been incurred; however, it is Unusual for the supporting foundation to be borrowing money from the schuuls. Finding lilo. E-Tenns Authorization For and requested loan documents between these entities and no such documents were provided. Therefore, the repayment terms, interest Iates, etc. are not clear or agreed to in advance of the loans. 'v'L5 was not provided with doarrnentation of the approval process of such loans by the board or other authorizing agent of the school or MEHF. MEIIF Interoompany Payable [negative amount is receivable] analyzed the intercompany borrowings noted in the general ledger. VIE. analyzed the general ledger in an attempt to understand the flow of the borrowings. Below is a listing ofthe amount outstanding as of June 30, Z?l? by school site. Table 5: ?at Due To [From] from General Ledger Due To [From] luElilF School Mane As af??af? Mail-1 5 [uses-'54] Milli-2' {115.3551 Mist-3 t3o2.osu:- hiss-4 wise-s {seasool MEA-E 135,565 MSA-T mil-B {1.519.545l MSA SD 112,551 MBA 51': 11'3593 P13 5A mane FTS ov 15?.5El? Total 5 [ml Par Audited F5 Difference 5 {$1.151} Note: There were 5 occasions in wearers: when the object code Ids-intercompany Receivohies was used. This is on account nonmaliy used by MERF to record transfers to and from the schools for transst "other"r than icons. The descriptions provided in the generai iedger state the transfers were for loans; therefore, they ware iaciuded in Martingale: L'an Sailqu District Magnolia Science E- - Forensic Accounting Lloyd 3: Etutaman REVIEW 0F INTER-CUM LCIANS 3-1 the above analysis and the}.' total 530,33. This amount is the di??erence bet'uveen the audited ?nancial statements and this analysis. See open items for further wont to be compieted in this ores. ?nding Na. 9 - lack of Authorization and Approvals of loans For and v1.5 requested loan documents between these entities and no such documents were provided. Therefore, the repayment terms, interest rate-5, etc. are not clear or agreed to in advance of the loans. ms was not provided with documentation of the approval process of such loans bv the board or other authorizing agent of the school or MEHF. Finding No. 1B - Joumal Entries In Fv2o11r12 and ID12I13 there were several journal entries made to shift cash between MEHF and the various schools. and MSA-B tvpicallv bear the majority! of the burden of loaning to MERF and the other schools as depicted in the above table. ills was not provided documentation authorizing or approving the transfers between MEHF and It appears the transfers were made to suit the needs of each school. but no supporting documentation of how the amounts were determined was provided. Finding No. 11 - Outstanding loan from PTS ov The above analvsis shows amounts due to MERF from PTS ov. according to MERF, Paci?c Technologv School Urangevale Oil} has been voluntarilv closed. The above chart shows an amount due to MERF from PTS ov of Since this school is now closed, It is unclear whether this is an uncollecu'ble debt. If this amount is not collected, the effect will be an increase in the net amount due from HERE This requires further follow-up by the BIG or Charter School Division. :lhlf?? Ll SHEEN ruin-u. Les Angeles Uni?ed School District Magnolia Science E: Forensic Accounting Lloyd Etutamon LLP REVIEW AN 0 ANALYSIS MERF GENERAL LEDGER I 33 W. Review and Analysis of MERF General Ledger .4. Procedures As discussed in more detail in section Accounting of Revenues and Expenditure: (page 39} V15 obtained a CtuickBoolrs back-up file for MERF and exported the revenue and expenditure detail for each ?scal year. The data was summarized by Dbject Code and ?scal year for further analysis. 013 conducted only a high level analysis of total activity for ERF and identi?ed activity that appeared significant or unusual. According to MERE, its revenues consist primarily of the CMD Fees charged to the schools and donations received. To verify that 0M0 Fees from MSA-E and MBA-2 were recorded correctly in the MERF general iedger, tits compared the EMU Fees recorded as expenditures for the schools to the respective revenues for MERF. B. Results ACEDRD Institute of Education Research Contract MEHF has an agreement with Institute for Education Research {a S?liclm entity} to provide various services. The services listed In the contract Include things such as curriculum development, professional training, assessments, human resources, business and ?nancial support, teacher evaluation and academic support services. The amount paid and contracted for these services is summarized below: Table 10: ACCORD Fees Paid by MERF Membership FeePer Contract Hoe Fm?nfermoes Total 2005-10 5 300,000 5 13,530 5 3,532 5 312,262 2010-11 455,000 0,501 464,500 201142" 225,400 13,525 292,025 2012-13" 542,015 1,200 644,115 2013?14?" 332,452 332,452 5 3,009,252 5 14,050 5 25,00? 5 3,050,454 4? Contract was for staccato, overpaid by credit #5153532 nos given against contract for $332,452 ?niy $205,000 has basil paid by MERi??for M01504 as of Maria Finding No. 12 - Lack of accountability of contract The fees associated with the services provided by ACCORD are based on a per student amount, starting at 516:! per student in creations and increasing to $225 to: Angeies Uni?ed Schooi District Science Academy 6 a Forensic Accounting Vicenti, tiayd Emmet! vicenrt, Lloyd disorremon LIP REVIEW AND ANALYSIS OF MERF GENERAL I 3d per student in In the contract listed key projects to be completed and did not reference a per student amount. The amounts paid to the vendor are based on a membership fee schedule and are not in direct relation to services provided, nor are they tied to hourlv rates or individuals assigned to the various schools. The billings also do not tie the fee to actual enrollment of students served. This lacir of accountabilltv over the contract does not allow for an assessment of whether the fees associated with this contract are fair andi?or reasonable. Finding Ho. 13 - of AEEDHD contract: The payments to ACCDFID constitute a high percentage of the total expenditures for MERF. In manna the expense was 19.1% of total expenditures and in it was 25.7%. As shown in the trend analysis, MERF experienced de?cit spending which causes doubt about whether this service was actualiv affordable. This, expenditure in excess of available funds can be construed as mismanagement and lack of proper budget controls for MERE Additionaliv, the current amount of Civic) fees collected does not appear to be covering this cost. Finding Ho. 14 - Related Party and possible duplication of services There appears to be a close relationship between MERF and ACEDFID. The; share the same facilitv in Westminster, and the services between the ttvo organizations are closer tled. For example, In the AEEDRD contract for FTZDIZIIB there is mention of services for accounting support, ?nancial audit preparation, business operations, revenue enhancement and board reports. This level of oversight seems to ovedap with the respo nsibilftv of and what is being paid for in CMD fees to MERF. In addition, this close relationship causes concern around the abilitv to be independent in relationship to offering both management and educational services simultaneouslv. In addition, the contract savs thev are offering assistance with the ?nancial audit preparation. tits is not certain of what the involvement is, but it is verv unusual to have an outside vendor with such an active management role in so many activities. Finding Ho. 15 - immigration)? Related Expenditures v15 identi?ed numerous payments from MERF to the u.s. Deparbnent of Homeland Securitv, Department of Justice, and immigration attomevs. In total, for F?il??g?n through Februairvr IE, 2D14, MERF paid a total of seas,ch to these various entities. reviewed supporting documentation for a sample of these transactions totaling $43,243. Based on the documentation reviewed, these costs are related to H.151 Les Angeies Uni?ed Schooi District Magnolia Science 6 IE 15mm hi I REVIEW AND DF MEHF GENERAL LEDEEH I 35 ?ling foes, I-ldo ?ling fees, I435 ?ling fees, attorneys fees, and fingerprinting fees. The support also shows that the cost for spouses and children were paid for by MERF. The following table summarizes the total cost or person or type of fee. For those transactions tested, the names were identi?ed from the supporting documentation. The names or tvpe of service for all other transactions were identi?ed from the general ledger of MEHF. The table is sorted alphabeticaliv. There is 562,531 categorized as "Unknown." These costs are for transactions not tested, and the general ledger detail did not contain the name of the person the cost was related to. ?v'ls did not compare the names below to the payroll or personnel records of MERF to determine If the individuals receiving the bene?t of these services were actualer MERE empiovees or relatives of MERF emplovees. Further incluirvr or review of these expenses is warranted to determine the of these individuals to MEHF. ills has been advised by the DIE that it will be performing a further review of these costs and no further work is required from W5. Table 11: MEEF Expenditures Related to Fees and Services Hanna Amount Milne Mount 5 son 1.8m 1,12o 3213 2,435 6.4m 52o 635 Lord Lars 31D Sill] Elli] BED LDID 1,5?0 320 son 3125 Luna 19,990 5,595 EDD ado 3m BID LBZD I. l. LosAngeles Un?eo' School Nitric: HOW a U-P Magnolia Science Academy 6 E: ?Forensic Accounting REVIEW AND ANALYSIS OF MERF GENERAL LEDGEFI I 35 Amount 3W 25D LEW 32%] 3m am Total egg am *The amounts Included above for Abdurrahman Bavraktar and nvbek Amaan were relmb ursed bv as part of the school?s start-up costs. ?These names also appear on the list of immigration and visa costs paid by M345 {Table 31 page I. In addition to the pavments discussed above, 1lullj Identified reimbursements made to AECDRD totaling $29,900 that were for tvpe services. 1:15 requested and revlevved all invoices for payments made to ACCORD: therefizmsr documentation was provided for the relmbursements of Immigrationfvisa fees and services. The following table provides the nam and amounts reimbursed to for immigration and visa services, which Include H151 ?ling consultation, printing, and mailing fees. Table 12: lrnn'ligra?onft?sa Fees Paid to ACCORD than Arnourrt Marne Amount 5 sso :Luoo sso 555 sso sso sso 559 sso 55a sso 55sso sso sso sso 55a sso 550 Los Angeies Uni?ed School District CDNFIDENTMI. moonlit. Lloyd 3: Stutzmon Magno?o Science a -?Foren5ic Accounting LJFW RENEW AND ANALYSIS OF MERF GENERAL 3? Home Arnount Hanna Amount 55o i 55o sso Total 5 znpoo 55o *The names with an asterisk are those that also appear in Table 11, the list of immigration and visa costs paid bv MERF to the respective agenov or attorney. (Note: The total above reconciles to the total shown as paid to ACCORD for H-1li FeesfFiling shown in Table 10 with the following adiustrnents - [11 subtract 59,300 that was paid to ACCORD in FTZDOOIOS and does not appear In Table 10; and add 53330 that was paid to ACCORD on MHIIDDE but the detail has not been provided to us for inclusion above] ?Ibrahim Karatepe also appears on the list of immigration and visa costs paid by roses [Table 31 - page as}. The onlv support provided and reviewed for the reimbursements to ACCORD were invoices from ACCORD listing the names and a description of the fee. The underlying invoice or application that ACCORD paid was not provided. ?liLS does not have . sufficient infonnatlon at this time to determine if anyr of these are duplicate payments. A further review should be done of the Immigra?onfvisa related fees reimbursed to ACCORD to ensure thev were appropriater billed to ME RF and were not duplicative of few alreadiir paid directiv bv MERF. Additionallv, a determination should be made regarding the reian nship of these individu als to MERF. tits has been advised by the OIG that it will be performing a further review of these costs and no further work is required from VLE. ?nding No. 16 - CMCI Fees According to MERF, the primarv sources of its revenues are the CMO Fees paid by the charter schools and donations received. To ensure that the CMO Fees recorded in general ledger are accurate, tits compared the CMO Fees expense-d by and to the revenues recorded by MERF for these two schools. MERF's chart of accounts includes a separate Object Code for the Cl'le Fees for each school. The following tables summa rice the comparison and variances identi?ed. tos Angeles Unified School District Maynoilo science Academy 5 El 7" ?Forensic Accounting chnti, Lloyd 3: Etutcmon REVIEW AND MERF GENERAL ER 33 Table 13: HSA-E EMU Fees mam 2:11am 2011112 21112113 201511! mm" ?5 Ewen? l" 5 55,115 5 $545 5 114.059 5 92.291 5 1.5215 cue Fees Resorded as Revenue m? In MERE 61 55.119 sun 114.059 92.291 Difference - 5 33.1125 5 - 5 16.215 Table 14: MSA-T EMD Fees Besu'lptlon 10111111 21111111 111111111? 2:115:14? mo Fees Heoorded as Expense In or. 5 42.566 5 95.332 5 W275 5 1411.222 EMU Fees Heoorded as Revenue from MEHFGL 31,924 95,532 142111? Diffra?enoe 5 10.543 5 - 5 - 5 - For the differences identi?ed above, it is possible that the revenue was recorded under a different school In general ledger. For example. one of the EMD fee expenses recorded in the MEA-E general ledger is for 513.291 on 111.2 same amount and date 15 recorded in general ledger as revenue from M511 San Diego. It is possible that dais amount should have been recorded as revenue ruse-s. Further review and inquiry? should be performed to determine the reason for the variances identi?ed above. Through Februarv 25. 21111 only. 1" 52.271 of the amount espensed a5 EMU teas appears to actuallv be for a relmbursement of costs for the arses after school program. shows this amount as EMU fee revenue as well. ?Through Februarv 23, 21111 dolly. Weenti. How Stutamon LLP Los Angeles Un?t-Ted School District Magnolia Science Academy 6 3r F?Forensic Acman i l" i" ACEDUHH HG OF REVENUES AND EIPEHDWRES I 39 1ll?ll. Accounting of Revenues and Expenditures A. Procedures Data Collection MERF performs the accounting for all of the Magnolia schools and maintains separate accounting ?les and records for each of the schools. MERF provided, directly from the accounting data processing svstem Quickeooks, a backup file for sass-c, mass and mess.? 'v'lj restored the QuickBoolrs backup ?les received for MEHF and the two schools. For each veer in the review period, ills ran a detailed general ledger report, which included: I The account number and name idEntified the type of account by object code I Date of die transaction I Reference number identi?ed check number, invoice number or electronic transfer, if applicable 'v'endo risources name Memo gave a brief description of the transaction, if applicable The split account the other account affected by the transaction Dollar amount of the transaction tits exported the detailed general ledger report into an excel format so that the data could be easily sorted and presented. Data Veri?ca?on To verify the accuracy of the data provided in the Quick?oolts files, hits compared the totals from the general ledger to the audited ?nancial statements for each vear in the review period for MEA-E. MSAJ and MEHF. ms was able to agree the totals by major reveaue or expenditure tegorv as well as agree the balance sheet accou nts, with the exception of the following differences: - MBA-E had a difference in F?fZ?ll?z In the amount of $3,349 for total revenue which was identi?ed in the subsequent year as an adjustment to beginning net assets to match the 2011.!12 audit report. ?1 The ouicxauuis backup ?le for MESA-E was dated March ts, 2:114. The Eluiclt?-oolts bedtup file for lass-r was dated March 13, The Quick?ooks backup file for MERF was dated Aprll 21, 2014. Lounge-res Uni?ed School District literati. Herd 3- Stutzman UP Magnolia Science Academy 5 a - Forensic Accounting or ssvcuues mo EXPENDHUHES an i MERE had variances in Pr'z?ltifll for both revenues and expenditures. Tutal revenues in MERF's general ledger exceeded total revenues shown in the audited financial statement by 593,322. Total expenditures shown in MERF's audited ?nancial statements exceeded total expenditures in the general ledger bv$i522?l12+ requested an explanation from MERF for the variances above: however, a response has not yet been provided {open item ltd-.1. Further inquiry! and review should be performed to determine the reason for these variances Data Consolidation Presentation Once the transaction detail was in a usable format in excel, tits sorted each year in review to ohiect code. created three different excel tables for each entity tn present expenditures or object code, revenue lav object code, and expenses by vendor. ins Apgeies lian School Disoict Magnolia Science illiccndempr 6 5" - Forensic Accounting Vicenii, tiovo' Etutamon minimal WU ACEDUNTINE CIF REVENUES AND EHPEHDITLIRES I 41 B. Presentation of Financial Infonnation Table 15 Magnolia Science Academy 5 Summary of Ilenenues by Dbloct Corie Revenue - Other Education Protection Amount Gen. Aid State Aid - Fund. In Lieu of Ether Federal Revewe Etl. IDEA Ehlid Huhi?on-Federal Education AB Child State All othersctate Revenue: Gram: Dona?ons Service Sales 934 Local Heumues 15 Totoi?euenues 51,215,045 5 1,155.53 51,115,5115 5 513,55? 5 rout? TotoiPerAndItR-Eport 5 1,215,045 5 51.11am 5 513.551 Di?'irence 1 5 5 El Th rough February 23; Hill-II only. CONFIDENTML L05 Anyei'es Uni?ed School District WCEHH. Stutrmon .LLP Magnolia Science Academy 6 in - Forensic Accounting 453501411145 515555141155 41411 51155145110353 4: Table 15 Hamelia Sdenee Academy 5 Summaryr 11f Expenditures thhjeet Code 0015111 . 5555 Damn 552055215 552515211 231.1212 532512215 @214" 1155 Teacher Salaries 5 245,551 5 355,532 5 435,535 5 355,255 5 227,355 1300 Sehooihdmlanrineipai 42,443 42,022 - 105,243 102,005 53,1139 2430 Clerical 5 Of?ce 5133 25,542 23,325 15,443 35,300 13,495 2300 Other Classi?ed Salaries 3,532 21,310 35,354 52,015 14,315 3000 Employee Hene?ts - Either 3,000 - - - 1 3151 '5Tns 55,313 55,352 51,255 32,555 21,552 3201 FEES 5,322 15,025 4,513 2,333 2,115 3301 DASWIMedieaI-efelternatiee 3,433 12,250 15,100 13,422 3,231 3401 Heelth? Welfare Bene?ls 45,122 50,213 30,322 52,355 43,4419 3501 Unemployment Insurance - - 10,254 5,245 235 3501 Workes Compensation 300 - - 3,305 5,342 3,395 5551 other En'ipio-Iree Bene?e 1,255 3,554 2,335 334 2,155 4155 T555453 45,555 151 32,242 3,335 55 4200 Beaks other than 253314535 2,122 1,154 2,331 1,425 5,529. 430} Materials and Suppiies Either 143 - 15 . - 4310 D?ioe? Classroom Supplies 5,321 12,353 2,550 2.190 3,342 4325 rr 145551525 315534355 1155 4,521 2,555 2,451 1,415 4340 Science Lab Supplies 255 - 54 525 - 4350 01351? Supplies 13,222 31,215 50,324 22,355 2,139 4455 Hon-4331111502511 Equipment 2,343 1,533 1,525 345 4200 Food Service Supplie: 22,200 31,045 25,335 24,425 3,793 mm Sewlees?li'ler Operating Exp a 13 Either 5200 Trevehl'conferenee 2,031 35,310 14,333 2,513 119 5300 DuefMemherships 1,535 13,031 13,031 5,223 5.45 5400 U?hliil'y" insurenoe 3,533 4,153 23,523 5,222 5,1394 Ciperation 3. Housekeeping Sew 55m - Either 6,514 1,555 - - - ss1e 053515 5,354 3,552 3,533 15,523 5,143 5520 Maintenance 422 - - 5543 Field Trips 31 Transportation 1,525 15,312 3,004 3,010 3,241 Heh?lsteasm?-?lepairs?a?encepl 5500 mm 3.05 - - - - 5510 Buildin? Rent 32,330 110,152 114,320 95.310 52,450 5525 Bulldin?peim 2,525 3,115 225 5530 Equipment Lease 3,330 5,342 5,322 2,125 2,3133 5540 Equipment Repairs - 132 - - 5355 mm? Em 21,555 15,522 452 22 5310 0140 Fees - 23,152 114,033 32,231 15,115 1? Through February 23, 2014 only. 5151551051304 l. 155 Angeles Unlfied 513551035151 Wei-anti, Lloyd 3 51111251123 LLP Magnolia Selene-e Academy 5 3 2 - Forenle Accounting OF REVENUES MEI Ila abject code 0351555? 555005510 555010511 5011515 551015515 5015514" 5515 enema-.1 5 Leger F1555 14,555 10,015 5,505 5.515 5550 5,555 5,150 5,040 5,455 5,355 5550 Professional 5ernte 155,545 1,555 5,055 1,555 5,14? 5341] Schenl [10555015 - Either - 545 - - - 5545 Academic - - 55 550 - 5345 Other 5mm! Prugmms - deli-'5 509 131 5550 Advertisement - 555 5,551 5,515 5555 meessinnal Deuelupment - 2,455 5,015 425 5550 Special Educatien East 15,541 155.504 115,055 55,555 55.5%" 5550 Interest - 155 555 50,550 555 5550 Annual AuditFee 5,500 5,000 5,000 5.515? 5555 Bent merges - 545 1,055 1,105 5555 Eubs?nne Tend-rem 6,002 4,355 355 6,525 5555 Clther Fees 5 Exp. 505 15,551 50,555 14,555 55,555 5500 Either 4,515 4,215 5,140 10,511? 4,545 5510 P01513503: Delivenr 55 555 54 1,525 5500 - Pen-nil meme-5 :51 - 5511!] Depredalien E1015n5e 5,715 15,551 21,353 17,156 - 5145 5p.Etl. Enenetnrnent {4,551} - - - 5 1,005,515 5 1,155,555 5 1,455,554 51,155,554 5 510,154 Tater FEfAt-?d??epnrt 5 1,005,510 5 1,155,555 5 1,451,555 51,155,554 515515an 5 5 5 15.5451 5 0 W5 also prepared an amunting 0f expenditures by vend0r. Due t0 the size of the table. it I155 been inducted 55 5 rather than in the b?d'f at this renert. '5 The variance for 1555 identi?ed r1 the subsequent year 55 an 5diu5trnent t0 begin ning, net 555515 1:0 rnatd't the audit report. CONFIEENTMI. Wee-11H, Unyd 3: Smirmnn LLP 15514115513 Unwed Sweet Dim-in Magnum: Science Academy 5? rFurensiI: Accounting DF REVENUES AND EIPENDETURES I 44 Table 12' Magnolia Science Academy 1 Summary of Revenues by abject Code 4454 trade unmanned 542415.51 mun F4241er 24154255 14? 5515 Gen. Purp. Entf?mnt?Siate Md 5 354,545 5 555,525 5 545,535 5 425,552 5515 Slate Md - Adjust-newts - - - [45.552] 5555 Funding In Hen 5f Prep 135,545 124,352 313,552 225,545 3110 Either Federal Remue 15,133 - - - 5151 Special Ed. IDEA 15,754 25,551 45,555 25,535 2225 I'Iluh'Itim-Federel - - 51,555 25,545 5255 4554} 11.152 51,555 253,151 44,521 3311 Special Educatlen AB 5112 3,662 55,221 113,513 33,351 All ether Stem Reumues E31131 - - - 5525 Cfer Ra?-Him 5Iate . 21,323 2,255 5555 51252 Laney - 25,514 25,515 25,1309 5525 After 55155 Grant .4555 - 155,455 52,5m 3530 ether State Revenues 5,147 63,25? 156.53? 423,335 3611} Dma?crns 153 - 1,1153 10:] 5515 Fundraising 3,422 4,515 15,545 22,522 5525 Grants - 14,340 3522 Sales 5,523 5,321 1333 5,555 3634 Feed Service 53155 1,222 2.163 3,134 2,225 3533 DtllEf Local Revenu 35,333 10,552 33,552 3,154 1'4th Revenue: 5 555,225 5 531,555 5 2,152,552 5 1,452,359 Report 5 555,255 5 531,554 5 2,152.35? Di??erence 5 1 5 1 5 ?Turn-ugh February 25, 2514 D?r'lhr. CENFJDENHAL L55 Angela Uni?ed 5512551 mm? Weentf, How r3: Stutzman Magnum: Science Academy 5 Awaiting ' lElF REVENUES AND EHPEHDHURESI 45 Tattle 10 Hagmlla Science Academy 2 Summary of Expenditures by abject Code nude 9mm 392919211 2911212 923913213 3913219" 1199 23991599333: 5 235,945 9 399,331 9 991,321 9 399.9372" 1300 Principal ESchnai Admin 93,151 100,251 115,394 52,412 2400 Clerical 0. 0FIice Staff 15,240 31,256 32,540 21,250 2900 Either ?assi?ed Salaries 22,012 32,930 42,542 31,215 3000 Ernplayree Bena?is Either - - - 155 3191 ares 94,399 49,999 93.939 35,393? 3201 FEES 2,339 3,255 3,225 2,490 3301 DRSDIIMedIcareMltanative - Either 9,120 13,501 19,235 15,524 3401 Health 3: Welfare Bene?ts 32,951 51,591 31,921 52,304 3501 Unemployment insurance 2,052 9,209 9.030 432 3501 Workers Campensaticin 1,125 5,525 14,333 0,541 3901 0ther Emplavee Bene?ts 2,250 5,932 12,414 [1,555] 4000 Banks Supplies - 0ther 242 - 4199 Tea-thanks 15,131 12,120 43,354 41,241 4200 Banks Either Than 545 439 4.153 0,203 4300 Materials and Supplies Etti'ier 41 122 4310 Official E??smum Sunniies 1,150 2,503 2,115 4,152 4320 IT Materials 4,421 5,133 5,440 2,222 4330 Office Supplies 12,423 4,221 2,290 44 4340 Science Lab Supplia 1,511 - 4390 Either 51199099 12,154 9,155 22,929 25,900 4400 Han-capitalized Equipment - - - 42 4200 Fund Service Supplies 52,155 25,054 55,513 43,932 5200 Travel 2,355 5,909 10,211 1,200 5300 Dues Si Memberships 5,222 11,401 5,213 2.003 5403 liability Insurance 1,313 9,292 21,500 12.312 9599 Dpera?nns S: Hnuselteeping SeriiI Either 2,509 1,254 2,259 1,923 5510 Util?j? 15,193 15,512 31,250 22,545 5520 Maintenance 1,300 5,533 12,125 2,503 5500 - 1,042 - - 5510 Building 0th 122,252 125,215 215,010 129,230 5520 Building Repairs 2,155 250 1,400 2,000 5530 Equipment Lease 1,592 2,321 9,225 3,190 5300 Consulting 95.3 [berating Exp. - 125 - - 5319 EMU Fees 31,935 35,332 152,225 144,22? 5015 Atternev 3: Legal Fees - 2,220 - 5320 DishichiCcIunt'gr Fees 5,522 5,959 11,425 9,129 9339 Professional Consular-g SeMce 13,549 200 1,326 10,219 5540 Sci'In-nl Programs - Other - 25,904 5341 95.9931qu Program - 2,951 Thruugh February 20, 2014 only. [as Angela: Uni?ed School Districr Vicentl, Hoyt! S: 50010102: 11!? Science Academy 5 :5 2 - Farensic Accounting 0F REVENUES AND EIPEMDITURES I 45 a: Dmipthn mums 1mm: mourn 3113! 1-1" 5343 Fleid Trips?Transpurtettun 2,63! 2.775 2,?34 531 5646 Dther Ethan! Programs - 4? 1H 5550 Aduertiaema? 329 3.23:: 1,5?1] ITS 5355 WWII DEUBImeent - 22G - 3,530 5666 Spatial Education Cast 5,125 66,951 141,141 11,061 Interest - 2,543 13,451} 2,543 5615 ?ank than-Ea 535' 5,596 4,513 2,312 5835 ITSEWIEES - - 194.535 5695 Substitute Teamm? 16,667 5,150 1.556 6,956 5899 ??ler meessinnal Fees aEsip 24,519 56,696 16,69? 35,556 59m (Immunizations 3,6?5 6,606 5.453 3.014 5400 Equipment - - - 565 6500 Depreciatan eqsense 2,153 5,269 11,415 - Tami Ewe-Wilma: 5 659,213 5 1,168,565 5 La?t?l? 1,335,162 TehiPerAudft?epart 5 655,228 $1,166,965 $1,310,310 Dam-ream 5 5 11 V15 atsn prepared an accounting of expenditures by veneer. Due tn the size of the taint-e, it has been included as Emmi: I rather than in the but]? of this report. Les Anyeies Uni?ed Sehuei Dim WNFIDENTML Magnet}: Spiense Academps tit :r'rFerensis Ama- Wrenti, Uapd Smtemen LLP UF REVENUES AND 47 Table 23 ?agella Educaticln 5. Research Faunda??an of Revenues by abject Cede abject cede mm mm: mm: was mm? mm Revenues-Ema 5 233.236 5 - 5 5 - EMU Marla tSerui 31m FEE ?me? ?3 592.1193 1,352.93} 2.235.131 1.1mm 1,412.15? 3200 Other EMU Service Fees 422.005 sewn - E595 covered am by 513,522 140,001 - - 7.5m Carper-ate Eentrihutims - my - - 2'33 - 3,343 Individual - 3511 Other - 15D 239,441! - 352i) Eran?inenatiun 39,515 1112 - 8521 em: in lilnd?Eiuuds - 2m SEED Interest - i239] - - - 3635' Other Local 15,226 amen [117.355] 8.213 1,639 3243 Refunds 35,355 1.?34 1?,102 9.53 15.332 Tutu! REFEHUEE 5 1,325.55: 5 1,596,931 5 2,135,143 52,534.33: 51.4544? Tctul Far Audit Hepart MIA 5 1,453,509 5 2435.143 52.52.41.331] Eminence" WA 5 93.322 5 5 0 "Through Februarvl?. 2014. only. 1" U13 requested that MEHF provide an explanation far the Imart-arm?? In mum; 11. its of the date of this report. a respunse has net been provided. Tim has Angels: Uni?ed Schuel District Hard 3. Stuntman LLF Magnolia Science Academy 6 3: Ferensic Accounting AECDUNTIHE OF REVENUES AND I 43 Table 20 Media Educa?nn 0 Research Foundation Summary [If Expenditures by Dialect Coda Earle Desu'lptian mm mm. 1511,21: M2213 2513214" ease Payroll-ether 5 [41.1551 5 5 - 5 - 2410 Net Salaries ?Cither 206,965 213,142 656,931 556,665 403,911 2420 Paw-elf Taxes - 0ther 351,25 242,522 224,542 254,451 150,552 3000 Employee Bene?ts Diner - 6,000 - 3401 Heallh 6: Weller: Bene?ts - 161,356 205,314 195,422 96 ,551 2501 Other Emplevee Bene?ts - - 5,000 4000 Supplies - Either - 462 - - - 0200 00065, Subscriptians??efrences 423 65 119 105 41 4300 Materials and Supplies - Either 1,421 - - a 4320 IT Materials Wres [1.6421 6,420 6,142 1,062 1,332 4330 Of?ce Supplies 1,023 6,631 23,252 12,321 11,523 4390 0013 Supplies - 12.611 51,290 11,466 5,032 4400 Hen-repriselized Equipment 23,323 2,595 3,166 1,332 2,355 4200 Fund Servine Supplies 223 35,000 39,612 35,029 3,559 Serviees, Usher 0perating Esp - 1 001K 5200 Traveifiianferenee - Other - 4,014 569 6,020 215 5220 Pris-gram Fee 2,030 11,952 5,400 5230 Fee 2 42,255 25,115 10,424 5,151 5240 ?3,113 Expense 662 2,212 5,546 4,622 2,339 5250 hiliIeege Emense 5,664 10,402 2,251 4,315 5260 Travelling Expense 120 32,265 19,329 62,654 15,012 5220 Rental 2'30 1,053 625 2,250 143 seen Due?i'Iemhe?hlps 1.210 1,542 244,039 645,332 249,557 5320 Fee 1,962 - - - 5400 Insurance 646 - - 321 - 5510 Water, Power. Gas 61 Trash 206 119 - - 55m Renieis?easesf?epalrs??mcap 435 EB itw Either 5610 Buiidmi?ent 56,642 60,250 66,560 22,36 60,334 5620 Building Repairs 195 - 5,000 - 5530 Equipment Lease 112 12,440 14,362 15,562 5,515 5555 sate Parking Rent 35 195 41 14 - 5600 Eansuiting Ser. and Operating 142 100 600 - 5515 Attorney 5: Legal F005 "20,345 115,124 23,020 56,291 9,255 5625 Arivertlsernent 60,323 14,263 6,264 14,262 1,525 5535 cu" sum"! 53?? {152,535} 541,523 32.502 55,542 95:17 5632 Pawn? Processing Fee 1,225 129 1,593 1.326 1352 5655 Prefessienel Develepment - - - 2,552 2? Threugh February 26, 2014 uni-,2. CHM-206222224 i. [as 292190015 Uni?ed Eshaei Den-r51: arr-me, .Liaye' Stutzman up Magnoiia Science Academy 6 6 2 ?Forensis Accounth " L?h? UF REVENUES AND EXPENDITURES I 45 Tremfer of Funds Interest Bank Annual Audll: Fee Other meessl?anal Fees Senr. Ccmmunlcedcns 5. cf Fadit?es and - Either U?li?es other - I?Jther - and 0 East and Cnnu?en?cn, revel - TahiEtFE?df?Jr? 51,540,112 $2,153,514 $2,650,410 52513339 $1,145,539 we 52.7mm 52,550,405 52,303,741 cmemm? ?522,302; 5 2 VLS eisc prepared an accounting of expenditures by vendor. Due to the slze of the table, it has been included as mucus rather then In the body of this repc rt. 3? His requested that MERF prculde an eupFanatlcn for ?1e variance In 1. As of the date of this report, a response has not been pmulded. WNHDENHAL Vicen?. Hard Stutzman MP Les Angefes Unt?ed Ethan! District Magnolia Science Academy 5 Sr Fcrensr'c Acceunting REVENUE AND EiiPElliDi'l'l-JHE TESTING 51} Revenue and Expenditure Testing The obiective of this testing was to review supporting documentation for a sample of revenues and expenditures for LISA-6 and for the review period to verifv that the transactions were accurater recorded In the books and records of the schools and were for legitimate business purposes of the schools. An accounting of the ?nancial activity of MBA-E, and lleitF is included in section It'll. Accounting of Revenues and Expenditures beginning on page 39. For a sample of tundralsing activities, was performed a comparison of tundraising speci?c revenues and expenditures tn detewine if the revenues reported appeared reasonable compared to the expenditures incurred. The results of this analysis are included below in section 5.5. {page 651. A. Procedures Sample Selection Process 'v'ls selected a sample of revenue and expenditure transactions for MBA-E and for each ?scal year under review. its previouslv mentioned, downloaded from Ctuicl-t?ooits' backup ?les the general ledger for each school and each ?scal year under review. The process used to select a sample was judgmental and based on the level of activltv for each school and each vear. Revenues - v15 selected the sample from object codes 8600 and higher as these are from donations, and local sources that would require a review of sup porting documentation to verify the source. For object codes scan through 3599, the sources of revenues are generallv the State of California and grants. These revenues were analyzed and compared to third?party sources California Department of Education websltel. selected transactions from the various object codes to provide coverage ao'oss the different tvpes of revenue. Additionallv, transac?ons that appeared unusual were included in the sample. Expenditures - VIE selected the sample from object codes 3005 through i999. Dbject codes through 2995 are related to pavroll costs, and were tasted through a separate process discussed in tit. Powell Expatse Analysis {page 63]. selected transactions from the venous obiect codes to provide coverage across the different tvpes of expenditures. Additionaliv. transactions that appeared unusual were included in our sample. MERF indicated that the ?les for through F?l'Z?ll?? were in storage, Rather than provide l'leltF a list of transactions for testing. tits requested that MERF provide all of the supporting documents for revenues and expenditures for these 1glears and make them available to This allowed full access to all available 11 For MBA-E and Mill-v? onlv. CONFIDENTML Wtenti. [lord Etulzmon tos Angela-s Uni?ed School Benin Magnolia Science Academy - Forensic Accounting UE AND EKPENDHUHE TETINE I 51 supporting documentation for these years. For the supporting documents were in the active ?les at therefore, provided MERF a list of transactions for testing. The supporting documents for the speci?c transactions selected Were then provided to VIE. 1'va of?uppor?ng Documentation Reviewed For revenue transactions, the tunes of supporting documentation reviewed include the following: Hank transaction receipts Cash count form signed by the school Principal andfor a MERF representative Eopies of dreolts deposited los Angeies count-l,r Dt?ce of Education Pawnent Request Form Los Angeles Uni?ed-School District Revewe Allocation schedules Wire transfer con?rmations For expenditure transactions, the nrpes of supporting documentation reviewed Include the following: "v'endor invoices Contracts I agreements Los Angeles countyr Of?ce of Education Pavment Request Form? Los Angeles Uni?ed School District {muse} Revenue Allocation schedules? wire transfer co l'l?lTl't??DDS Check stub Attributes Tested During Review of Supporting Documentation we tested the following lte'r.t attributes for each revenue and expenditure transaction. Heuerrues - For each revenue tmnsactlon veri?ed that: I The revenue amount recorded in the general ledger matched the revenue received per the supporting documents I The revenue tvpe [Object Code] recorded in the general ledger was appropriate based on the type of revenue received per the supporting documents. 13 Certain expenditures are deducted from general apportionments received through LAEDE. vL?i reviewed the Favorent Request Forms from LAEDE toverlfv the amount and nature ofthe expendimre selected. 1" Certain expenditures are deducted revenues allocated through LAUSD. reviewed the Revenue Allocation schedulesto verify the amount and nature of the expenditure selectEd. Les Angeles Unwed School District Wtenii. Lloyd 5: Stutamon Magnolia Sciontte Academy 5 d: Forensic Accounting REVEH LIE AN TESTING 52 The revenue was recorded in the correct fiscal year based on when it was earned andfor received. The revenue vras recorded to the correct school based on the information provided in the supporting documentation. Expenditures For each expenditure transaction, tits veri?ed that: The expenditure amount recorded in the general ledger matched the cast incurred per the supporting documents. The expenditure type {Dbject Code] recorded in the general ledger was appropriate based on the type of cost Incurred per the supporting documents. The expenditure was recorded in the correct ?scal year based on when the costwas incurred. The expenditure was recorded to the correct school based on the information provided in the supporting documentation. The expenditure appeared to be for a legitimate business purpose of the school. Analytical Review of Fundraisers and Field Trips For MBA-6 and tits selected four fundraislng events andr'or field trips per school to compare total revenues to total expenditures to analyze whether the total revenues idepositsi appeared reasonable considering the expenditures incurred. The results analysis are included below. B. itesu?s Stone-nary of Transactions Tated The following tables summarize the total number and dollar amount of transactions tested for each schooif?r' The tables Identify payroll costs separately as they were analyzed through a separate process discussed later in this report. tiicenti, tioyd it? Les ilngeles tini?ed Schooi District Magnolia Science Academy 5 - Forensic Accounting EXPENDITURE TESTING I 53 Table 11: Summary ef Revenue Testing 10091111 11110111 ?111,111 M15 M14 MBA-E TetaiReyenuePe'G?. 51,115,045 51,155,511 51115515 5 513.551 5 151,541 5 551,151 511111151 $1,115,151: 5 535.051 5 Revenue Tested - MERF Supp-art 39,133 39,154 11,945 14,023 111,324 TetalRevmuetr?eri?ed $1,115,331 $1,155,535 51.955256 5 565.655 5 117,314 Pereentage Tested 91.355 99.515 93.415 sees 14,355 Table 21: REA-E Summary of Expenditure Testing M10 W11 M11 NW3 2013114 lass-s TetalansendtturesPerE-i?. 51,001,511 51,35,555 51,437,554 51,155,554 5 515,114 Payreilmsted 311,118 5 ?65,055 5 EELEM 5 555.11? 319,554 All Ether Expendibtres Tested 359,515 255.09? 445,350 161,3?4 105,335 Tetai Expendttures Tested 5 111,134 5 111.116 $1,151,555 5 seen 5 515,551 Percentage Tested 11.115 sens 14.515 11.1115 55.155 Trareaesans'netec vs 115 as 115 19 Table 23: HER-1 Summary of Revenue Testing main sewn 1n12?a 11113111 REA-T Total Revenue Per GIL 5 595,111] 5 931,555 $2,152.35? $1,552,355 Revenue Tested - 5rd Party 5 545,551 5 353,119 51,055,415 5 - Revenue Tted - MERF Support 55,811}? 9,555 11.33? 20,355 Total Revenue IIverified 5 555,415 .5 WEEDS $2,1??,535 5 10,594 Percentage Tested 93.155 51.555 51955 11:15 Revenues received from the State of California, which were funded thrnugh either LAUSD er LAEDE {represented by abject ce-des EDGE - 5559}, were tested by the tatal revenues reenrded In these abject nudes tn scltetlulEs abtai necl from 3? party seurees, such as the Department af Educatlen website. Supp-tat received frarn Elrd party suurces [5 generally censldered the must rellebie. However. this infnn?natlnn Is not abyays available until after the end of a ?scal year. Because this were was perfumed before the end of ?2013114, the funding Infermatian far this year was net available. Vicenti, Hard Stuntman LLP 1115 Angel's-5 Uni?ed .5li District Science Academy 6 Fare-nch REVENUE AND DITUHE TESTING 5d Table Summary of Expenditure Testing MW 11 MB 21313!? sea-r Total Per .5 555,213 51,253,905 5LETDJEG $1,335, 162 Paymll Tested 3 353.154 5 scams 5 232,230 5 srssas Ail Ether Tested 111,431 356,290 356,35 2.56.853 Total Eignertdibsres Tested 5 575.335 5 323.953 ?nesse 351.449 Percentage Tested 57.553 64.553 51.1% 511.55 Transactions Tested 59 T1 55 ET Exceptions Identi?ed timing Testing This section details the variances Identi?ed through testing for the attributes listed above. 1] Improgr Accounting Tmetment He. 1? - Dverstatement of Revenues v13 identi?ed revenue transactions diet were Improperly recorded as such. These overstatements of revenue resulted when one of the following occurred: - A refund was received from a vendor for an overpayment [expenditure abatement}, er I An electronic payment was returned by the banlr due to insufficient funds or Incorrect payee information. A refund for an overpayment should be recorded as a Debit to Cash and a Credit to the appropriate expense account [or obiect code originally used when the payment was made}. On several occasions. these types of transactions were recorded as a Debit to Cash and a Credit to a revenue account, resuiting in an everstatement of revenues and expenditures. A payment returned by the bank for a liability of the organization should he recorded as 3 Debit to Cash and a Credit to either Accounts Payable or the reiated expenditure account [or object code originally used when the payment was made}. Cin several occasions, these types ef transactions were remrdEtl as a Debit to Cash and a Credlt to a revenue account, resuiting in an overstaternent pf CONFIDENTIAL Les Angeies Uni?ed Scheoi District Vicenti, Lipyd a Magnolia Science Academy 6 Ir? Forensic Accounting I Vicentf, Lloyd 3: Stutzman tlf' REVENUE AND EXPENDITURE TESTIHGI 55 Finding Ho. 13 - Duplicate Expenditures identi?ed expenditures that were entered multiple times in the general ledger, resulting in an overstatement of expenditures. These duplicate expenditures resulted when a paymeot was returned by the bank. due to insuf?cient funds or incorrect payee Infonnation. As mentioned above. the returned payments were recorded as reuenue. When payment was attempted a second [and sometimes third] time, ft was again debited to an expenditure account resulting In an ouerstatement of expenditures. Haring Ho. 19 - Expens? Related to Other Schools 'y'l3 identi?ed expenditures that were paid by and recorded in the general ledger of either Mia-E or MBA-T but were related to a different school within Magnolia Public Schools. This exception was identi?ed in two instances, which are detailed below. school Fiscal School Year Date Vendor Amount Support also? 2011112 cratier Pitney?owes tease MBA-2 rose-1 smarts Manon Pitney Bowes sees: oases 51.31111 Finding No. to -- Employee Payroll Deductions Recorded as Expendhaes VLS Identified one instance in which a payment to Colonial Lffe Insurance for an employee paid benefit was expensed to MBA-F. The premiums due to Colonial Life Insurance were deducted from the employee's paycheck, and MBA-T was acting as a third-party agent by transferring the funds on behalf of the employee. When payroll was processed and entered into the genelal ledger. the gross salary of the employee was recorded to a payroll expendfture account. LatEr, when the Employee premiums were paid to Colonial Life Insurance. the amount paid was recorded as an expenditure of The amount deducted for the premiums should have been recorded in Accounts Payable to create a liability. When the actual payment was made. Accounts Payable should haye been Debited and cash Credited. The total amount incorrectly expensed was $595.33. Finding Ho. 21 Expenditure Annuals mating Difference] Identi?ed expenditures that were recorded In the wrong ?scal year in the general ledger. These transactions were primarily the result of expenditures incurred in one year and paid in the following year. At the end of a ?scal year, all expenditures incurred and not paid should be recorded as a liability in the Les Angeles Uni?ed School Magnolia Eclence Academy 5 Farensfc Accoaotlnp REVENUE AND TESTING 53 penod covered, andr'or the school the services were for. For example, tettbouks and other goods are often purchased through Amazon and shipped to one of the schools. v13 Identi?ed instances In which onlv a payment continuation showing the total amount paid was included as support. The payment con?rmation does not include the items purchased or the shipping addrem. This Is Insufficient information to conclude that the items purchased had a legitimate business purpose for the school. Because i'vIEltF performs the accounting for ail charter schools within its organization, it is not uncommon for one vendor invoice or contract to include the cost for all schools. In manyr instances, the Invoice or would break down the cost by school or would write on the Invoice the breakdovrn by school. iils identi?ed transactions in which there was no indication of the breakdown bv school: however, assessed the reasonableness of the amount paid by and errpensed to or MBA-T. Ail expenditures paid by the schools should he supported with suf?cient documentation that includes the amounts applica hie to each sd'looi. Finding No. 25 -- Ho Calculation for also Fees Each school under MERF page a EMU {Charter Management Eirganitationl Fee to MERF of 11% of its total revenues (excluding Federal funds and Special Education The EMU Fee is paid via electronic transfer from the school bank account to MEHF's hank account. The supporting documentation in the ?les included onlv a cops:r of the electronic transfer continuation which indicates the "from" and ?to? accounts, amount transferred, date of transfer, and description. There is no documentation to support the amount being transferred or how It was calculated. requested that provide documentation showing how the fees were calculated; however, this support has not been provided as of this report. To determine the reasonableness of the EMU Fees expensed and paid lav and 'v?l3 performed a reasonableness calculation of the Fees for each school. According to MERF, EMU Fees are calculated on all revenues ence pt for Federal funds received and Special Education IDEA. VIE used total revenues per the general lodgers, subh'acted Federal and Special Education IDEA funds, and applied the CMD rate for each year. The following tables summarize the calculations. This rate was effective beginning In September tom. Prior to this.tl1? rite Ehal?EEd ?'35 3-1555- Weenh', Lioyd 5i Stuntman LLP Los Angeies Unified School District Magnolia Science Acoderny at Forensic Accounting ill?ll?l REVENUE AND EXPENDITURE TEFHNE I 59 Table 15: MSA-E cnro Fee Recalcula?on Demip?on man we? amuse mans enema Total School never-rues 1,215,an 5 1,165,313 Liliana 5 913.59? 151.34? Less Federal Revenues [$53,131: WWI {532.15%} {611,691} {34355} Revenues Used For Hecaloslatlon 5 err 312 51? 5 913 9'15 5 T5553 Chin Hate ease 11.1m- 11.114111 11.11135 Hecalouinted ceo Fees 5 eases usasr 115.11a 5 waste 5 cease Dino Fees Expenses in arse-s aL 55,113 cases titties H.191 15,115 a Bass 31.552 5 2.011! 5 3.13 star Table 25: HSA-F EMU Fee ?ecaicula?on Desalptlon morn m1: smarts Insane Total sci-reel never-lees sas,1ro 5 senses a 1,151.35? 5 Laszasa Less Federal Revenues {tam} [15,519] tastes: mosses] lieuerms Used For Recalculatio-n a are a Lrsdoos 5 1:17 mo ante use use 1111 11st RecalculatodEMD Fees 71524 5 areas 5 133m 5 means cue Fees Erpereed in use-r at cam were 144,211? nineenceoverriUr-aeri 211.953 5 {1.6541 5 seats 5 ease The resurts of the calculations above show that, In all veers but one for Vlj?s recalculation msulted In higher Elvin fees than what was actuall'rr espoused bv the two schools. in some lrears, the difference is minimal and the expenses appear reasonable. In other years, the variances are quite signi?cant. It?s possible that a portion of these variances is the result of timing differences; however, further review and irrnuirvr would be needed to determine the reason for the variances above. Each payment of a EMU fee should be supported by the iculation used to arrive at the amount paid, and the revenues used in the calculation should tie to actual or budgeted revenues in the general ledger. {Ell Mation of Duties Elait Cards ?nding Ho. 11' - Principal Debit Cards The Principal at each school site is issued a debit card to use for purchases related to school activities. The debit cards are under a separate account with the bank, and the account is funded through transfers from the school?s regular checking account. According to HERE to minimize exposure, funds are transferred in small amounts as their are needed. The following tables su mmarize total debits i purchases] from the debit card accounts for each school. ?3 According to Board minutes provided bv MEI-1F, the EMU rate was increased from 3.259% to 1115 effective September 2111a. Revenue for July and August Hill] was only $22,131. ?v'lS applied the 11% rate to all revenues for 11 as the difference between the lower and higher rate is onlv $15119. Los Angela: Lian School Ufslrict Vicenti, Lloyd 3: Stuiamon Magnolia Science Academy 651 Forensic Accounting Hill Dr 59 Table as: msA-a Debit Card Activity? mum mums mun: mans muru' July 5 ta 5 1a 5 553 ?eet - 511 2,545 5,501 September - Bil 1,659 392 number 155 1,255 2.151 L217 Hmmbar 715 an ass 554 December . as: sea In 213 January 454 5215 219 453 February 1.11::r ass 315 1555 March 1,1. 511 ass are April 1:125 5?5 an are May 2525 Less 542 MM June 55? 55? 135 A Total 5 10,655 1,553 5 9.50? H.555 Table 13: Debit Hearth 55 1a 231 Total 5 525? 14:35 Typical purchases made with the debit cards Include: Textbuclts Ciassrnam and office supplies Meals and snacks Field trip costs Travel tests for ccnferentes Equipment Maintenance and repair supplies Althe ugh M?r? cpened in the ?rst I..rear that a debit card was used under a separate account was 5? Through Feb want as, 2014 c-nl'f. 3'1 Through February 23. mm unlyr. Vicenti, Llayd' Stutamcn Les Ange-1'25 Unified School District Magnolia Science Academy 6 chnsic Amer-mg UE AND TESTING I 51 According to MEHF. the current pollcv allows Principals to approve purchases up to Anything over this amount must be approved bv the Accounting Manager, or CEU depending on the amount. Through a review of the debit card bank statements the Principals at both schools used the debit cards to make purchases greater than These tranmctions did not include documentation of an; additional approvals compared to the transactions below $500. The following tables include the purchases over 5500 for each school. Table 25: nose-s Debit Card Purchases Greater Than $500 Date Hattie Amount bouillon Amazon 5 cases WEI-301.1 Andemic Cap Ht Gown EDIE MEIER Discoverv Sdence tonne WIDE Committee for Children Seattle assoc smartest Aquaricnn ofthe Pacific 8114.00 For tested two of the transactions listed above. The purchase from Amazon was for two portable basketball courts, and the purchase from Academic Cap Gown was for caps and gowns. There was no indication in the records whether anyone else reviewed or approved these purchases. Table an: use-7 Debit Card Furd'lases otootor Than ssoo? Date him Amount mutton. Costco 55:131 tarmac: Costco sao.s1 salesman Costco 833.75 us?ll'l?? Costco 535.43 oaruleou Costco TIMI Entrants Costco 131.5? 1W3 Costoo nest MIRROR Costco asses WW4 Costco 555.15 For MSA-T, v15 tested all four of the Costco purchases made in months. One purchase was for surveillance equipment and the other four purchases were for snacks and supplies for the ASES program. The purchases for ASES were not recorded to Object Code 5341. which ts sopposed to be used for A5E5 related expenditures. VIE did not test anv of the Costco purchases made In Again, there was no indication in the records whether anyone else reviewed or approved these purchases. For thcoalto through manna, copies of the debit card statements and original receipts were made available to ?v?lS. For manila. copies of the a: The last three purchases from Costco do not appear in the general ledger for MSAJ. It appears that none of the debit card purchases subsequent to October Elli! have been entered into the general ledger. Los Angela's ?amed School District il'icenti. [lord d: Shit-smart LLP Magnolia Science Acoderny a I Forensic Vicenti, Hogarth Scotsman LLP REVENUE AND 9in MDITURE TESTIN I 52 statements and receipts for selected transactions were provided. It appears a montth reconciliation of the debit card accounts is being performed as the purchasES are matched with the corresponding receipts and entered into the general ledger with a description; however, there does not appear to be a fon-naI approval or assessment of the reasonableness of the transactions. Additionally, funds are transferred to the debit card accounts as needed rather than having a prenestablished budget. Additionailv, the supporting documents [store receipts} do not indicate receipt of the goods at the school sites, so it Is not known whether the goods were actualiv delivered to and used at the schools. Proper controls in the purchasing function require that the approver of a purchase be separate from the requester, and all shipments of goods should he signed in: a receiver. By allowing the principals to use a debit card to make purchases they are acting as the requestor, and receiver, which lacks proper segregation of dutEEs. There does not appear to be the proper budgetary and oversight controls in place to ensure that costs are controlled and funds are used for legitimate business purposes of the schools. ills tested a sample of transactions reiated to the debit cards as part of the testing of expend itures. vis identi?ed instances in which the Principal purchased equipment, such as servers and surveillance equipment, using the debit card. All purchases of equipment should go through IT to ensure proper controls over the tagging and inventorsr of these assets. Unusualan or ?onable Transactio Finding No. 25 - imn?dgratioansa Related Expenses MSA-E and made pavments to the Department of Homeland Security? department of Justice, and immigration attorneys in relation to obtaining and renewing U5. visas. selected all transactions of this nature for testing. The following tables summarize the expenditures by the person for which the services were paid. tos Angeles Uni?ed Echool District Magneto Science Academy 6 a Forensic Accouan F?e . l._l DEL: REVENUE AND EKPEHDITLIRE TESTINGI 63 Table 31: Immigration Related Expenditures Fined ?I'ear tot-rte Amour: loomed Payroll 5 1.12:} neoosrso vs; 820 F?I'I?l?r'i? ?I'es too thoosno Ho ass mourn lilo 1,de Framers: 'I'es ass moms: Ho Lass Fveotom Ho . 955 hio Total 5 a, Table 32: HSA-I Im on Related Expensitures icei?lfnar Harrie haunt WI 325 treasure No Total 5 325 The ?Payroll? column identi?es whether VLS could locate the person's name on the payroll register for the respective school. As can be seen In the tables above, Slit of the nine lndivid uals did not appear In the payroll records. Additional review and inquiry is required to determine the relationship beMeen these individuals and the schools to assess If these were appropriate expenditures {see open item Iii]. 'v'LS'vvas advised by the DIG that it would perform additional review of these transactions and tits was not required to perform additionai work. Finding lilo. - Use of Day Laborers V15 identi?ed at least two instances in which a Principal requested reimbursement for cash payments made to day laborers hired to help move furniture. In both instances, the Principal did not provide any support other than an email or written note that the payment was made with cash. This resulted In the Principal being reimbursed for an expense that did not have sufficient documentation. The use of dayr laborers for of?cial school business is not a recommended practice as these individuals are likely not covered under the school's general liability in the event of an injury. Additionally, the school Is unable to properly report to the IRS payments made to the ind ividuais as there is no documentation on the individuals paid. 33 These costs were originally paid for by MERF during the start-up phase of MESA-E. MBA-E has reimbursed MEFIF for these cosh. 3? lbrahlm Karatepe also appears on the list of immigration and visa costs paid for by AEEDHD and reimbursed by l'v'iEiIF. tits does not have suf?cient inlonttation at this time to determine If this amount inciudes dupilcate payments. 35 These names also appear on the list of immigration and visa costs paid by MEHF. does not have suf?cient Information at this time to determine If this amount includes duplicate payments. CONFIDENTIAL Los Angeles Unified School District liirenti, Lloyd 3. Stutzmon lti? Mognoiio Science Academy 6 5 i" Forensic Accounting REVENUE AND DITLIRE TESTING 64 Fint?ng No. 99 - Meal and Food Purchases ?v'ts identified numerous transactions in which food or meals were purchased for teachers, parents, students, or business associates of the Many of these purchases were paid for using the Principals? debit cards, which, as discussed above, does not appear to have adequate controls. Through a review of supporting documentation, 1b.1939 identi?ed that some purchases of this nature were for ASES [After School Education and Safety}, a grant funded program. MERF representatives stated that the cost of supplying made during ASES is a part of the approved grant funding, and these costs are monitored throUgh speci?c cbiect codes. The schools do not have an Dbject Code to track food and meal purchases, and they are typically charged to the Dbject Code for "Uther'Supplies." For some of the transactions tested, although the support indicated the food or meals were for #555, the expense was still charged to "Other Supplies." Additional inquiry could be made with MERE to determine if there is a budget established for these types of expenditures or if the Principals are given complete discretion on spending in this area. Finding No. 31 - Medical Expenses 'v?L9 identi?ed a total of $2,499.59 paid by Cedars Sinai medical Center and a student's parent related to medical costs for a student injured on campus, According to the supporting documentation, the student sustained the iniuries when he was pushed by another student. 51,495.25 was paid to the parent as reimbursement for the amount paid out of pocket and $1,993.95 was paid directly to Cedars Sinai?IE 9'19 did not inquire with MEHF regarding any analysis performed in determining whether to pay this expenditure. The rational for paying these types of expenditures should be thoroughly documented to ensure the appropriate steps were taken and the payment of this expenditure was in the best Interest of the school. Finding Ilia. .92 Relocation Costs 'v'lj identi?ed a total of $2,991.92 paid to I for reimbursement of relocation costs when was hired at MBA-E. The payment Included $599.99 for general relocation costs, $175.92 for a moving truck, and $2,129.99 for extra rent paid by . These amounts were all paid by manual - L. a" The actual payment to Cedars Sinai was for the full amount of $2,499.99. Cedars Sinai sent $1,999.25 hath; no as this amount was already paid by the parent. roses then issued a separate check for this amount relmbu rse the parent. CUNFFDENHAL chnti, Lloyd ti: Stotrmon LLP tos Angeles Uni?ed School Magnolia Science Academy 5 Forensic Actual-rang REVENUE AND EHPENDHURE TESITHGI ES cheeks and did not appear in the perm" registers presided by MERF. The issue of emplmiee campensetien payments made outside at the paymli tempanr is further discussed in Section er. Feral! Expense Analyse: Hiding his. 35 {page [51 Anam? 9f fundrelsing and Field [rip ?guenues The idliewing tables summarise fer each scheel the revenues and expenditures fer the events selected. Table 33: MBA-6 Greet lht?nlm Amine Tear-bunks Sela Eurupe Trip Bunk Fair mm Revenues 5 2.6? 5 2,135 - 5 - 5 Expenditures {1,531} {2,585} - - - Mel: Inmmeiitessi 5 Late 5 [45m 5 - 5 - 5 - mum Revenues 5 3,15: 5 5,513 5 Emu 5 1,691 Expendimres {2,1115} - [4,355] {46,620} {1,615} Net Inmmeiil-nssi Lat-4 - 5 L013 5 [22.920] 5 15 Rmues - Expenditures - {9,03} - - Hat Incume?lmsi 3 - 5 (1.395WINE Heuen ues 5 25195 5 - 5 - 5 Expendimra [2,2511 - - Net lnmme?Lpss] 5 - {1511Hansen: Revenues 1,226 Expelnditures - - - - {1,226} He Immune} - - - - Tutsi for All tears 5 less 5 {Lens} 5 2.013 {223101 5 16 Les dngeks Un?e? Ethos-i District Uisenti, Hard 5 Stutemun LLF Magnolia Science Academy 5 E- - Forensic Amunting Revenue mo eseeuorruet TESTING es Table as: MSA-T llnifom Sales Tunnels Book Fair W11 flevenues 5 5,531 5 55D 5 Expenditures [3,135] [1.132] . Hettncorne?Loss} 5 (2.515] ls?ll 5 mourn 5 5.?59 5 1.101 3 L451 ocperidauru [4.6911 [1315:- 5 1,1115 5 151 [375:- mourn Itevmues 5 5.416 5 1.4450 5 2.359 Expenditures {12,3} {2.11591 Net insert-emote 5 {3.2011 5 1.5m 5 - mourn 5.511s - 5 Expendiqu isms} [era] - Hat lnmme?Ln-ss} 5 {serial 5 i?i?l 5 - Total for an Tears 5 {Less} 5 tea 5 (ate: Ho. 33 Possible ?lming Deposits Based on the comparison of revenues and expenditures for the events sneleciugsglI some of the events experienced losses. it is not clear, without further investigation. it this was due to poor management, lack of sales, or unreported deposits. MBA-E experienced a loss on 1t'earlzroolu: sales; however. it is unknown whether this is a fundraising event. At a minimum. it is expected that the school would pass on at least the cost of the hooks to the students. in the same reap-act, has taken a signi?cant loss for Uniform Sales. a total of H.933 for all veers analysed. The book fair appears to have either lost monev or broke even in each of the 1pears that it was held. This is an event that tvpicallv helps make monev for schools. and it Is expected that these events would show a pro?t. Further analvsis mav be warranted to determine the cause of these losses [see open Itern lilo. 34 - Reasonableness of Field Trip Costs sponsored a ?eld trip to Europe in The total funds expended on the trip were greater than revenues collected by almost $13,0lill. During ?scal year, rinses incurred a de?cit of almost $24,000, which calls into question the reasonableness of spending resources on these types of events. The totals above were calculated from the detail In the general ledger based on the description entered for each transaction. Further investigation or review 7733;] I. ?1 Based on the supporting documentation reviewed, it appears the trip was to Ileiv and Turirev during April mu CONFIDENTIAL los Angeles Unified School Drama Weentl. Lloyd Stutcmon Magnolia Science Academy 5 E: Forensic Accounting REVENUE AND wuuld have to he performed to determine the true cause of the variances identi?ed above. At a minimum, MEHF should ensure that adequate procedures are in place to malte certain that all funds cellected are deposited into each schuel?s account. Further analysis is warranted to determine the cause of these 1u'nrianrses [see open item Les Angel's-s Un?'ied lichen-f mgne?e Science Academy S: ?Farensit Acct-tummy Weenti, tinyd 3: Shdaman EIPEHSE ANALYSIS EE lit. Payroll Expense Analysis The objective of the payroll expense anaiysis was to yarify that payroll expenditu ?as were properly recorded in the general lodgers of MSA-B and and to provide a summary by person of payroll costs to ensure salaries are reasonable for the positions held. A. Procedures 'ii'LS obtained from MERF Payroll Registers for MSA-E {August 2099. February 2014] and MSAFT [September lino-February 2014i. MERF uses a third party provider, Time to Pay by-Aocuchex to process payroll for both and The use of a third party provider afforded VLS the con?dence to use the-53 independent third party payroll reports to conduct testing. The reports listed grass earnings, taxes, deductions, and net pay. The reports also listed the method of payment to each employee whether direct deposit or check. if the payment to the employee was made by check, the payroll reports listed the check number used for payment. Verificatio la ense gross salary expenses reflected in the Payroll Registers were compared to salary expenses in the general ledger and to the audited ?nancial statements for each school for each year??El This process was used to 1irerify whether all paymll expenses were properly recorded in the general ledger and that all payroll expe rises In the general ledger appeared yalid. When unusual activity was noted In any of the Payroll Reports or general ledger, lnquired with MERF. The results of thuge Inquiries are documented in the ?Resu Its" section included below. y'gri?gtion of Direct Deposit and Tax Liability anments y?lS obtained Payroll Summary Reports for F?i'ltil?fl?l and rinse?y Fr2?11i12.? these reports listed net check amounts, direct deposit amounts, and tax liability amounts per month and annually. liiLS compared the summaries to the payroll registers previously mentioned by tracing the direct deposit and tax liabiIit-g amounts. This step was conducted to ensure that the reports were consistent. The direct deposit and tax liability amounts were also traced to the transfer of funds from each school?s Individual bank accounts.? The tax liability associated with 5? Because F'i'lIEilEl?ii was still in process as of the time of this forensic accounting reylew, the payroll expel-.935 were not reconciled to audited financial statements. a The testing procedures applied to the Payroll Summary Reports were performed for a sample only: dsereiore, only one year was selected for each school. Some of the transfers Included the payee name Attaches and some were listed as debit transfer. or with drawals. yerifled the amount and date for each. to: Angela?s Uni?ed School Em; Woenti, Lloyd Stutsmon Magnolia Science Academy 5 8i i? -- Forensic Accounting ?7 3333 PAYHULL EXPENSE Ea payroll was also traced to the bank statements and the cash account in the general ledger. life of STRS ERS Benefit Pa en obtained Reports for F?I'I?l?fll and F?I'Z?ll?l which list employee earnings, the employee portion, and the employer match. HIE compared these reports to the Payroll Registers to check for consistency by tracing the employee STRSIPEHS liability. To test accuracy of accounting ?45 compared these reports to the general ledger, and traced the employer match to the expense listed in the general ledger.? The total STRSIPERS montth liability, that included the employee and employer portion, was then traced to the respective payments in the bank statements to ensure that the appropriate payment was made for each of these expenses. ?mmagy of Payroll Costs used the Payroll Register Reports to create a schedule of payroll and benefit allocation costs. A summary of payments made to employees through payroll Was also created for each school and year that shows the employee departments, employee names, type of pay and total gross payments. The tables for are located in Echi?it 12, and the tables for MSA-T are located in Echloft 13. The following tables summarize annual yoluntary deductions other than STRSIPERS. Table 35: HER-6 Voluntary Deductions Ether Than STRSIPEEIS Animal Employee Home Deduction Total Deduction Typo 'rear - can eacsrto can s11 tattoo as smarts are more {ass catsuit Lure alerts ass zois?c so: soups 153 smarts '1 In most months, MEHF was espensing the employee portion at STEHSIPEHS as STRSIP EltS bene?t expense in the general ledger. This issue is discussed further in the ?Flesults?r section. tosAngeies Unified School District- choti, Lloyd ah Storzm'on Magnolia Science .i'lcodemy 6 E: ForEnsic Accouctr'ng E?lIiFllJEillTlAl. Uicenti, Lloyd Stutrmon LLP expense 7o Table 36: Milt?? Voluntary Deductions Dther Than STRSIPERS Annual Emlioyee Nine Deduction Total Deduction Type Tear 5 #00 seal: 20min EDD mill: $111! 12 Ell-D 403i: 21111313 Heaths Finding Ho. 35 - Mlscoded Payroll Expense use-s The August zoos payroll expense of 54,915 reflected in the Payroll Register for wisp..- was not found the in the MSA-E general ledger. Upon inquiry with MERF it was determined that this amount was originally paid by MEHF. Tl'lt.I W35 then reimbursed to MERF by MSA-E as part of a larger reimbursement of various starts?; costs. All items included in me reimbursement were expensed to object code 5834]? Professional Consulting Senrlce, with the memo line Walton Grant Early Hire Expenses. The start-up costs should have been allocated to the appropriate object codes based on the nature of the expenditures, and this particular expense should have been recorded to salaries expense in order for payroll expense to he presented fairly. Finding lilo. 35 - Payments Made ?utside of Payroll Registers - anti MBA-T VIE identi?ed salary and other compensation payments to employees that were made outside of the payroll company. tits 1ireri?ed that these payments were far employees' salaryi'lncentiue pay and not a reimbursement for expenses. All employee compensation payments should he made through the payroll company to ensure that all taxes. STRSIPEES. and other deductions are properly captured and reported in the employees forms for tax reporting purposes. If circumstances require that a manual check he issued to an employee. the manual check should he reported to the payroll company for proper tax reporting and payment. A reylew uf employee W?zs is necessary to ensure all compensation is appropriately reported to the ins {see open item The following tables identify the names and amounts paid outside of the payroll company and did not appear in the payroll registers. There may be additional payments made ouuide of the payroll company that are not listed because they were not Identi?ed during testing. Les Angelos Uni?ed Echooi District Magnolia Science Academy 6 ii i' Forensic Accounting 3:11:13 wave?1.144 EEPEHSE Table use-s Payments to Employees for Wu outside of Payroll Date Horne amount Description object Code someone . and suntan enrollmeat Bonus slim-other employee benefits 355 Hot indicated mouse classified salaries 1234M i . 3,930 S?op bonus amEmployee bene?ts-amal- LEW Worked exp-a hours null-Teachers salaries various acct Relocation cote? various Total 5 sass? Tattle as: Payments to Employees for Conversation outside of Payroll Employee Date Monte Amount Desolation mm modicum 5 till a hours of oil?ioe coverage EDD-tithe classified salaries torzsraoto 1513 Insurance Waive Payment asol-Ddter employee bene?ts insurance Ililtl'aiue Payment for afl?fldu 15!] March m1 1 soot?other employee bene?ts Insurance Waive Paymentfor muf?n: 1 150 2011 ?lial-Duty employee benefits marten 150 Insurance Waive forluly loll sail-other employee bene?o am?ll 15o Insurance Waive for August 1o11 soot-one employee Inne?l: 1.353 Payroll 51.5 hours it 525! limit-Teacher Salaries Total Finding Ho. 3? - MSA-T Accounting Errors Hesuiting in Duplicate Expenditures Re?ected In the general ledger for men-r on was an expense for Teachers Salary for $29,219. This expense was not recorded in the Payroll Register for this period. Documents provided by and an analysis of the general ledger showed that the April 2D11 Direct Deposit to Aocuchex was returned due to insuf?cient funds to cover payroll, and had to execute a wire out of funds to Accuchex? to cover the payroll. The returned funds were inappropriately recorded by MERF as a debit to Cash and a credit to Revenue. This issue is discussed further in section Wii. Revenue and Expenditure Testing above. When MERF issued the second payment by wire transfer, it recorded the transaction as a debit to the payroll expense account llm-Teaciters? Salaries and a credit to l?ash. This entry caused the TeachErs' Salaries Expense to be overstated as it should not have beon recorded as an expense in the general ledger. Expenses were also overstated for in F?il?l??d due to Improper accounting when recording manual payroll checks that cleared the bank account. During this fiscal year, MEHF was using a payroll clearing account to post all payroll transactions. ?1 IRS Publication 521 addresses the reporting to the IRS of moving expenses and employer reimbursements of such expenses. Moving expenses reimbursed by an employer are required to be reported on an employee's W- 2. An analysis must be performed by the employer to determine lithe moving expenses relmbu rsed Would be reported in the ?income? section or another section of the W-l If It is determined that the reimbursements are Income to the employee, the employer must withhold income. social and Medicare taxes. tos Angeles Unified School District Vicenii, tioyd 45 Slut-anion Magnolia Academy 45 Futonsic Accounting Ulcenl?i, lloyd Stutrnion PAYROLL 12 When payroll is processed, the appropriate payroll expanse accounts are debited and the payroll clearing account is credited for the net amount due to employees. As payroll checks clear the bank account, MEHF should have debited the payroll clearing account and credited sh. Instead, in some months, the transactions were recorded as a debit to expense and a credit to cash. The Object Codes used for the-5e expenditures were 553i] - Promssional Consulting Services and 5399 - Either Professional Fees Er Expenses. identi?ed this Issue forthree months in this fiscal year: Il'lctober 2?13 - $10,342, November 2013 HINT, and December 2013 - $1,235. MEHF has used the payroll clearing account for blah?2 payroll sinee #2011112. It is possible that similar errors were made in other months; however, has not reviewed the payroll clearing for all months during this time period. No. 38 - Ineon'ect Accounting Treatment of STRSIPEHS Deduction MBA-E. and For ihe period of tempos to arsorzou for MSA-E and gimme to srsorzou for salary expenses recorded in the general ledger were understated while the STEBSIPEHS employer match expense was overstated. MBA-E overstated STRSIPERS employee benefits expense by $49,412, while it understated payroll expense by the same amount. The overstatementil understatement for was $23,309. This was the result of excluding the employee portion from the total salary expense in the general ledger and then adding the employee portion to the employer expense portion. Payroll expenditures should reflect the gross payroll of employees as deductions for the employee?s portion of bene?t costs are not an expenditure of the employer. Only the employer's portion of bene?t costs should he expensed as bene?t costs. When comparing STRSIPERS reports for F?I?Z?lb?l to the general ledger, VLS was unable to tie the employer match to the expense listed in the general ledger. One of the steps performed in verifying the 5Tli5ylP EH5 liability was to trace the total liability per the STliSf ERS report to the actual payment made by the school. For the months of July 201i] through January 2011 and June 2011, based on information included in the general ledger, it appears that the STRSIPERS liability was deducted from the General Apportionment revenues from LACDE. Further analysis is necessary, including a review of the LACGE funding statements and a reconciliation of the net amount paid to the bank statements. For February 2l111, there Is no ST HSIPERS expense in the general ledger for Misha For March and April 2011, V15 was unable to locate in the general ledger and In the bani: statements a payment for the liability. it is possible that me payments were also made by deduction from the General Apportionment from however, the transactions are recorded differently in the general ledger for these months. Los Angeles Uni?ed School District Magnolia Science Academy 3: Forensic Accounting 7 ?l r- :77" rm; can. ILA r. LCD Uicenti, Lloyd :9 Etuttmon EXPENSE I 3'3 Additional inquiry ls needed to determine the reason for the yariances between the STESIPERS expenditures per the payroll reports compared to what was recorded in the general ledger. Additionally, additional steps would he needed to verify proper payment of the STRSIPERS liability {see open item Jill}. Mo. 35 - Payroll Expenses Recorded outside of Payroll abject Codes When reconciling the gross salary per the Payroll Registers to the salary expense recorded in the general ledger, identi?ed payroll expenses that were coded to object and other than the appropriate payroll expense accounts. For MSA-G in the period of December Inn to June EDIE, each month there was an expense of $3,351.63 recorded in object code SEED-Special Education Cost that should have been recorded as Payroll Expense in the 1WD ohiect codeh?Teachers Salary. Similarly, in MSAJ there were payroll expenses recorded incorrectly to object codes other than Salary [see other obiect codes identi?ed in the table below}. All teacher salaries should be recorded to an object code In the woo range to accurately report salary costs. By recording these salary costs to other ohiect codes, the payroll expense is understated In the general ledger and does not properly re?ect actual payroll. if wishes to track specific types of salary costs (for example, salaries related to the after school program}, a unique object code can be created in the 1000 range that will allow this cost to be tracked and still report salaries in the proper object code. The following tables list the payroll expenses recorded to non-payroll object codes. Table so: MSA-E Payroll Expensed to Hon-Payroll Codes Date Arr-omit Coded To tourmuoeorzuu 5 23,531 SEED?Special Education Cost Total 5 23,531 Table ill]: Payroll Expensed to Hon-Payroll (1me Codes Date Amount Coded To tortureou 5 1,53? mama- professional Faes and Expenss slalom: Loot} Slut-Eras Expense Eleonora-323mm 25,904 SEW-School Programs Either af?zDH-??i??ta scans scat-Aha School Program Total 5 53339 Los Angeles Uni?ed Echool District Magnolia Science Academy 5 a! 3" Forensic ?ccouothg CONFIDENTIAL lflcen?, iioyd a Stuntman DUTSTANDIHE MEHF 74 ll'Ilpien ltenls - Requests Outstanding From MERF The following information or support was requested from l'leltF; however, it was not received In time to Include in this report. All ?eld work was stopped as of the date of this report. In relation to borrowings; the analvsis completed by tits identi?ed a discrepancy of $30,?5l] in the audited ?nancial statements In regards to the net amount owed by MEHF to other schools. requested bank statements for I'leltF in order to verva the actual cash transfers oeuveen the entities and reconcile the Bank statements for MEHF have been requested to ensure that the cash transfers appear on the bani: statements for MERE Inditing the transfers were properly made in the cash account. The transfers have been confirmed for mate and MSAJ, but not the other side of the entrv in MEHF. V15 requested a sample of bank reconciliations to review and con?rm that the bank accounts reconcile to the general ledger These documents were nut received. {Ill In there is a difference between MERF's audited ?nancial statements and general ledger in the amount of 593,322 for total revenues and $622,3?2 for total expenditures. 1trill requested that lv'lEItF provide an explanation for these variances; however, a response was not received. Support andfor further information were requested for the following transactions and have not been provided. MM (Hod code mm Type om Hun Mono Professional I. Title'll'PartEv sac Consulting cinch 5015? m?m'nl Inlpleltlm??nnPheseTh'o 3cm Service nppor?mlnenttoMEle Ellrabelh H15 Fundralshg Deposlt "manna F?tlvalFundrsislng 31mm 201D- ?inch snorrscu scars Power: Imuahllm'mm?? sums Authorltv (Wharton-l aces 3mm Deposit contract: Amaton Ashtolch'lsfordetalls 533: Of?ces; lam minors Check Emmott some lamest'tvce PEMals 5525p Eupplles Los Angeles Unified School Dim-liq Magnolia Science Academy 5 Forensic Accounting I. 'l?f?i?f?iWT?lj?ljj rr-r-I DPERI REQUESTS OUTSTANDING MEHFI 1'5 uni-ct ood- Accounth?m Type Date Horn More Ill-auto credit insult-T, Tnnroytu?nemn ?5.11] Rm?ent en tms?nm Status chord- minimum: gnome Trinitytuthaan 551D mull-1mm all! lJ?S?l?lJ euros Burdr [imbue-ole?n: Equipment scan Lease Elli M?i?mz 21153392 Rorricalirlnoita (opium-dune 1,563.55 Walters lolntPower Worm aim moon Milli! 1012-13 Ao?rortty 9,535.20 Workers 3m tornpeo?tion ?red: soaps Assoc Luann totality lohtPower 5cm Insurance Ell 1m: 1011-13 RuthorRy in?nite Special General 5p.Ed.Faerwa sail] Educa?mrtost Journal W13 Etlanir RENEE. rl'ltlaterialslr nasal HID Soho-am Chock schemata roan Morroslm 315m {El Additlonal support or explanation was requested for the following payroll transactions for MBA-E: H2011f12 Employee receiyed one 51.15:} payment through payroll on Hf?if??l?ment made to this employee. Requested MERF proyide employee contract. F?r'Z?lilf? Employee . receiyed one 52,350 payment throngh payroll on srsorzou. Only payment made to this employee. Requested MERF provide employee contract. Additional support or explanation was requested for the following payroll transactions for Vlcentl, Lloyd 3: Stutzmon HF payments made through payroll for afterschool overtime hours Waters ?reman, sralrao? and maroon. payments made through payroll for afterschool oyertime on and leisuzou. was paid $1,500 with code 14-Health insurance on 5RD additional salary payment on 10}? 1r'2i111. $1,501] BTSA stipend on SENIOR. receiyed one 51,452.50 payment through payroll on ?nly payment made to this employee. Requested MERE proyide employee contract. Los Angel-es [Jan School District Magnolia Science Academy 5 Forensic Accounting Ill. Vicenti, Lloyd a MP FURTHER RESEARCH 15 Possible Further Review The following list identi?es areas that warrant additional inquiry. research. or review. ms was informed that the Office of Inspector General will perform the additional reuiew necessary and VLS was not required to perform additional work. Consuit with MERF about whether the amounts are or will be collected from PTS UV for outstanding debt, totaling 5151,1190. ill Further research regarding whether there are relationships between the board members of ACCORD and the board members of MERF. Further research is warranted in regards to immigration fees paid and the business purpose or relationship for said fees. Additionally, furd1er review should be made of immigration fees reimbursed to ACCORD by MERF to ensure they are legitimate business expenses of MEHF and are not duplicatlye of costs already paid by MERF. Further research could be completed in regards to why certain fundralsers, such as yearbook and uniform les, are experiencing losses. [Si Con?rm W-I reporting has been handied properly for employee payments made outside of payroll. Con?rm credentials and quali?cations of employees. [it] Further research is warranted proper payments and recording of expenses. Further review is warranted to determine the reason for the yariances In the CMU fee recalculation performed by as well as the variance between the Chili] fee expenses recorded by MBA-E and and the corresponding revenues recorded by MEHF. tor Angeles Lr'f'llFElil' School {listed Magnolia Science Academy 5 .7 Forensic Accoun?ng ?l "i 7 ml T?l F'il?lm? Ti USTCIF List at Exhibits Stand?Mme Audited Financial Statements for HEDDEIID through man; 13 men-s Interim Repnrt fer muniu Stand-Alene Aud lted ?nancial Statements for 11 thruugh F?I'Z?llrlIr 13 use? Interim Rennrt fur Hear-nu MERF Stand-Alene Au dited Financlal Statements for 1.1 through M01313 MSA-E Expenditures by Vendor MBA-T Expenditures by Fender use]: Expendltures by Fender . that at Accounts 10. the?: {If Accounts 11. Deposit Example 12. Pawn" Summary 13. MSAJ Payroll Summary Les Angelic-s Uni?ed Sch-an! District warrant: Science Academy 5 - Fare-ash: accounting wren?, Lloyd Stuntman