A charter school is a public school that runs under a written performance contract with a chartering authority. By federal definition it is nonsectarian, charges no tuition and admits students by lottery when applications exceed capacity (20 U.S.C. 7221i). The money follows the students, so the audit begins with enrollment.
The same definition says a charter school agrees to meet the same federal and state audit requirements as other public schools unless the state waives them. Reporting models differ by state, and some charter schools report as nonprofits under FASB while others report under GASB. The engagement letter should state the framework before any fieldwork starts.
Where the revenue comes from
- State per-pupil funding. Counts of students on a designated date drive the amount. Delaware's performance audit of charter units describes funding that depends mainly on enrollment measured in units as of the last school day of September, where a unit is a set number of students that varies by grade and special education status.
- Federal formula and discretionary grants. Title and special education funds, Charter Schools Program grants and food service reimbursements each carry their own compliance requirements.
- Local and other revenue. Facilities aid, philanthropy and fee-based programs.
- Management organization arrangements. Many schools contract with an education management organization (EMO) or charter management organization (CMO) for operations. Fees and shared costs create related-party questions.
Risk areas
- Enrollment and count-date support. The count is a revenue estimate with a legal consequence. In the Delaware review, which covered 11 charter schools, five lacked supporting documentation for student attendance or classification during the count period, and some schools had classroom attendance reports that did not agree to the full student register.
- Special education classification. Higher funding per student raises risk of misclassification or missing eligibility files.
- Grant compliance. Allowable costs, cash management, reporting and period of performance for each federal program.
- Single Audit threshold. A Single Audit or program-specific audit applies when the entity expends $1,000,000 or more of federal awards in its fiscal year (2 CFR 200.501(a)). Federal awards expended as a recipient or subrecipient count. Payments made as a contractor do not. See the Single Audit walkthrough and the threshold standard.
- Related parties. EMO fees, building leases with an affiliated real estate entity, shared staff. See related party transactions.
- Facilities and debt. Lease structures, bond covenants and capital projects.
- Going concern. Dependence on a single authorizer, falling enrollment and charter renewal date.
- Cash and procurement. Segregation of duties in a small business office, credit card use and board approval of contracts.
Audit procedures
- Obtain the enrollment register as of the count date and agree to the state submission. Test a sample of students to enrollment forms, residency proof, grade and special education records, and attendance for the count window.
- Recompute the funding using the state formula and compare to the amounts received. Investigate true-ups, clawbacks and receivable from the state.
- For each federal program, identify the award, test allowable costs, match requirements and reporting. If the Single Audit applies, determine major programs by risk.
- Test payroll against approved positions and certifications where the program requires them.
- Review the management agreement. Agree fees to contract terms and test that costs billed by the EMO are supported and not duplicative.
- Obtain written lease agreements and confirm related-party disclosure.
- Read board minutes for charter renewal conditions, notices of concern and approval of significant contracts.
- Evaluate going concern using the charter term, enrollment trend and cash.
Worked example
Example: Lakeview Charter receives $9,000 per student from the state, based on its fall count of 400 students. That is $3,600,000.
The auditor tests a sample of 40 enrolled students. Three have no signed enrollment form on file and one withdrew two days before the count date. The exceptions are 4 of 40, or 10%. Projecting the 10% exception rate across 400 students gives about 40 students, so the funding at risk is 40 times $9,000, or $360,000. Management agrees to report the count error to the state. The auditor records a receivable or refund liability for the likely repayment, evaluates it as a loss contingency, and reports a control deficiency over count preparation. Because the school expended $1,150,000 in federal awards, a Single Audit is required as well.
PBC items to request
- Charter, authorizer agreements and latest renewal letter
- Enrollment register, count-date reports and state submissions
- Attendance records for the count window and special education roster
- State funding statements and reconciliations
- Federal award letters, drawdown reports and expenditure reports
- EMO agreement and invoices
- Lease agreements, bond documents and covenant calculations
- Board minutes and approved budget
The PBC list guide shows how to sequence requests.
Red flags
- Enrollment rising the week before the count date and falling after it
- Count reports that do not agree to attendance records
- EMO fees that grow faster than enrollment
- Federal draws unrelated to expenditure
- Board approvals missing for major contracts
Sources
- 20 U.S.C. 7221i, definitions (Cornell Legal Information Institute): https://www.law.cornell.edu/uscode/text/20/7221i
- 2 CFR 200.501, audit requirements (Cornell Legal Information Institute): https://www.law.cornell.edu/cfr/text/2/200.501
- Delaware Office of Auditor of Accounts, Charter Schools Unit Count FY22 and FY23: https://auditor.delaware.gov/?p=4472
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