Audit Report on the Oversight of the Financial Operations of the Merrick Academy Queens Public Charter School

Executive Summary

Charter schools are independent public schools governed by Boards of Trustees and managed under contracts, also known as “charter agreements.”  The authority to establish charter schools is found in Article 56 of the New York State (NYS) Education Law, also known as the Charter Schools Act (the Act), which first became law in December 1998.  Pursuant to the Act, in order for a charter school to be created in New York City, it must have been approved by one of three possible authorizing entities: the Board of Trustees of the State University of New York (SUNY Trustees), the New York State Education Department (NYSED) and, for schools operating within the five boroughs of New York City (City), the City’s Department of Education (DOE).

Merrick Academy Queens Public Charter School (Merrick) is a SUNY-authorized charter school located at 136-25 218^th Street in the Springfield Gardens section of Queens.  Merrick was granted its first provisional charter by SUNY’s Charter Schools Institute (the SUNY Institute), which acts on behalf of the SUNY Trustees (its authorizer) and was operating under its third charter renewal (July 11, 2011) during our scope period and served students in grades K-6.  Its charter was renewed again on February 3, 2015, for another five-year term to serve grades K-5.

During Fiscal Years (FYs) 2013 (July 1, 2012, through June 30, 2013) and 2014 (July 1, 2013, through June 30, 2014), Merrick had a management service agreement (the Management Services Agreement) with Victory Schools, Inc. (Victory), to manage the school’s operations.  Pursuant to this agreement, Victory had broad responsibility for the management and operation of the school.  In exchange, Merrick agreed to pay Victory $2,739 per enrolled student, which amounted to approximately $2.6 million over two years.  During school year 2012–2013 Merrick enrolled 499 students and reported revenue of $7,080,658, while during school year 2013-2014, Merrick enrolled 500 students and reported revenue of $7,139,811.  Most of this revenue—$6,704,641 in FY 2013 and $6,878,345 in FY 2014—represents per-pupil payments received from DOE.  The remainder came from federal, State, and local grants and other private sources.

Audit Findings and Conclusions

Merrick failed to adequately oversee its fiscal affairs during the period under review.  Although the school had established policies and procedures designed to facilitate fiscal management and oversight, we found that Merrick failed to consistently follow them.  Specifically, we found that Merrick modified its Management Services Agreement with Victory without, as required by the contract, memorializing the modifications in writing.  As a result, there was inadequate documentation to establish that payments of $1.2 million to Victory in FYs 13 and 14 were necessary, appropriate, valid and reasonable.  We also found that Merrick failed to consistently use contracts or purchase orders as required by the school’s operating procedures, and did not consistently ensure that payments made to vendors were adequately supported and properly authorized, or that invoices were paid in a timely manner.

We found that Merrick lacked sufficient evidence that major decisions were adequately reviewed and voted on by the Board.  The Board is the steward of public funds and under a duty to manage the business affairs of the school to ensure its financial and operational success.  It is further under a duty to memorialize its work in the publicly available minutes.  Its failure to provide evidence that it carried out its fiduciary duties raises serious concerns of whether it did in fact properly carry out its duties here.

In addition, we found that Merrick did not maintain a current inventory of fixed assets nor did it have evidence that a periodic physical inventory count of such assets was performed as required by its written operating procedures at the end of FYs 2013 and 2014.  We also found that Merrick failed to consistently ensure that New York State Education Law requirements for employees’ criminal background checks were adhered to and as a result, we found that of 29 sampled employees, Merrick did not have evidence that background checks were performed prior to the employment start date for 23 (79 percent) of them.  In addition, we found that five sampled employees worked for the school without a clearance from approximately six months to over 4.5 years.  Finally, Merrick did not have the required financial disclosure forms for all of its trustees for FY 2013 and FY 2014.

Audit Recommendations

Based on our findings, we made seventeen recommendations to Merrick Academy, including the following:

• Merrick should ensure any modifications to its Management Services Agreement are documented in a formal writing.
• Merrick should ensure that it obtains approval for changes to its Management Services Agreement from the SUNY Institute.
• Merrick should ensure that a contract, purchase order or work order has been approved in connection with the procurement of all goods and services.
• Merrick should retain adequate documentation to support purchases and payments made to its vendors.
• Merrick should ensure that the appropriate authorizers approve all purchases and payments.
• Merrick should ensure that it pays its vendors in a timely manner.
• Merrick should ensure that the Board of Trustees reviews and considers all significant matters relating to the financial and operational practices of the school, and that the Board’s minutes adequately record the applicable discussions.
• Merrick should ensure that the Board of Trustees votes on all significant matters pertaining to the financial and operational practices of the school and that the Board’s minutes adequately record those votes.
• Merrick should ensure that it obtains required criminal background clearances for employees before allowing them to work at the school and that all evidence of criminal background inquiries and clearances are maintained in employees’ personnel files. 

Agency Response

Merrick agreed with the audit’s 17 recommendations.  However, Merrick expressed concerns about the accuracy of some of our findings.  Merrick’s concerns are based largely on its claims that (1) its inadequately documented actions were justified because they resulted in positive outcomes, and (2) a lack of documentation does not mean a lack of appropriate actions.  However, we found no basis for many of the asserted positive outcomes and appropriate actions.  Furthermore, we note that as a publically funded institution, Merrick is required to maintain adequate documentation of expenditures and operations to ensure transparency and accountability.  After carefully considering Merrick’s comments, we find no basis to alter any of the report’s findings.

The full text of the Merrick response is included as an addendum to the report.