Auditing the Head Start Program as Part of Your Single Audit: Avoid Common Pitfalls

1. Auditing the Head Start Program as Part of Your Single Audit: Avoid Common Pitfalls A Governmental Audit Quality Center Web Event October 11, 2012

2. Administrative Notes Troubleshooting Tips • No Audio? • Ensure that your computer speakers are turned on and that the volume is turned up. • Check to ensure that audio streaming is enabled on your computer • If the presentation slides stop advancing during the presentation you should: • Hit the red “Exit” button located to the right of the main screen; this will close out of the presentation and re-launch the webcast • If you are still having audio or other technical difficulty. • Check with your IT personnel at your firm. • Call the AICPA Service Center at 888.777.7077 2

3. Administrative Notes • We encourage you to submit your technical questions – please limit your questions to the content of today’s program. • You can submit your questions at any time during this Web event by clicking on the “Q &A” tab on the bottom of your screen. • You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab. • This event is being recorded and will be posted in an archived format to the GAQC Web site. 3

4. Continuing Professional Education To document your participation and obtain CPE, you must click “OK” on 75% of pop-up markers. There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes). To track your progress on the pop-up markers, click on the Participation tab on lower portion of screen. At the end of today’s presentation we will provide steps for obtaining your CPE certificate. Contact the Service Center for help with obtaining CPE at 888.777.7077 or service@aicpa.org. If you are not receiving CPE for this event, ignore the pop-up markers if they appear. 4

5. Presenters Ann Linehan, Deputy Director Office of Head Start Terry Ramsey, CPA U.S. Department of Health & Human Services Belinda Rinker, JD Senior Advisor to the Office of Head Start Jim Belanger,CPA Director, Fiscal Operations, Program Monitoring Eric Formberg, CPA, CGFM Plante & Moran PLLC 5

6. What We Will Cover Overview of the Head Start Program Compliance Requirements Common Program Findings Audit Quality Issues Tips for Avoiding Pitfalls 6

7. Overview of the Head Start ProgramAnn Linehan, Deputy DirectorOffice of Head Start 7

8. Purpose of Head Start • Head Start is a Federal program that promotes the school readiness of children ages birth to five from low-income families by enhancing their cognitive, social, and emotional development. • Early Head Start provides services to pregnant women and families with children up to age three. • Head Start serves children age three to five and their families. • Together the two programs are commonly referred to as Head Start. 8

9. Head Start Services Each year, Head Start / Early Head Start programs provide comprehensive services to over a million eligible children and families. Comprehensive services include early childhood development and education, health, family engagement, and community partnerships. Community Assessment determines program model/s: center-based, home-based, or family child care. 9

10. Head Start Grants and Eligible Entities Head Start grants are provided directly to local agencies by the Administration for Children and Families, Office of Head Start, with no intermediary state funding agency. Eligible agencies include local public or private nonprofit agency, including community-based and faith-based organizations, or for-profit agency, within a community. See Head Start Act Sec. 641(a)(1) [42 U.S.C. 9836]. Recipients may designate delegate agencies to operate all or part of the Head Start program. 10

11. ACF Office of Head Start Geographic Regions Note: Region 11 (American Indian/Alaska Native) and Region 12 (Migrant and Seasonal Head Start) have national administrative offices in Washington, DC. Regional Contact Information: http://www.acf.hhs.gov/programs#region 11

12. Head Start Grants The current federal funding is nearly $8 billion. The smallest grant is $190,664 and the largest is $210 million. With over 1600 grantees, the average funded enrollment per grantee is 595, ranging from 15 to 22,348 children. 12

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14. Early Childhood Learning and Knowledge Center (ECLKC) Head Start Performance Standards Head Start Act Monitoring Protocol Training and Technical Assistance Centers Program Instructions Information Memorandums Head Start Announcements …and more! http://eclkc.ohs.acf.hhs.gov/hslc 14

15. Governance Structure • Head Start agencies must establish and maintain a formal structure for program governance, including a governing body and a policy council. See Head Start Act Sec. 642. • The governing body has fiscal and legal responsibility for the Head Start agency. • The policy council is responsible for supporting program direction. A majority of policy council members must be parents of children who are currently enrolled in the agency’s Head Start program. • Delegate agencies must establish a policy committee. 15

16. Monitoring Reviews • Head Start agencies must be monitored to determine compliance with all applicable requirements. See Head Start Act Sec. 641A. • Review Types:Triennial,First Year, Other • Monitoring teams include fiscal reviewers. • Agency receives a written report identifying any areas of deficiency or noncompliance and is given a timeframe to correct all findings • The protocol used to conduct reviewscan be found on the ECLKC website under the Monitoring & Reports tab. 16

17. Regulatory Developments Limitation of grant period to five (5) years. See Head Start Act Sec. 638. [42 U.S.C. 9833]. Designation Renewal System at 45 CFR Part 1307 identifies seven conditions which, if met, requires a Head Start program to re-compete for a five-year grant. 17

18. Regulatory Developments, cont. Three of the seven DRS conditions relate to fiscal operations. §1307.3(e): an agency has been suspended from the Head Start/Early Head Start program by ACF during the relevant time period covered under§1307.7. §1307.3(f): an agency has been debarred from receiving Federal or State funds or has been disqualified from the Child and Adult Food program (CACFP) during the relevant time period covered under §1307.7. §1307.3(g): An agency has been determined within the twelve months preceding the responsible HHS official's review under § 1307.7 to be at risk of failing to continue functioning as a going concern. 18

19. Compliance RequirementsCommon Head Start Program Findings Audit TipsPresented by:Terry RamseyBelinda RinkerJim BelangerEric Formberg 19

20. Session Goals Explain Head Start requirements most likely to be misunderstood by auditors. Identify common Head Start risk factors and provide audit tips. Help auditors perform an effective and efficient audit of the Head Start program. 20

21. Materials Highlight RequirementsUnique to Head Start Basic single audit knowledge is assumed. Audit Standards (GAAS & GAGAS) OMB Circular A-133, Audits of States, Governments, and Non-Profit Organizations A-133 Compliance Supplement OMB Administrative and Cost Principle Circulars Federal Audit Clearinghouse reporting Ability to write proper audit findings Register for AICPA Web Event titled, Writing Up Government Audit Findings, October 19, 2012, click here. 21

22. Information Provided is not a Substitute for Compliance Supplement or OMB A-133 Session covers only areas identified as common risks for Head Start programs. An individual entity’s risk may be different Auditor must still comply with OMB A-133 and consider all requirements identified in the Compliance Supplement. 22

23. Overall Program & Entity Risks • Head Start not designed to make money. • Only covers costs that are reasonable, allowable and allocable (RAA) for the accomplishment of program objectives • At best, entity relying on Head Start funding breaks even. • Grantee must insure that costs are allowable or cover unallowable costs from other revenue sources • Entity primarily funded by Federal grants at higher risk for unallowable costs, particularly match. • Limited options to cover unallowable costs 23

24. Overall Audit Tips Combine similar areas if practical. Ensure samples target risk areas. Be alert to: Improperly allocated costs Both direct and costs claimed as match Cost shifting Particularly around beginning and end of period

25. Activities AllowedProgram Services Funds must be spent for program services consistent with the Head Start Performance Standards. See list of allowable activities in Compliance Supplement If unsure whether a cost is allowable: Check the program regulations (45 CFR 1301 – 1311) at the Policy & Regulation tab on the ECLKC website (provided earlier).

26. Activities Allowed Capital Expenditures Must have ACF prior approval. Necessary for purchase or sale of items of equipment that meet or exceed the Federal acquisition cost level of $5,000. Required for all facilities activities funded in whole or in part with Head Start funds as described in 45 CFR Part 1309 including: Construction Initial Purchase or Down Payment Major Renovation Mortgage Principal and/or interest

27. Activities AllowedTransportation Costs • Transportation costs to and from Head Start center-based programs and other program activities are only allowable if provided in accordance with Head Start Transportation Regulations (45 CFR 1310). • Transportation of center- based children must be in a compliant vehicle with an age and weight appropriate child restraint system. • Related risk area: time and cost of parent supplied transportation in a non-compliant vehicle is not allowable as match.

28. Activities UnallowedNutritional Services The Head Start Performance Standards at 45 CFR 1304.23 require grantee agencies to use funds from the US Department of Agriculture (USDA), Food and Nutrition Service (FNS), Child Nutrition Programs as the primary source of payment for meal services. The most common USDA program utilized by Head Start programs is the Child and Adult Care Food Program (CACFP). Head Start funds may only be used to cover those allowable costs not reimbursable by USDA. Parents may not be charged for Head Start nutrition program participation.

29. Activities UnallowedNutritional Services Audit Tips • Food costs charged to Head Start present a risk of questioned costs. • Ask why costs not charged to USDA • Validate that costs are allowable • Validate that USDA would not reimburse costs • Determine if grantee has been suspended or debarred from USDA participation

30. Cost AllocationDirect Allocation Method • Many smaller grantees do not have approved negotiated indirect cost rate. • Shared costs are allocated as direct costs based on benefit to each program. • Occupancy costs of shared facilities • Personnel working for multiple programs • Teacher for both Head Start and child care • Executive Director for multiple program agency • Busses shared with Head Start and public schools • Communication systems and other equipment

31. Cost AllocationDirect Allocation Method • Entity should have a written cost allocation plan describing the basis and method for allocating shared costs. • ACF does not review or approve direct cost allocation plans • Cost allocation plans may be informal, such as annotated spreadsheets • Method must provide for an equitable allocation of costs to each program based on benefit received.

32. Cost Allocation Risks Actual allocation of costs not in accordance with cost allocation plan. All costs allocated based on single basis such as level of funding rather than benefit to program. Over-allocating costs to Head Start to cover deficiencies in other funding sources. Failure to include all shared costs in the cost allocation plan. Double charging for same costs by inclusion in a negotiated indirect cost rate agreement and direct charging through allocation. 32

33. Cost Allocation Audit Tips • Determine whether cost allocation plan: • Fairly allocates costs based on relative benefits received • Uses reasonable allocation bases • Is consistently applied to all programs • Allocation methods supported by the accounting system • Indirect costs are charged per negotiated indirect cost rate agreement both in terms of rate and base. • Test documentation supporting allocations to insure that they are reasonable, allowable and allocable. • Be alert to identified cost allocation risks. • Listen to an archived “open to the public” GAQC Web event on Understanding Indirect Cost Rates: A Primer for Auditors Performing Single Audits.

34. Activities Allowed & Cost Principles Risks Inadequate source documentation. More common for match and shared costs Lack of written fiscal procedures. Engaging in procurement activities without free and open competition. Inadequate documentation for shared personnel compensation expenses. Payroll records Daily time records for non-exempt employees Personnel activity reports

35. Activities Allowed & Cost Principles Risks Journal Entries • Journal entries indicate costs moved from other programs to Head Start. • Costs entered before or after award period to shift costs between award periods. • Multiple adjusting entries needed at end of award period. • Audit tips: • Test supporting documentation for journal entries • Check for approval or purchases and sales of facilities and equipment • Be alert to unusual journal entry activity, particularly at year end

36. Activities Allowed & Cost Principles Risks Internal Controls Basis for allocation of costs is not supported or source documentation is lacking. Small programs may not have sufficient staff to effectively segregate fiscal responsibilities. Credit card use and petty cash access may not be adequately limited. Bank account reconciliation shows unissued checks as outstanding.

37. Other Activities Allowed Risks • Extensive use of Head Start funds for professional medical and dental services. • Head Start must be payer of last resort • Dental services often area of highest risk • Compensation to individual employee paid in excess of Executive Level II ($179,700). Not in 2012 Compliance Supplement, will be added to 2013 Compliance Supplement. • If paid in excess, Head Start may not pay any part of the compensation (42 U.S.C. 9498, Sec. 653) • May not allocate pro rata part below $179,700 to Head Start • May not be included in negotiated indirect cost rate agreement or allocated direct costs

38. Activities Allowed & Property • Real property, facilities, equipment and related assets purchased in whole or in part with Head Start funds must be used for program purposes. • Grantees must adequately protect Head Start assets. • Head Start funds more facilities activities than any other ACF program, including 3,632 current facilities. • Facilities activities allowed under 45 CFR Part 1309 include: • Purchase (initial or through payment of mortgage principal and/or interest) • Construction (applies only to new facilities) • Major renovation as defined in 45 CFR 1309.3 • Use of Head Start funds for facilities activities results in a Federal interest which must be protected by filing a notice in the public record or posting for modular units.

39. Activities Allowed & Property Risks • Equipment inventory is not updated and reconciled to source documents as required every two years. • Equipment or facilities are not properly insured for property damage and liability. • Grantee uses Head Start funds for a facilities activity without prior ACF approval. • Notice of Federal interest is not filed in the public record or posted on a modular unit. • Property subject to a Federal interest is pledged as collateral without ACF approval.

40. Activities Allowed & Property Risks • Required ACF rights of notice, cure and substitution are not included in leases, mortgages or subordination agreement. • Facilities are sold or transferred without ACF disposition instructions and compensation of Federal share. • Rent is charged at full fair market value instead of depreciation or use allowance under capital (material equity) leases and related party leases. • Depreciation uses a basis other than acquisition cost or uses accelerated depreciation rather than straight line for facilities.

41. Activities Allowed & Property Audit Tips • Identify capital expenditures and determine if ACF consent to purchase was received. • Examine leases to identify any that are capital leases or involve related parties. • If so, determine if ACF permission was received for pledge of property • Review lines of credit to determine if property purchased in whole or in part with Head Start funds was pledged as collateral. • If so, determine if ACF permission was received for pledge of property • If Head Start funds were used for facilities activities insure notice of Federal interest was filed or posted.

42. Eligibility & Earmarking • Children must be age-eligible for the Head Start program. Not in 2012 Compliance Supplement, will be added to2013 Compliance Supplement. • At least three years old by the date used to determine eligibility for public school in the community. • Early Head Start serves pregnant women and families with children under age 3. • Required percentage of income eligible families. • 90% of children from low income families below the poverty line, including homeless families and those eligible for public assistance • May have up to 10% of children from non-low income families • Under certain circumstances may have an additional 35% of children from families up to 130% of the poverty line • Indian tribal programs have unique eligibility requirements

43. Eligibility & Earmarking • Grantee must examine documents for proof of eligibility, but not required to retain copies. • Acceptable documents include tax forms, W-2’s, pay stubs, statements from employers and proof of receipt of public assistance • Head Start provides a recommended form entitled Head Start Eligibility Verification (OMB 0907-0374). • The employee who reviews documents and determines eligibility must provide a signed statement to be retained in the child’s records: • Identifying what documents were reviewed • Stating the child is eligible to participate • Grantees are strongly encouraged to retain copies of the documentation reviewed.

44. Eligibility & Earmarking • Head Start grantee must enroll 100% of funded enrollment. • Actual enrollment must be reported monthly, including reason for any shortfall below funded enrollment • Not less than 10% of enrolled children must be children with disabilities. • Funded enrollment less than 10% requires waiver • Risk of failure to enroll sufficient income eligible children. • Enrollment of children who are not age eligible. • Failure to identify documents relied on to determine eligibility or sign verification.

45. Eligibility and Earmarking Audit Tips Encourage grantees to follow Head Start guidance and use forms provided for eligibility verification. Test regularly at points throughout the program year (end of months). Compare various sources of enrollment and attendance to determine consistency, such as monthly enrollment reports and CACFP meal counts. Highest risks include children enrolled whose families are not income eligible and failure to meet overall required percentages for low income families and children with disabilities.

46. Program IncomeNo Participation Fees Programs may not collect fees for Head Start services or participation, including meals. However, if a parent volunteers to pay all or part of the child’s costs, it may be accepted Recorded as program income Must be used for allowable program costs Program may collect co-payment for non-Head Start child care services as part of an extended day (commonly referred to as wrap-around services). Program income may also be received from rental of property purchased with Head Start funds.

47. Program Income Audit Tips • Determine if the program is collecting any fees from Head Start parents. • If so, examine fees for allowability (not for Head Start services) • Then determine whether allowable fees are used for program costs • Be alert to income from equipment sales such as vehicles purchased with Federal funds but no longer needed for program purposes. • Watch for applicable credits mischaracterized as program income.

48. Cash Management & Period of AvailabilityRed Flags for Year End Float Risk Risk conditions at year end: Head Start has funding not drawn down from HHS Payment Management System (PMS) Other programs have bills without available cash to pay Entity is short on cash Red Flag actions at year end: Pull down all available funding from HHS PMS Books next year’s expenses in current year Journal entries with no support Allocating other program costs to Head Start Writing checks with no supporting invoices 48

49. Cash Management & Period of AvailabilityAudit Tips for Year End Float Risk • Understand each program’s cash flow. • Possible delays in receipt of state child care funds • Be alert to unusual year end transactions. • Understand business reasons • Test supporting documentation for journal entries. • Especially charges under agreements for shared services • Review year end direct cost allocations and indirect cost charges. • Consider possibility of over-allocating to Head Start • Inquire why year end checks do not clear promptly. 49

50. Cash Management Risks & Audit Tips • Standard cash management requirements apply to Head Start programs. • Risk results from ability of Head Start programs to draw down cash from HHS PMS in advance of expenditures. Availability of cash may lead to: • Drawing down excess cash not needed for disbursement • Loaning Head Start funds to another agency program to cover delayed receipt of funds • Early drawdown not minimizing time elapsed between drawdown and payment. • Drawdown based on accrued expenses not disbursed until later date (or next fiscal period).