The Commonwealth of Massachusetts
AUDITOR OF THE COMMONWEALTH
ONE ASHBURTON PLACE, ROOM 1819
BOSTON, MASSACHUSETTS 02108

A. JOSEPH DeNUCCI

TEL. (617) 727-6200

AUDITOR

NO. 2006-4500-3C
INDEPENDENT STATE AUDITOR’S REPORT ON
CERTAIN ACTIVITIES OF THE
FREDERIC L. CHAMBERLAIN CENTER, INC.
SEPTEMBER 1, 2003 THROUGH AUGUST 31, 2006

OFFICIAL AUDIT
REPORT
MARCH 18, 2008

 2006-4500-3C

TABLE OF CONTENTS/EXECUTIVE SUMMARY

TABLE OF CONTENTS/EXECUTIVE SUMMARY
INTRODUCTION

1

The Frederic L. Chamberlain Center, Inc. (FLC) was organized and founded in 1976 under
the provisions of Chapter 180 of the Massachusetts General Laws (MGL) as a not-for-profit
charitable corporation for the purposes of operating a private school for both day and
residential students with special educational, developmental, communicative, and other
learning disabilities. In 1992, FLC formally restated its Articles of Organization to
specifically include the language that the corporation be formed for “All charitable,
educational and scientific purposes within the meaning of Section 501(c)(3) of the Internal
Revenue Code.”
The scope of our audit was to examine various administrative and operational activities of
FLC during the period September 1, 2003 to August 31, 2006. However, in some instances
it was necessary for us to extend the period covered by our audit in order to adequately
examine certain transactions that were selected for testing during our review.
Our audit was conducted in accordance with generally accepted government auditing
standards for performance audits issued by the Comptroller General of the United States.
Our audit procedures consisted of the following:
•

A determination of whether FLC had implemented effective internal controls,
including:
a. Processes for planning, organizing, directing, and controlling program operations;
b. Policies and procedures to ensure that resource use is consistent with laws and
regulations; and
c. Policies and procedures to ensure that resources are safeguarded and efficiently
used.

•

An assessment of FLC’s business practices and its compliance with applicable laws,
rules, and regulations, as well as the various fiscal and programmatic requirements of
its state contracts.

Our audit identified several problems within FLC's operations, as detailed below:
AUDIT RESULTS

5

1. DURING CALENDER YEAR 2004, FLC PROVIDED ITS EXECUTIVE DIRECTOR AND
ANOTHER MEMBER OF ITS ADMINSTRATIVE STAFF WITH COMPENSATION
TOTALING $254,384 IN EXCESS OF THE AMOUNT ALLOWED BY OSD
REGULATIONS AND DID NOT REPORT AT LEAST $64,781 OF THESE EXPENSES AS
BEING NON-REIMBURSABLE

5

During calendar year 2004, FLC provided compensation to its Executive Director and
Chief Operating Officer (COO) that exceeded the amounts allowed by state regulations

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TABLE OF CONTENTS/EXECUTIVE SUMMARY

by $254,384. Although the agency identified $189,603 of these expenses as being nonreimbursable in the financial statements it filed with the Commonwealth, it did not
properly disclose the remaining $64,781 of this compensation as being non-reimbursable.
2. UNDOCUMENTED AND NON-REIMBURSABLE CREDIT CARD EXPENSES TOTALING
$225,476

9

During the fiscal years 2004 through 2006, FLC permitted eleven staff members to use
its corporate credit cards. However, our review of the credit card expenditures made by
these staff members during this period revealed that 1,767 expenditures totaling $337,335
were questionable in that they were either inadequately documented or did not appear to
be directly related to the FLC’s program-related activities. According to state regulations,
expenses such as these are non-reimbursable under state-funded contracts. Although
FLC reported $111,859 of these expenses as being non-reimbursable in the financial
statements it filed with the Commonwealth for these fiscal years, it did not report the
remaining $225,476 as being non-reimbursable.
3. FLC DID NOT REPORT NON-REIMBURSABLE EXPENSES TOTALING $15,403
RELATIVE TO ITS OPERATION OF A PROPERTY IN BERMUDA

15

During our audit period, FLC’s Director of Marketing and Development leased a house
in Bermuda, which was paid for by FLC. Between fiscal years, 2004 and 2006, the
agency incurred expenses totaling at least $294,484 relative to the operation of this
property. According to FLC officials, the agency rented this space as part of what it calls
its “Bermuda Project,” which these officials told us involved broadening FLC’s services
and referral sources and developing a base for international marketing. Based on the
documentation we reviewed relative to FLC’s operation of this property, we determined
that no students ever used this property, and that FLC was primarily using this property
for business versus programmatic purposes. Also, although FLC identified most of the
expenses associated with the operation of this property as being non-reimbursable, we
determined that the agency did not identify $15,403 of the expenses associated with this
property as being non-reimbursable.
4. NONCOMPLIANCE WITH BOARD GOVERNANCE STANDARDS APPLICABLE TO NONPROFIT HUMAN SERVICE CONTRACTORS

During our audit period, FLC did not comply with various board governance guidelines
issued by the state’s Office of the Attorney General (OAG) and with related
requirements of the terms and conditions of its state contracts. Rather, up until fiscal
year 2006, FLC operated under the control of its Executive Director and related
individuals without the necessary independent Board oversight.

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INTRODUCTION

INTRODUCTION
Background

The Frederic L. Chamberlain Center, Inc. (FLC) was organized and founded in 1976 under the
provisions of Chapter 180 of the Massachusetts General Laws (MGL) as a not-for-profit charitable
corporation for the purposes of operating a private school for both day and residential students with
special educational, developmental, communicative, and other learning disabilities. In 1992, FLC
formally restated its Articles of Organization to specifically include the language that the corporation
be formed for “All charitable, educational and scientific purposes within the meaning of section
501(c)(3) of the Internal Revenue Code.” In August of 2006, FLC again restated its Articles of
Organization to specifically add the language that the corporation “is formed to receive and
administer funds exclusively for educational and charitable purposes without pecuniary gain or
profit, incidental or otherwise.”
FLC emphasizes a co-educational model of education with psychological and therapeutic treatment
components for male and female adolescents ages 11 through 18. The school’s stated philosophy is
based on the belief that “all children are capable of achieving success in vital areas of their lives no
matter how adverse their lives may have been thus far.” Students are primarily placed at FLC as a
result of a school district’s determination that conventional in-district public school program
offerings were deemed insufficient to accomplish the goals set forth in the child’s individualized
education plan (IEP). While FLC’s day academic program is approved and monitored by the
Commonwealth’s Department of Education (DOE), its 98-bed residential program is licensed by
the state’s Department of Early Education and Care (DEEC), formerly known as the state’s Office
of Child Care Services.
During the period covered by our audit, FLC employed approximately 45 full-time staff in addition
to approximately 95 staff members serving in a part-time capacity. In fiscal year 2006, the school
served approximately 20 students in its Day Program and approximately 90 students in its
Residential Program from Massachusetts cities and towns, other states, and the country of Bermuda.
Although DOE is responsible for approving the operation of private special education schools like
FLC, the Commonwealth’s Operational Services Division (OSD) is responsible for regulating the

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INTRODUCTION

operations and activities of all such private special education schools and is responsible for
establishing each school’s tuition rates for Massachusetts students.
Once a program is established and is approved by DOE to function as a special education school, it
can then submit a detailed budget to DOE that shows its anticipated expenses and enrollment
figures. DOE reviews this budget and makes any adjustments it deems appropriate. For example, if
DOE believes that more staffing is needed, it will adjust the school’s operating budget accordingly
to reflect the costs associated with adding higher staffing levels. DOE then sends the final adjusted
budget along with its approval to OSD. OSD reviews these documents, and in accordance with its
regulations, 808 Code of Massachusetts Regulations (CMR) 1.06, establishes an authorized price for
the school. This price, which is essentially calculated by OSD by dividing the school’s budgeted
costs by its expected enrollment, is the annual rate that the school can charge Massachusetts
municipalities and state agencies for each student who attends the school. Once this authorized price
is established, neither OSD nor DOE typically initiate any changes to this rate. Rather, any rate
changes have to be initiated by the school itself, otherwise its authorized price will remain
unchanged. During fiscal year 2006, the tuition rate that had been established by OSD for FLC’s
residential program was $270 per student per day.

Although OSD establishes FLC’s in-state

residential rate, FLC can and does establish a separate tuition rate for out-of-state and private pay
students, which according to OSD regulations must be at least the Massachusetts rate. During fiscal
year 2006, the residential tuition rate established by FLC for out-of-state and private pays was $318
per student per day.
The majority of FLC’s funding is derived from student tuition payments that its receives on behalf
of the students from a variety of sources, including Massachusetts state and local government
entities, other state and local government entities, the government of Bermuda, and private payees.
Local cities and towns that enroll students at schools like FLC pay for the tuition costs through a
variety of sources, including local appropriations and state-funding sources (i.e. MGL Chapter 70
funding for primary and secondary education and MGL Chapter 71B and Circuit Breaker Special
Education funding), as well as indirectly through various federal grant programs. During the period
of our audit, FLC received funding from a variety of sources, as indicated in the table below:

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INTRODUCTION
Summary of Revenue*
Fiscal Year

Fiscal Year

Fiscal Year

2004

2005

2006

$0

$6,416

$5,850

100,935

132,535

141,383

68,649

221,141

204,586

322,128

19,688

0

Massachusetts Local Govt.

4,195,365

4,701,306

4,857,356

Non-Mass. State Local Govt.

3,022,098

3,116,619

3,034,130

566,955

1,067,153

1,244,168

23,642

32,819

15,032

Other Revenue

687,657

666,811

628,730

Total Revenues

$8,987,429

$9,964,488

$10,131,235

Revenue Source
Contributions and Gifts
Mass. Gov. Grant
Dept. of Mental Health
Dept. of Education

Private Client Fees (excluding 3rd party)
Investment Revenue

* This information was extracted from FLC’s Uniform Financial Statements and Independent Auditor’s Reports
(UFRs) that it filed with OSD. Further, unlike the state’s fiscal year, FLC’s fiscal year runs from September 1st
to August 31st of each year.

Audit Scope, Objectives, and Methodology

The scope of our audit was to examine various administrative and operational activities of FLC
during the period September 1, 2003 to August 31, 2006. However, in some instances it was
necessary for us to extend the period covered by our audit in order to adequately examine certain
transactions that were selected for testing during our review.
We conducted this performance audit in accordance with generally accepted government auditing
standards issued by the Comptroller General of the United States. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence that provides a reasonable
basis for our findings and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Our audit procedures consisted of the following:
•

A determination of whether FLC had implemented effective internal controls, including:
a. Processes for planning, organizing, directing, and controlling program operations;
b. Policies and procedures to ensure that resource use is consistent with laws and
regulations; and
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INTRODUCTION

c. Policies and procedures to ensure that resources are safeguarded and efficiently used.
•

An assessment of FLC’s business practices and its compliance with applicable laws, rules, and
regulations, as well as the various fiscal and programmatic requirements of its state contracts.

In order to achieve our objectives, we first assessed the internal controls established and
implemented by FLC over its operations.

The purpose of this assessment was to obtain an

understanding of management’s attitude, the control environment, and the flow of transactions
through FLC’s accounting system. We used this assessment in planning and performing our audit
tests. We then held discussions with FLC officials who, in some cases, were also members of FLC’s
Board of Directors, and officials from the OSD and the state’s DOE; and reviewed organization
charts and internal policies and procedures, as well as all applicable laws, rules, and regulations. We
also examined FLC’s financial statements, cost reports, invoices, and other pertinent financial
records to determine whether the expenses it incurred during the period covered by our audit were
reasonable; allowable; properly authorized and recorded; and in compliance with applicable laws,
rules, and regulations. Finally, we reviewed various documents that were provided to us by FLC
officials relative to certain activities conducted by two of FLC’s related-party organizations,
Vandewinnkel Realty Trust and Edwards Realty Trust.
Our audit was limited to a review of certain activities of FLC. Although we reviewed various
documents relative to certain activities conducted by two of FLC’s related party organizations, we
did not conduct any audit work on site at these entities. Our audit was not made for the purposes of
expressing an opinion on FLC’s financial statements. We also did not assess the quality and
appropriateness of program services provided by FLC in its programs. Rather, our report was
intended to report findings and conclusions on the extent of FLC’s compliance with applicable laws,
rules, regulations, and contractual agreements, and to identify any operational and administrative
processes, methods, and internal controls that could be made more efficient and effective.

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AUDIT RESULTS
1. DURING CALENDER YEAR 2004, FLC PROVIDED ITS EXECUTIVE DIRECTOR AND
ANOTHER MEMBER OF ITS ADMINSTRATIVE STAFF WITH COMPENSATION TOTALING
$254,384 IN EXCESS OF THE AMOUNT ALLOWED BY OSD REGULATIONS AND DID NOT
REPORT AT LEAST $64,781 OF THESE EXPENSES AS BEING NON-REIMBURSABLE

During calendar year 2004, FLC provided compensation to its Executive Director and Chief
Operating Officer (COO) that exceeded the amounts allowed by state regulations by $254,384.
Although the agency identified $189,603 of these expenses as being non-reimbursable in the
financial statements it filed with the Commonwealth, it did not properly disclose the remaining
$64,781 of this compensation as being non-reimbursable.
OSD has promulgated regulations that specifically define certain expenses as being unallowable
and non-reimbursable under state contracts. In this regard, 808 CMR 1.05(24) identifies the
following salary expenses as non-reimbursable costs under state contracts:
Salaries of Officers and Managers. Salaries of officers and managers to the extent they
exceed the rate paid to state managers in job group M-XII, step seven [in the schedule
contained in MGL C30; Sec.46C. . . .]

During our audit, we reviewed the compensation provided to members of FLC’s administrative
staff during calendar year 2004, as reported by the agency on these individuals’ IRS Forms-W2.
Based on our review, we determined that the compensation provided to two individuals
exceeded the amount allowed by OSD regulations by $254,384. However, the agency only
reported $189,603 of these expenses as being non-reimbursable, as indicated in the following
table:
Non-Reimbursable Compensation Summary
2004 Staff Person’s

Compensation

Allowable Rate

Title

Executive Director
COO

Excess
Compensation

$296,980.66

$128,181.04

$168,799.62

213,764.92

128,181.04

85,583.88

Excess Amount

254,383.50

Reported NonReimbursable

189,602.48*

Total Unreported NonReimbursable

$64,781.02

*The amounts reported by FLC in its UFR’s for fiscal years 2004 and 2005 were
adjusted to derive this calendar year amount.

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Of particular concern is that $114,957 in questionable bonuses that the Executive Director
approved for himself and the COO without any independent oversight was included in the
$254,384.
In this regard, 808 CMR 1.05(9), promulgated by OSD, identifies the following as being nonreimbursable expenses under state-funded contracts:
Certain Fringe Benefits. Fringe benefits determined to be excessive in light of salary levels and
benefits of other comparable Contractors and fringe benefits to the extent that they are not
available to all employees under an established policy of the Contractor.…

During our audit, we determined that FLC did not have a formal written policy regarding staff
bonuses. Despite this, during fiscal year 2004 the agency’s Executive Director and its COO,
who are also members of the agency’s Board of Directors, voted to give themselves $114,957 in
bonuses. Specifically, at the agency’s April 28, 2004 Board meeting, at which only the agency’s
Executive Director, the COO, and the COO’s sister were present, the following action was
voted on.
[name of Executive Director] proposed that a bonus of $70,000 net of taxes to be paid to
[name of Executive Director] and [name of COO] for their twenty-six plus years of
service to Frederic L. Chamberlain Center, Inc.
The Board voted to pay a $70,000 net of taxes bonus each to [name of Executive
Director] and [name of COO]. Such bonus will be paid as funds allow.

Subsequent to this vote, on April 30, 2004, the agency’s Executive Director was issued a bonus
check of $86,452.89 ($70,000 net of deductions). Subsequently, the COO was issued two bonus
checks, one on May 13, 2004 for $11,111.23 ($10,000 net of deductions) and another on
December 1, 2004 for $17,393.09 ($15,000 net of deductions). Given the fact that FLC did not
have a policy that provided for these individuals to receive these bonuses and the fact that the
agency’s Executive Director and the COO authorized these bonuses for themselves in a
discriminatory manner without any independent oversight, these bonuses clearly represent nonreimbursable expenses in accordance with state regulations.
Recommendation

In order to address our concerns relative to this matter, FLC should amend its UFR for fiscal
year 2004 and declare the aforementioned $64,781 as non-reimbursable salary expenses. Based
on this amendment, if FLC does not have sufficient non-state funds to offset these non-

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reimbursable expenses, it should remit to the Commonwealth an amount equal to the amount of
the non-reimbursable expenses, which it cannot offset in accordance with OSD regulations. In
the future, FLC should take measures to ensure that any compensation it provides to members
of its staff is reasonable and allowable in accordance with the established policies and procedures
of the agency, as well as state regulations.
Auditee’s Response

In response to our draft audit report, FLC officials provided written comments, which are
excerpted below:
While FLC paid wages in excess of the OSA guidelines, FLC did not violate any regulation.
FLC properly disclosed and reported wages above the OSD guideline as nonreimbursable. OSA’s wording implies FLC violated some regulation. . . .

In addition to FLC’s comments, a representative of the law firm representing FLC in this matter,
provided comments which are excerpted below:
Compensation of officers and employees of non-profit corporations must be reasonable
and it is an area that is carefully scrutinized by the IRS. Compensation of officers and
employees is also limited by state regulation and reimbursements cannot be sought for
compensation exceeding the state regulations. It is not illegal or improper to
compensate officers and employees above the amounts authorized under mass
regulations provided the amount is reasonable. The question of reasonableness is a
federal question and clearly would have been addressed in the federal audit. The IRS
did not find any compensation paid to officers and directors as unreasonable and
therefore highlighting the non-reimbursable compensation paid to officers and directors
serves no legitimate purpose. . . . Discussion of compensation of the officers and
employees should be limited to the claimed reimbursable which appear to be at issue.
. . .OSA’s recalculation of compensation attempts to convert FLC’s Fiscal year reported
non-reimbursable amounts to a calendar year basis in order to compare those amounts
to calendar year W-2 wages. There are a number of problems with this approach:
•

OSA uses W-2 wage information, which is not appropriate for calculating the amount
of compensation that is in excess of OSD guidelines.

•

Even though OSA attempts to calculate excess wages on a calendar year basis, OSA
used Fiscal Year amounts for the “allowed” wages. Thus, overstating the “excess”
amounts.

•

OSA’s calculation of excess wages essentially manipulates reported data by including
vehicle expense amounts for some years where FLC already reported those vehicle
expenses as non-reimbursable. OSA fails to recognize the amounts related to vehicle
expenses FLC already reported as non-reimbursable. OSA compares (total 1) the W-2
wages (which include taxable vehicle use) to (total 2) the non-reimbursable wages
reported on FLC’s UFR (which do not include vehicle use).

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FLC suggests the correct method to determine excess wages is to perform the calculation
on a fiscal year basis per OSD guidelines. FLC suggests that the amounts reported on its
UFRs are the correct and appropriate way to calculate and report non-reimbursable
wages.
Upon review of FLC’s Fiscal Year 2005 UFR, we found we used an incorrect amount for
the “allowed” wages. FLC used $136,316 instead of $132,667.38. As a result FLC under
reported non-reimbursable wages by $7,291. . .
Auditor’s Reply

Contrary to what FLC states in its response, the agency did not in fact comply with OSD
regulations when it did not report $64,781 of the excessive compensation in question as being
non-reimbursable. Consequently, it is necessary and proper for us to report this issue in our
report. We agree with the assertion that FLC makes in its response, that compensation provided
to officers and employees of non-profit corporations should be reasonable. It is for that reason
that OSD has promulgated 808 CMR 1.05(24), which limits the amount of salary that can be
provided to certain executives of non-profit corporations with state funds. Regardless of what
the IRS may deem to be reasonable, the maximum rate of compensation that can be paid to
certain executives using state funds is established by OSD through its regulations. This is the
criteria that is used by our auditors during each and every audit of the Commonwealth’s
contracted human service providers to determine the reasonableness of the compensation
provided to certain executives.
Our audit report does not state or even imply that it is illegal or improper to compensate officers
of a corporation in amounts above those allowed by state regulations. Rather, our report clearly
states that when compensation above this amount is provided to executives of a non-profit
corporation, the excess amount cannot be paid with state funds, and the amounts and sources of
non-state funding used to provide this level of compensation needs to be properly disclosed.
We disagree with FLC’s assertion that it was inappropriate to use information from these
individuals’ IRS W-2 Forms in our analysis. While fiscal year information reported in the
agency’s UFR’s would show the salary provided to certain staff members, it was necessary for us
to determine the total compensation, including taxable fringe benefits, provided to these
individuals in order to perform an accurate analysis. The amount of compensation that could be
charged to state funding that we used in our analysis did not vary from fiscal year to fiscal year
during out audit period, so FLC’s concern that we used a fiscal year “allowable amount” as

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opposed to a calendar year “allowable amount” is not relevant. Finally, contrary to what FLC
asserts in its response, our analysis did in fact include non-reimbursable compensation, including
personal use of vehicles provided to the individuals in question.
2. UNDOCUMENTED
$225,476

AND

NON-REIMBURSABLE

CREDIT

CARD

EXPENSES

TOTALING

During the fiscal years 2004 through 2006, FLC permitted eleven staff members to use its
corporate credit cards. However, our review of the credit card expenditures made by these staff
members during this period revealed that 1,767 expenditures totaling $337,335 were
questionable in that they were either inadequately documented or did not appear to be directly
related to the FLC’s program-related activities. According to state regulations, expenses such as
these are non-reimbursable under state-funded contracts. Although FLC reported $111,859 of
these expenses as being non-reimbursable in the financial statements it filed with the
Commonwealth for these fiscal years, it did not report the remaining $225,476 as being nonreimbursable.
808 CMR 1.05 identifies the following as being non-reimbursable costs:
(12) Non-Program Expenses. Expenses of the Contractor which are not directly related
to the social service Program purposes of the Contractor.
(26) Undocumented Expenses. Costs which are not adequately documented in the light
of the American Institute of Certified Public Accountants statements on auditing
standards for evidential matters.

Further, 808 CMR 1.04 establishes the following recordkeeping and reporting requirements with
which all contracted human service providers such as FLC must comply:
(1) Recordkeeping. The Contractor and its Subcontractors shall keep on file all data
necessary to satisfy applicable reporting requirements of the Commonwealth (including
DPS, the Division of Health Care Finance and Policy and Departments), and financial
books, supporting documents, statistical records, and all other records which reflect
revenues associated with and costs incurred in or allocated to any Program of services
rendered under the Contract. The Contractor and its Subcontractors shall maintain
records of all types of expenses and income or other funds pertaining to the Program
paid to the Contractor by every source, including from each Client…

During the period September 1, 2003 through August 31, 2006, FLC permitted its Executive
Director, Chief Operating Officer, Director of Admissions, Program Director, and seven other
members of its staff to use its corporate credit cards. During this period, 2,335 purchases

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totaling $491,093 were charged on FLC’s corporate credit cards, and FLC used funds that it
received from tuition payments to pay for these purchases. Our assessment of FLC’s internal
controls over these credit card expenditures indicated that FLC had established written policies
and procedures relative to the use of these credit cards, including requiring staff members to
provide original receipts, a description of each expense, an indication of the business purpose of
each expense, and the name of the individual for whom the expense was incurred. However, we
noted many instances where the agency was not monitoring and enforcing compliance with its
own policies and procedures relative to the use of its corporate credit cards. Additionally, we
found that no member of FLC’s staff performed an independent review of these credit card
expenditures to assess their reasonableness.
Based on these internal control problems, we reviewed all the documentation FLC maintained
relative to the $491,093 in credit card expenses it incurred during fiscal years 2004 through 2006
and found that the agency paid for $337,335 in credit card expenses that were either inadequately
documented or appeared to be non-program-related. The inadequately documented expenses
included expenses for which FLC lacked invoices, receipts, or other documentation to
substantiate the nature or business purpose of the expenses. A summary of the questionable
expenses we identified appear in the table below:
Expenditure
Deficiency

Fiscal Year
2004

Fiscal Year
2005

$43,781

$22,337

$29,049

$95,167

Inadequately
Documented

24,108

44,968

83,473

152,549

Non-Program

55,254

22,187

12,178

89,619

$123,143

$89,492

$124,700

$337,335

No Receipt

Total

Fiscal Year
2006

Total
2004 - 2006

Examples of the non-program-related expenses include the following:
•

Alcohol purchases totaling $955, including a $634 charge on June 9, 2005 for catering at a
Marriott Hotel in Colorado.

•

Gift purchases totaling $714, including a $609 charge on September 22, 2003 for a necklace
given to a temporary consultant.

•

Various out of the country trips (Europe, Japan, Canada) totaling $10,077 where the
business purpose of the trip was not indicated.

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Usage of corporate credit cards, and the amounts of inadequately documented expenses and
non-program-related expenses incurred by staff members for fiscal years 2004 through 2006, are
as follows:
Summary of Questionable Credit Card Expenses and Usage by Staff Members
Fiscal Years 2004 through 2006
Staff Member
Executive Director
Chief Operation Officer
Director of Admissions
Program Director
Other Staff
Total

Number of
Charges
524
37
582
565
59
1,767

No Receipt

Inadequately
Documented

$58,164
3,441
16,967
12,392
4,203
$95,167

$39,112
300
54,114
53,075
5,948
$152,549

Non-Program
$1,404
19,840
1,051
66,751
573
$89,619

Total Fiscal
Years 2004-2006
$98,680
23,581
72,132
132,218
10,724
$337,335

Regarding this matter, FLC officials stated that the information provided to us relative to these
expenses may be incomplete, and that they would continue to look for other supporting
documentation. However, to date, FLC has not provided us with any additional documentation
to substantiate the reasonableness of the questioned expenses.
Recommendation

According to the UFRs that FLC filed with OSD during fiscal years 2004 through 2006, the
agency did identify $111,859 of its credit card expenses as being non-reimbursable.
Consequently, in order to address our concerns relative to this matter, FLC should amend its
fiscal years 2004 through 2006 UFRs and accurately report the remaining $225,476 in nonreimbursable credit card expenses. Based on these amendments, if during any fiscal year FLC
does not have sufficient non-state funds to offset these non-reimbursable expenses, it should
remit to the Commonwealth an amount equal to the amount of non-reimbursable expenses,
which it cannot offset in accordance with OSD regulations. In the future, FLC should take
measures to ensure that agency staff comply with its policies and procedures relative to the use
of its credit cards, and that all expenses be reviewed by an independent member of FLC’s
administrative staff to ensure that any non-reimbursable expenses are identified and reported as
such by the agency.

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Auditee’s Response

In response to our draft audit report, FLC officials provided written comments, which are
excerpted below:
. . . .While FLC recognizes there have been problems with documentation of credit card
transactions, it has adopted policies and procedures to address them.
The OSA stated . . . . “we found that no member of FLC’s staff performed an
independent review of these credit card expenditures to assess their reasonableness”
•

On a weekly basis FLC’s controller, Executive Director, and Chief Operating Officer
review the documentation status of any credit card transaction, this procedure was in
effect at the time of the OSA field audit.

•

All invoices and expenditure requests (including the credit card statements) are
approved by two authorized signers. This procedure was also in effect at the time of
the OSA field audit.

. . . . FLC has reviewed the list provided by OSA and questions why OSA labeled charges

as “inadequately documented” when in the notes shown on OSA’s worksheet describe
the purpose of the charge. In other cases the purpose of the transaction is obvious.

•

For example there were several charges for a conference in Glasgow Scotland, a
charge for a flight to London and another for a flight from London to Glasgow. While
the two charges are listed below each other, OSA identified the flight from London
to Glasgow “no purpose indicated”. It would seem logical that for a conference in
Glasgow that one might fly to London then to Glasgow.

•

Another example, again from the OSA list of “inadequately Documented CC Charges
(Out of Country) FY04-FY06. . . . . the list OSA lists airline tickets for students and
staff with a GL description of Europe trip and an OSA note “airfare student trip”. The
OSA knows FLC students and staff took educational trips to Europe. OSA was even
provided with a list of staff and students that participated. Furthermore, the parents
of the students that participated paid for the student trip costs. So these costs were
covered by related income.

OSA provided FLC worksheet . . . . “FY04-FY06 Inadequately Documented CC
Expenditures Charged to State Contracts”. FLC reviewed those schedules and notes the
“GL Description” and the “Note/Quote” associated with the transaction to be clear as to
the purpose of the transactions.
•

All of the transactions the OSA categorized as “inadequately documented” have
receipts.

•

The majority of the 763 transactions the OSA categorized as “inadequately
documented”, have a written indication of the purpose for the charge.

•

A number of the charges were for “gas” used in FLC vehicles and charged by the
employees who were assigned those vehicles. . . .

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•

A number of the charges were clearly for attendance at conferences (travel
expenses, meals, and lodging). Yet the OSA chose to define them as inadequately
documented.

•

OSA chose to define transactions as inadequately documented simply because the
transaction took place outside of Middleboro. . . .

. . . . While FLC recognizes the receipt for the transaction was not provided, the purpose
of the transaction is clearly demonstrated as supported by the notes on OSA’s worksheet.

MGL 808 CMR 1.05 states:
26. Undocumented Expenses. Costs that are not adequately documented in the
light of the American Institute of Certified Public Accountants statements on
auditing standards for evidential matters.
The AICPA standards on evidential matter and SAS #106 on audit evidence insist that
“sufficient appropriate audit evidence” is a matter of professional judgment. There is no
written criterion one must have in order to be adequately documented.
FLC cannot say that it has complete documentation for all the charges OSA summarized,
but we question the validity of the [totals of the non-reimbursable and unsupported
expenses.]
Auditor’s Reply

In its response, FLC contends that during the period covered by our audit, certain members of
FLC’s staff routinely reviewed and approved all credit and transitions. However, the agency
does not dispute the fact that during our audit period, it did not have any formal written policies
or procedures that required these activities to be conducted. Further, based on the agency’s
credit card records that we reviewed, there was no evidence that indicated that any independent
review or approval of agency credit card expenditures was being conducted. By FLC’s own
admission, “there have been problems with documentation of credit card transactions. . . .” If
the credit card review procedures that FLC talked about in its response actually existed during
our audit period, we question how such documentation issues could exist. For example, there
was no documentation for approximately 28% of all the credit card expenses we reviewed.
Moreover, even if such a review process as described by FLC in its response did exist and was
being followed by the agency, one would have to question how independent such a process
could be, given the fact that the individuals (e.g., FLC’s Executive Director and Chief Operating
Officer) who were purportedly conducting there reviews were actually the individuals incurring a
significant amount of the expenses.

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As stated in our report, credit card expenses totaling $95,167 had no documentation, and in our
opinion, additional credit expenses totaling $152,549 were inadequately documented. In many
cases the only source documentation FLC had to support credit card expenditures was a credit
card statement. FLC is correct in stating that based on the credit card statements and other
agency records, it was possible to identify the nature of the transactions in question. However,
while we were able to determine the nature and amount of many expenditures, there was no
documentation that indicated the business nature of these expenses, and consequently, we
deemed them to be inadequately documented. For example, although a credit card statement
could identify a flight to London or Glasgow, there was no other documentation as to who went
on the trip or the business nature of the trip. Further, a number of the travel expenses charged
on agency credit cards listed meal charges with no indication as to who attended the meal or the
business nature of this expense.
We acknowledge the fact that all of the inadequately documented expenses had receipts.
Otherwise, they would have been properly characterized by the audit team as “undocumented”
as opposed to “inadequately” documented expenses. However, while a receipt may document
the amount of the expense, in our opinion additional information is needed to document the
reasonableness and allowability of each expense. FLC is correct in its assertion that determining
whether or not an expense is adequately documented is a matter of professional judgment. In
this regard, we do not believe that it is unreasonable for us to expect every organization that
receives state funds to be able to document that all expenses paid for with state funds were
actually incurred, and that the business nature of each expense is clearly identifiable. In our
professional judgment, when documentation does not meet these standards, the auditee has not
met its contractual and regulatory obligations to the Commonwealth to maintain documentation
for all expenses that clearly demonstrates that they are reasonable and allowable, and it is
therefore our obligation to report on this matter. It is not for the audit team to decide or
surmise that an expenditure is business related based solely on the nature of the expense.
Rather, it is clearly the responsibility of the agency to maintain sufficient documentation to
demonstrate the reasonableness and allowability of its expenses.

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3. FLC DID NOT REPORT NON-REIMBURSABLE EXPENSES TOTALING $15,403 RELATIVE TO
ITS OPERATION OF A PROPERTY IN BERMUDA

During our audit period, FLC’s Director of Marketing and Development leased a house in
Bermuda which was paid for by FLC. From fiscal year 2004 through 2006, the agency incurred
expenses totaling at least $294,484 relative to the operation of this property. According to FLC
officials, the agency rented this space as part of what it calls its “Bermuda Project,” which these
officials told us involved broadening FLC’s services and referral sources and developing a base
for international marketing.

Based on the documentation we reviewed relative to FLC’s

operation of this property, we determined that no students ever used this property, and that FLC
was primarily using this property for business versus programmatic purposes. Also, although
FLC identified most of the expenses associated with the operation of this property as being nonreimbursable, we determined that the agency did not identify $15,403 of the expenses associated
with this property as being non-reimbursable.
808 CMR 1.05, promulgated by OSD, identifies the following as non-reimbursable costs under
state contracts:
(12) Non-Program Expenses. Expenses of the Contractor which are not directly related
to the social service Program purposes of the Contractor.

Since 1999, FLC has paid for rented property in Bermuda. According to the agency’s Chief
Operating Officer, from 1999 through 2002 the agency rented an apartment that cost FLC
approximately $3,300 per month. However, in 2002, the agency began leasing a much larger
property in the agency’s Program Director/Vice President name from REGO Realtors
(Bermuda) Limited. According to the lease for this property, this new property consisted of a
house that contains three bedrooms, a den, a kitchen with a breakfast area, a living room with a
fireplace, a laundry area, and a swimming pool. Under the terms and conditions of the most
current lease for this property (which covered the period June 1, 2004 through May 31, 2005,
with an optional one-year renewal), the tenant (FLC’s Program Director/Vice President) was
responsible for furnishing the property, paying all the utility costs associated with the property,
maintaining the pool, and paying a monthly rent of $7,500. During the period covered by our
audit, FLC incurred at least $306,475 in expenses associated with the operation of this property,
as indicated in the table below:

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Summary of Bermuda Expenses
Fiscal Year

Expense Item
Rent

2004

2005

2006

$ 98,923

$ 97,438

$66,675

$263,036

0

2,226

4,359

6,585

14,799

14,627

7,428

36,854

$113,722

$114,291

$78,462

$306,475

Advertising
Meals and Travel

Total

According to documentation provided to us by FLC officials, the agency rented this space as
part of what it calls its “Bermuda Project.” In a January 25, 2006 memorandum from FLC’s
Program Director/Vice President to the agency’s Board members, the Director stated that she
and the agency’s COO initiated the project in 1998 for “the purpose of broadening our services
and referral sources, as well as to develop a base for international marketing.” According to this
memorandum, the activities that would be conducted in the Bermuda Project would include: (1)
marketing FLC to the Bermuda Government and private agencies to attract Bermuda students,
(2) conducting conferences in Bermuda to expand the agency’s exposure in the country, (3)
importing mental health providers into Bermuda to provide services, (4) using Bermuda for
educational trips for some students, and (5) developing a program for up to 10 students to
essentially spend their freshman year of college at the Bermuda College, where they would
receive transferable credits.
Based on the documentation we reviewed, it did not appear that FLC ever used this property to
house any of its students. In fact, only certain members of FLC’s staff, including its Program
Director/Vice President, ever used this property. Since this property was not used to benefit
any of its Massachusetts-funded students, none of the expenses associated with the operation of
this property represent reimbursable expenses in accordance with OSD regulations.
FLC does take some students on educational trips to Bermuda. However, the students do not
stay at the house; in fact, FLC charges the parents of the students who attend this trip a fee to
cover the cost of the trip.
FLC stopped leasing this property in March 2006.

In its financial statements, FLC

acknowledges the fact that most of the expenses related to its Bermuda property were nonreimbursable. However, we found that FLC did not identify $15,403 in expenses associated with

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the operation of this property during fiscal years 2004 through 2006 as being non-reimbursable,
as indicated in the table below:
Fiscal Year

Unreported Non-Reimbursable Expenses

2004

$721

2005

10,274

2006

4,408

Total

$15,403

Recommendation

In order to address our concerns relative to this matter, FLC should amend its UFR’s to identify
an additional $7,513 in Bermuda-related expenses as being non-reimbursable, as follows:
Fiscal Year

Amount

2004

$34

2005

3,072

2006

4,407
$7,513

This amount represents the difference between the total non-reimbursable Bermuda expenses of
$15,403 and the non-reimbursable expenses totaling $7,890 which were already identified as
questionable credit card expenses in Audit Result No. 2. Based on these amendments, if FLC
does not have sufficient non-state funds to offset these non-reimbursable expenses, it should
remit to the Commonwealth an amount equal to the amount of non-reimbursable expenses,
which it cannot offset in accordance with OSD regulations. In the future, FLC should ensure
that any expenses that are not directly related to its state-funded program activities are properly
identified as being non-reimbursable expenses in its UFRs.
Auditee’s Response

In response to our draft audit report, FLC officials provided written comments, which are
excerpted below:
OSA’s work sheet demonstrates that OSA already included $86,925.44 identified as
“Bermuda (non-program)” in determining the total non-reimbursable credit card charges

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of $256,982 OSA. . . . Thus, the OSA’s recommendation for audit result . . . . would
require FLC to pay for the same non-reimbursable amounts twice. . .
. . .Contrary to OSA’s audit result, FLC’s activities in Bermuda did benefit all our students
including Massachusetts’ students.
FLC realized $935,166 in tuition revenue and $40,700 in other revenue from Bermuda
during the audit period. This revenue helped FLC to subsidize Massachusetts’ students by
funding quality teaching, nursing clinical and residential staff and paying for increased
costs not covered by the Massachusetts tuition rate.
Our work with the Bermuda government and agencies enhanced FLC’s reputation as a
school and built relationships that continue to provide a source of students. . . .

In addition to FLC’s comments, a representative of the law firm representing FLC in this matter
provided comments which are excerpted below:
. . . . None of the contractual obligations involve the Bermuda property. Chamberlain is
legally permitted to conduct numerous activities to further its educational and charitable
purposes. Chamberlain is not contractually obligated to use the Bermuda property for
”the benefit of Massachusetts students.” . . .
Auditor’s Reply

In our recommendation to this issue, all Bermuda-related expenses paid for by credit card have
been removed from our recommended UFR adjustment amounts. Consequently, our report
does not duplicate the amounts identified as unreported non-reimbursable expenses.
In its response, FLC contends that this Bermuda property did in fact benefit its Massachusetts
students, and supports this assertion by stating that it received over $975,000 in Bermuda-related
tuition that was used to fund expenses not covered by Massachusetts’ tuition. However, the fact
that FLC identified most of its Bermuda expenses as being non-reimbursable to the
Commonwealth is a clear indication that the agency did not truly believe that these expenses
benefited Massachusetts students. Their assertion is, in our opinion, unfounded, since clearly if
FLC had filled the slots utilized by its three students from Bermuda with local students, it would
have generated approximately the same amount of revenue without incurring hundreds of
thousands of dollars of additional expenses relative to its Bermuda-related activities.
4. NONCOMPLIANCE WITH BOARD GOVERNANCE STANDARDS APPLICABLE TO NONPROFIT HUMAN SERVICE CONTRACTORS

During our audit period, FLC did not comply with various board governance guidelines issued
by the state’s Office of the Attorney General (OAG) and with related requirements of the terms

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and conditions of its state contracts. Rather, up until fiscal year 2006, FLC operated under the
control of its Executive Director, his ex-wife, and his ex-wife’s sister without the necessary
independent Board oversight.
The state’s Executive Office for Administration and Finance (EOAF), Office of the State
Comptroller (OSC), and OSD have jointly issued Commonwealth Terms and Conditions for
Human and Social Services (General Contract Conditions) with which all human service
contractors such as FLC must comply. Regarding an organization’s Board of Directors, these
General Contract Conditions state the following:
11. Human and Social Services Contracting Provisions; a. Board of Directors Standards.
If a non-profit organization, the Contractor shall comply with the principles in the
Massachusetts Attorney General’s “Guide for Board Members of Charitable
Organizations” [Guide] and with the standards for boards contained in the American
Institute of Certified Public Accountants (AICPA)’s statements on auditing standards,
as may be amended from time to time. Further, the Contractor specifically agrees
that: i) members of the Contractor’s management and immediate family (as defined
in the AICPA’s Financial Accounting Standards Board Statement number 57) will not
comprise more than 30% of the voting members of the Contractor’s board or any of
the board’s committees or subcommittees; and, ii) the Contractor’s Board of
Directors will approve the selection of the Contractor’s audit firm, will annually
review its executive director’s or other more senior manager’s performance and set
that person’s compensation by formal vote, and will meet as frequently as necessary
to fulfill the Contractor’s obligations under this section. Where the board meets less
than two times during its fiscal year, the Contractor shall submit a description of its
board structure and the dates of each board and subcommittee meeting with its
Uniform Financial Statements and Independent Auditor’s Report (UFR).

The OAG’s Guide for Board Members of Charitable Organizations (OAG Guide) identifies the
following financial responsibilities of charitable organizations’ Board members:
As a board member you have primary responsibility for making sure that the charity is
financially accountable, has mechanisms in place to keep it fiscally sound, operates in a
fiscally sound manner, and is properly using any restricted funds it may have. The board
shall be involved in all aspects of the finances of the charity….
The budget should be developed early enough so that the entire board can be involved
in its review and approval before the beginning of the fiscal year.
The board should be sure that the charity has adequate internal accounting systems.
Board members should expect management to produce timely and accurate income and
expense statements, balance sheets and budget status reports and should expect to
receive these in advance of board meetings.

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The board should require periodic confirmation from management that all required filings
(such as tax returns and the Massachusetts Form PC) are up-to-date and that employee
withholding taxes and insurance premiums are being paid when due.

During our audit, we reviewed all of the provided minutes of the meetings of FLC’s Board of
Directors during our audit period. Based on our review, we found that through the end of fiscal
year 2005, FLC’s Board composition and activities were not in compliance with the OAG Guide
or the state’s General Contract Conditions, in that from the beginning of our audit period
through the end of fiscal year 2005, the agency Board was comprised completely of agencyrelated employees. During fiscal year 2006, the composition of the Board changed; as new
people were added and one resigned. However, two of the five Board members, or 40%, were
still staff members, and therefore the agency was still not in compliance with the General
Contract Conditions. In essence, throughout our audit period FLC management employees and
their immediate family members effectively controlled FLC’s governance process, with
minimum participation by unrelated independent individuals. This Board composition, in our
opinion, impaired the ability to provide the independent oversight called for by the OAG Guide.
Examples of this include the following:
•

The OAG Guide charges the full Board with responsibility for setting the Executive
Director’s entire compensation package based on an annual evaluation. However, FLC’s
Board, given its composition, could not have performed an independent evaluation of the
performance of the agency’s Executive Director. Consequently, there is no assurance that
the pay increases and bonuses that were given to the Executive Director during our audit
period were reasonable.

•

Regarding conflict-of-interest situations, the OAG Guide:
1. Calls for strong formal conflict-of-interest policies, including annual written
disclosures by all members to the entire Board of all business involvements with the
charity and involvement with other charitable and for-profit entities and the
establishment of procedures for disclosure of financial interest and withdrawal from
discussion and voting in conflict-of-interest situations.
2. Recommends the use of outside evaluations and greater than majority votes in
conflict-of-interest situations.
3. States that transactions should not occur unless the Board determines them to be
clearly in the best interest of the charity. However, FLC’s Board has not established
conflict-of-interest policies, and we noted one instance in which certain Board
members voted to give themselves significant bonuses, and many other instances in
which the Board allowed the use of agency funds to fund non-agency related activities.

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4. The OAG Guide assigns the Board primary responsibility for ensuring fiscal
accountability and sound operation, calling on the Board to review and approve the
budget before the start of each fiscal year. The OAG Guide also states the expectation
that Board members receive timely and accurate income and expense, balance sheet,
and budget status reports in advance of meetings. However, we found no
documentation to substantiate that FLC’s Board ever formally reviewed or approved
any of FLC’s budgets or reviewed any of FLC’s financial reports during the period
covered by our audit.
Regarding this matter, FLC officials told us that they are in the process of expanding their
Board.
Recommendation

In order to address our concerns relative to this mater, we recommend that FLC continue to
reconstitute its Board so that it is in compliance with OAG and state contract requirements.
Further, the agency’s Board should adopt a conflict-of-interest policy that requires Board
members to abstain from voting on issues which could benefit the members or their relatives.
Auditee’s Response

In response to our draft audit report, FLC officials provided written comments, which are
excerpted below:
FLC has expanded its board and reduced the number of related parties on the board.
During various points of fiscal year 2006 the board was comprised of up to eight
members with as little as two related parties.
The non-related parties of the board set the Executive Director and Chief Operating
Officer’s compensation package based upon an independent salary study.
…Prior to fiscal year 2006 the Board was comprised of individuals who were directly
involved in the operation, financial reporting, and programmatic aspects of FLC. The OSA
ignores the fact that two of the Board members met weekly on the financial and
operational status of FLC and thus had direct knowledge and approval of FLC’s budget
and annual audit.
Furthermore, as FLC’s UFR filings demonstrate, the Board met each year and formally
recognized and accepted the representations of management and independent auditor’s
opinion.
Auditor’s Reply

According to FLC’s response, the agency is taking measures to continue to reconstitute its Board
so that it is in compliance with OAG and state contract requirements. We believe such measures

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are necessary and should serve to better ensure the proper governance of the agency. However,
we again recommend that the agency’s Board formally adopt a conflict-of-interest policy that
requires Board members to abstain from voting on issues which could benefit the members or
their relatives.
Contrary to what FLC states in its response, our report does not ignore the fact that two of the
agency’s Board members may have met weekly on the financial and operational status of FLC,
and thus had direct knowledge and approval of FLC’s budget and annual audit. However, if this
is in fact the case, there were no written records (e.g., minutes of such meetings), to substantiate
this assertion. Further, it would be more appropriate for such matters to be discussed at formal
Board meetings, so that the agency’s entire Board, and not just certain members, are aware of
and approve of such actions, and that Board approvals could be formally noted in the minutes
of the Board meetings. As noted above, the OAG Guide assigns the Board primary
responsibility for ensuring fiscal accountability and sound operation, calling on the Board to
review and approve the budget before the start of each fiscal year. The OAG Guide also states
the expectation that Board members receive timely and accurate income and expense, balance
sheet, and budget status reports in advance of meetings. However, we found no documentation
to substantiate that FLC’s entire Board ever formally reviewed or approved any of FLC’s
budgets or reviewed any of FLC’s financial reports during the period covered by our audit.

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