Management report, Department of Education, an organizational unit of the state of Georgia, year ended June 30, 2004

STATE OF GEORGIA
DEPARTMENT OF AUDITS AND ACCOUNTS
Russell W. Hinton State Auditor
MANAGEMENT REPORT DEPARTMENT OF EDUCATION AN ORGANIZATIONAL UNIT OF THE STATE OF GEORGIA YEAR ENDED JUNE 30, 2004

DEPARTMENT OF EDUCATION MANAGEMENT REPORT -TABLE OF CONTENTS-

LETTER OF TRANSMITTAL

SECTION I

SELECTED FINANCIAL INFORMATION

EXHIBITS

A ANALYSIS OF CHANGES IN FUND BALANCE

BUDGET FUND

1

SCHEDULES OF FUNDS AVAILABLE AND EXPENDITURES

COMPARED TO BUDGET

BUDGET FUND

B

"A" DEPARTMENT OF EDUCATION

2

C

"B" LOTTERY FOR EDUCATION

4

D RECONCILIATION OF SALARIES

5

E SUMMARY OF TRAVEL

6

F SUMMARY OF PER DIEM AND FEES

7

SECTION II AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS

SECTION Ill CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF AUDITS AND ACCOUNTS

254 Washington Street, S.W., Suite 214

RussELL W. H1NTON
STATE AUDITOR (404) 656-2174

Atlanta, Georgia 30334-8400

January 21, 2005
Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia Members of the State Board of Education
and Honorable Kathy Cox, State Superintendent of Schools Department of Education
Ladies and Gentlemen:
As part of our audit of the statutory basis financial statements of the State of Georgia presented in the State of Georgia Report of the State Auditor, the basic financial statements of the State of Georgia presented in the State of Georgia Comprehensive Annual Financial Report, and the issuance of a Statewide Single Audit Report pursuant to the Single Audit Act Amendments, as of and for the year ended June 30, 2004, we have performed certain audit procedures at the Department of Education. Accordingly, the financial statements and compliance activities of the Department of Education were examined to the extent necessary in order to express an opinion as to the fair presentation of the financial statements contained in the foregoing documents and to issue reports on compliance and internal controls as required by the Single Audit Act Amendments of 1996.
This Management Report contains information pertinent to the financial and compliance activities of the Department of Education as of and for the year ended June 30, 2004. The particular information provided is enumerated in the Table of Contents.
This report is intended solely for the information and use of management of the State of Georgia and members of the Board and is not intended to be and should not be used by anyone other than these specified parties.
Respectfully submitted,
~~

RWH:mah

SECTION I SELECTED FINANCIAL INFORMATION

DEPARTMENT OF EDUCATION ANALYSIS OF CHANGES IN FUND BALANCE
BUDGET FUND YEAR ENDED JUNE 30, 2004

EXHIBIT "A"

FUND BALANCE - JULY 1 2003
Reserved Surplus
ADDITIONS
Adjustments to Prior Year's Accounts Payable Grants Payable
Excess of Funds Available over Expenditures Exhibit "B" Exhibit "C"
Increase in Reserve for Inventories Reimbursement of Prior Year's Expenditures
Grants Other
DEDUCTIONS
Unreserved Fund Balance (Surplus) Returned to Office of Treasury and Fiscal Services Year Ended June 30, 2003
Reserved Fund Balance Carried Over from Prior Year as Funds Available
FUND BALANCE - JUNE 30, 2004
SUMMARY OF FUND BALANCE
Reserved Federal Financial Assistance Inventories Georgia Academic and Medical System (GSAMS) Training State Data Research Center Other Funds Copeland Glenn Georgia Partnership for Excellence in Education Next Generation Schools - Private Grant Partner Donations for Technology United States Senate and Youth Program
Undesignated Surplus Regular Lottery for Education

"A" DEPARTMENT OF
EDUCATION

"B" LOTTERY FOR
EDUCATION

$

20,534,243.51 $

8,107,249.31

307,937.61 $ 279,275.09

$

28,641,492.82 $

587,212.70 $

TOTAL
20,842,181.12 8,386,524.40
29,228,705.52

$

1,633,670.07

143,325,423.42 $

-136,287, 146.98

486,974.86

7,621,704.60 43,476.40

$

16,824,102.37 $

$ 252,619.62

1,633,670.07 143,578,043.04

306,495.93

-136,287, 146.98 306,495.93 486,974.86

23,662.54

7,645,367.14 43,476.40

582,778.09 $ 17,406,880.46

$

8,107,249.31 $

18,170,458.33

$

26,277,707.64 $

$

19,187,887.55 $

279,275.09 $ 307,937.61 587,212.70 $

8,386,524.40 18,478,395.94 26,864,920.34

582,778.09 $ 19,770,665.64

$

2,561,364.33

2,927,260.04

9,701.88 5,235,328.78 $

3,240.00 163,081.85
4,326.03 3,006,855.72
8,152.91

$

13,919,311.54 $

5,268,576.01

$

19,187,887.55 $

$ 306,495.93
306,495.93 $

2,561,364.33 2,927,260.04
9,701.88 5,541,824.71
3,240.00 163,081.85
4,326.03 3,006,855.72
8,152.91
14,225,807.47

276,282.16

5,268,576.01 276,282.16

582,778.09 $ 19,770,665.64

- 1-

DEPARTMENT OF EDUCATION SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES
COMPARED TO BUDGET BUDGET FUND
"A" DEPARTMENT OF EDUCATION YEAR ENDED JUNE 30, 2004

EXHIBIT"B"

FUNDS AVAILABLE REVENUES
State Appropriation Federal Revenues Other Revenues Retained
CARRY-OVER FROM PRIOR YEAR Transfer from Reserved Fund Balance

BUDGET

ACTUAL

VARIANCEFAVORABLE (UNFAVORABLE)

$ 5,920,874,093.00 $ 5,918,874,093.00 $

-2,000,000.00

1,605,969,988.00 1,205,753,463.81

-400,216,524.19

59,934,955.00

42,247,778.01

-17,687, 176.99

$ 7,586,779,036.00 $ 7,166,875,334.82 $ -419,903,701.18

9,335,000.00

18,170,458.33

8,835,458.33

$ 7,596,114,036.00 $ 7,185,045,793.15 $ -411,068,242.85

EXPENDITURES
Personal Services Regular Operating Expenses Travel Equipment Computer Charges Real Estate Rentals Telecommunications Per Diem and Fees Contracts Capital Outlay Other
Utilities QBE Formula Grants:
Kindergarten/Grades 1-3 Grades 4-8 Grades 9-12 Limited English-Speaking Students Program Alternative Programs Vocational Education Laboratories Special Education Gifted Remedial Education Additional Instruction Staff Development and Professional Development Media Indirect Cost Pupil Transportation Local Five Mill Share Mid-Term Adjustment Reserve Other Categorical Grants: Equalization Formula Sparsity Grants Special Education Low - Incidence Grants Non-QBE Grants: Next Generation School Grants Youth Apprenticeship Grants High School Program - Agriculture Ed High School Program - Tech/Career Ed

$

51,693,808.00 $ 37,760,665.71 $

13,701,088.00

5,281,718.66

2,848,044.00

807,098.31

315,560.00

46,037.45

22,028,279.00

18,275,684. 76

1,253,515.00

1,169,645.40

1,026,355.00

719,159.99

9,044,395.00

2,872,254.07

52,135,027.00

17,756,489.97

30,569,700.00

0.00

845,521.00

799,895.36

1,701,449,206.00 1,558,843,885.00
760,946,059.00 70,181,744.00 72,301,580.00
202,217,533.00 793,709,927.00 191,525,578.00
22,048,886.00 46,869,079.00 31,146,339.00 148,678,213.00 920,705,498.00 157,439,881.00 -1,206,225,204.00 23,464,578.00

1,701,449,206.00 1,558,843,885.00
760,946,059.00 70,181,744.00 72,301,580.00
202,217,533.00 793,709,927.00 191,525,578.00
22,048,886.00 46,869,079.00 31,146,339.00 148,678,213.00 920,705,498.00 157,439,881.00 -1,206,225,204.00 23,404,627.00

288,182,775.00 6,352,443.00 826,722.00

288,182,775.00 6,261,321.00 810,249.00

384,555.00 4,022,464.00 12,795,074.00 54,827,755.00

109,800.00 4,022,450.00 11,120,713.00 37,789,892.07

-2-

13,933,142.29 8,419,369.34 2,040,945.69 269,522.55 3,752,594.24 83,869.60 307,195.01 6,172,140.93
34,378,537.03 30,569,700.00
45,625.64
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 59,951.00
0.00 91,122.00 16,473.00
274,755.00 14.00
1,674,361.00 17,037,862.93

DEPARTMENT OF EDUCATION SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES
COMPARED TO BUDGET BUDGET FUND
"A" DEPARTMENT OF EDUCATION YEAR ENDED JUNE 30, 2004

EXHIBIT"B"

BUDGET

ACTUAL

VARIANCEFAVORABLE (UNFAVORABLE)

Payment of Federal Funds to Board of Technical and Adult Education
Vocational Research and Curriculum Title I-A Improving Basic Programs - LEA's Title I-B Even Start Instructional Services for the Handicapped Retirement (H.B. 272 and H.B. 1321) Title VI-A State Assessment Programs Tuition for the Multi-Handicapped PSAT School Lunch (Federal) Joint Evening Programs Education of Homeless Children/Youth Pay for Performance Pre-School Handicapped Program Mentor Teachers Advanced Placement Exams Serve America Program Title IV-Al, Safe and Drug Free Schools School Lunch (State) Charter Schools Refugee School Impact Health Insurance - Non-Cert. Personnel and
Retired Teachers Innovative Programs Title II Math/Science Grant (Federal) Migrant Education (State) Regional Education Service Agencies Severely Emotionally Disturbed Georgia Learning Resources System Special Education at State Institutions Byrd Honor Scholarships Title I-F, Comprehensive School Reform Character Education National Teacher Certification Principal Supplements Grants For School Nurses Reading and Math Programs Student Testing Internet Access School Improvement Teams Communities In Schools Knowledge is Power Program Postsecondary Options Title I-B Reading First Title I-C Migrant Education (Federal) Title I-D Neglected and Delinquent Title II-A Improving Teacher Quality Title 11-D Enhancing Education Thru Technology Title Ill-A English Language Title IV-B 21st Century Communication Title VI-B Rural and Low-Income Temporary QBE Reduction

$

24,682,880.00 $ 15,300,460.09 $

9,382,419.91

57,313.00

0.00

57,313.00

392,607,079.00

390,055,818.99

2,551,260.01

8,262,024.00

7,345,553.00

916,471.00

294,920,457.00

286,845,135.00

8,075,322.00

5,508,750.00

5,239,851.85

268,898.15

10,777,690.00

9,428,919.00

1,348,771.00

1,746,166.00

1,739,775.00

6,391.00

719,129.00

719,129.00

0.00

393,759,029.00

337,327,800.79

56,431,228.21

191,578.00

191,578.00

0.00

2,081,186.00

1,983,154.00

98,032.00

5,702,322.00

5,702,222.02

99.98

21,881,401.00

21,881,401.00

0.00

1,158,544.00

1,158,316.46

227.54

1,608,000.00

1,608,000.00

0.00

992,609.00

469,042.21

523,566.79

13,499,343.00

13,203,368.00

295,975.00

36,246,276.00

36,244,764.00

1,512.00

7,301,341.00

2,953,487.60

4,347,853.40

639,390.00

541,507.11

97,882.89

107,826,070.00 11,581,498.00 2,715,528.00 267,535.00 11,111,789.00 70,114,679.00 7,260,672.00 3,744,077.00 1,188,000.00 17,260,555.00 250,003.00 6,894,490.00 5,643,290.00 30,000,000.00 80,091,752.00 10,975,646.00 3,644,339.00 11,636,228.00 1,305,919.00 11,466.00 2,395,064.00 48,379,915.00 10,748,364.00 3,558,376.00 89,275,183.00 23,178,850.00 10,677,731.00 27,096,098.00 8,240,024.00
-283,457,474.00

107,826,070.00 11,575,487.00 0.00 267,533.00 11,111,515.00 69,438,970.00 6,266,102.00 3,396,000.00 1,180,500.00 8.426,644.00 89,629.00 5,873,884.00 5,643,290.00 30,000,000.00 55,535,547.10 10,975,646.00 3,644,339.00 11,445,399.60 1,305,919.00 0.00 2,381,573.00 23,408,941.00 10,594,970.00 2,342,674.00 89,245,683.00 23,130,663.00 10,677,726.69 21,823,688.87 8,235,241.00
-283,478,659.00

0.00 6,011.00 2,715,528.00
2.00 274.00 675,709.00 994,570.00 348,077.00 7,500.00 8,833,911.00 160,374.00 1,020,606.00
0.00 0.00 24,556,204.90 0.00 0.00 190,828.40 0.00 11,466.00 13,491.00 24,970,974.00 153,394.00 1,215,702.00 29,500.00 48,187.00 4.31 5,272,409.13 4,783.00 21,185.00

$ 7,596,114,036.00 $ 7,321,332,940.13 $ 274,781,095.87

Excess of Funds Available over Expenditures

-3-

$ -136,287, 146.98 $ -136,287, 146.98

DEPARTMENT OF EDUCATION SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES
COMPARED TO BUDGET BUDGET FUND
"B" LOTTERY FOR EDUCATION YEAR ENDED JUNE 30, 2004

EXHIBIT "C"

FUNDS AVAILABLE REVENUES
Other Revenues Retained
CARRY-OVER FROM PRIOR YEAR Transfer from Reserved Fund Balance

BUDGET

ACTUAL

VARIANCEFAVORABLE (UNFAVORABLE)

$

307,938.00 $

0.00 $

-307,938.00

0.00

307,937.61

307,937.61

$

307,938.00 $

307,937.61 $ _ _ _ _-_o_.3_9

EXPENDITURES Computers in the Classroom

$

307,938.00 $_ _ _1,~44_1_.6_8 $_ _ _3_06~,4_9_6_.3_2

Excess of Funds Available over Expenditures

$

306,495.93 $=====30=6=,49=5=.9=3

-4-

DEPARTMENT OF EDUCATION RECONCILIATION OF SALARIES
YEAR ENDED JUNE 30, 2004

EXHIBIT "D"

Total per Annual Supplement
Accruals June 30, 2003
Adjustment Prior Year's Accounts Payable

$ 31,107,481.78
-14,289.84 14,289.84
$ 31,107,481.78

-5-

DEPARTMENT OF EDUCATION SUMMARY OF TRAVEL
YEAR ENDED JUNE 30, 2004

EXHIBIT "E"

Totals per Annual Supplement Budget Fund Fiduciary Fund

$

924,599.61

8,486.72

$===93=3=,0=8=6=.3=3

-6 -

DEPARTMENT OF EDUCATION SUMMARY OF PER DIEM AND FEES
YEAR ENDED JUNE 30, 2004

EXHIBIT"F"

Totals per Annual Supplement Budget Fund Fiduciary Fund

FEE AMOUNT

EXPENSE AMOUNT

TOTAL

$ 2,522,880.66 $ 1,010,566.13 $ 3,533,446.79

5,700.00

6,747.00

12,447.00

$ 2,528,580.66 $ 1,017,313.13 $ 3,545,893.79

-7-

SECTION II AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF EDUCATION AUDITEE'S RESPONSE
SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2004

PRIOR YEAR FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

FINDING CONTROL NUMBER AND STATUS

FS-414-02-02 FS-414-02-04 FS-414-02-05 FS-414-03-01 FS-414-03-02 FS-414-03-03

Unresolved - See Corrective Action/Responses Partially Resolved - See Corrective Action/Responses Further Action Not Warranted Further Action Not Warranted Partially Resolved - See Corrective Action/Responses Unresolved - See Corrective Action/Responses

CORRECTIVE ACTION/RESPONSES

EXPENDITURES/LIABILITIES/DISBURSEMENTS Improper Contracting Practices Finding Control Number: FS-414-02-02

See our corrective action/responses to finding number FA-414-02-03 in the Prior Year Federa_l Awards Findings and Questioned Costs.

EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequacies in Information System Operations, Changes to Applications, Security and Audit Trail Maintenance Finding Control Number: FS-414-02-04

We concur with this finding. GAORS 1. a) Configuration and Change Management

A Configuration Manager has been hired to implement a new configuration and change management process to improve or replace the system currently being used by GAORS and all other 1/T applications.

b) Quality Assurance and Testing

A formal Office of Quality Assurance has been formed since the last reporting period ending 6/30/2003. Enhancements, bugs and new development of GAORS and all other Information Technology applications are required to pass Quality Assurance testing before being released for user acceptance testing and moving to production. Testing documentation (test plans, test scripts) is being maintained by the QA office.

c) Permissions

New procedures are being developed by the Configuration Manager to further enhance the security and organization of the source code for GAORS and all other applications. Source code is being maintained using VSS (Visual Source Safe) which maintains both current and previous versions of the source code.

- 1-

DEPARTMENT OF EDUCATION AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
PRIOR YEAR FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
CORRECTIVE ACTION/RESPONSES
EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequacies in Information System Operations, Changes to Applications, Security and Audit Trail Maintenance Finding Control Number: FS-414-02-04
Auditing - GAORS
The GAORS application has full audit functionality. All changes to important data is tracked and recorded. User actions are tracked in the application.
1. The new QBE application is planned for production for the Initial 2006 allotment period. This delivery will give the users full access and control to run the application without significant 1/T support.
2. The QBE system is fully documented by the use of development documents (use cases, business rules, test scripts, test plans, automated testing scripts, vision document, glossary, etc.). In addition, a full integrated help system will be delivered with the application as well as a full user manual.
CAPITAL ASSETS/PROPERTY MANAGEMENT Inadequacies in Operation of Property Management System Finding Control Number: FS-414-03-02
See our corrective action/responses to finding number FA-414-03-01 in the Prior Year Federal Awards Findings and Questioned Costs.
CAPITAL ASSETS/PROPERTY MANAGEMENT Inadequate Capital Asset Records Finding Control Number: FS-414-03-03
We concur with this finding. The DOE, in conjunction with the Georgia Technology Authority, discovered that the date used to calculate depreciation on the various buildings is the in-service date and not the acquisition date. All inservice dates were external as the date they were put into the Asset Management system and not the historical in-service date. This caused the account balance for buildings cost of depreciation to be misstated. The DOE is in the process of correcting the in-service date for all buildings and any adjusting journal entries necessary will be made to the general ledger to correctly state the account balance for buildings (net of depreciation).
-2 -

DEPARTMENT OF EDUCATION AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

PRIOR YEAR FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

FINDING CONTROL NUMBER AND STATUS

FA-414-02-01 FA-414-02-02 FA-414-02-03 FA-414-02-04 FA-414-02-05 FA-414-02-06 FA-414-03-01 FA-414-03-02 FA-414-03-03 FA-414-03-04 FA-414-03-05 FA-414-03-06 FA-414-03-07

Further Action Not Warranted Unresolved - See Corrective Action/Responses Unresolved - See Corrective Action/Responses Unresolved - See Corrective Action/Responses Partially Resolved - See Corrective Action/Responses Further Action Not Warranted Partially Resolved - See Corrective Action/Responses Previously Reported Corrective Action Implemented Previously Reported Corrective Action Implemented Unresolved - See Corrective Action/Responses Unresolved - See Corrective Action/Responses Previously Reported Corrective Action Implemented Unresolved - See Corrective Action/Responses

CORRECTIVE ACTION/RESPONSES
EXPENDITURES/LIABILITIES/DISBURSEMENTS Improper Expenditures Finding Control Number: FA-414-02-02
We do not concur with this finding. The Title VI innovative funds guidelines were met by the five contracts identified in the audit. The Department feels the funds were spent in support of local school system programs and activities, which meets Title VI regulations. The Department asked U.S. Department of Education personnel to review the contracts to verify that they are within guidelines and regulations. Copies of the contracts were sent to a Title V (formerly Title VI) program coordinator with the U.S. Department of Education. The coordinator has agreed to review the contracts for compliance with Title VI regulations and guidelines.
EXPENDITURES/LIABILITIES/DISBURSEMENTS Improper Contracting Practices Finding Control Number: FA-414-02-03
We concur with this finding. The Department of Education (DOE) is in the process of re-examining its current procedures, and will make any necessary changes. In addition, DOE will be re-training its staff who handle contract matters.

-3-

DEPARTMENT OF EDUCATION AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
PRIOR YEAR FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
CORRECTIVE ACTION/RESPONSES
EXPENDITURES/LIABILITIES/DISBURSEMENTS Improper Contracting Practices Finding Control Number: FA-414-02-04
We concur with this finding. In November 2004, Federal indictments were issued against the Former Georgia School Superintendent, Former Chief Deputy, and a computer consultant. The Department of Education (DOE) will follow whatever guidance is issued as a result of the outcome of this matter.
SUBRECIPIENT MONITORING Inappropriate Issuance of Management Decision Finding Control Number: FA-414-02-05
We concur with this finding. This audit finding is partially resolved. The Georgia Department of Education refunded to the United States Department of Education (USDOE) $102,129.32 for the resolution of the finding related to Okefenokee Technical College.
We have contacted the USDOE for a resolution of the finding related to Augusta, Dekalb, and Savannah Technical Institutes.
EQUIPMENT AND REAL PROPERTY MANAGEMENT Inadequacies in Operation of Property Management System Finding Control Number: FA-414-03-01
We concur with this finding. The DOE has implemented procedures to ensure that equipment additions are reconciled to the general ledger expenditure accounts. The DOE is currently in the process of conducting a physical inventory at all locations which should correct the deficiency of items on the equipment records being surplused or transferred and not being removed or updated. Also, procedures are now being placed in operation to assign the proper location codes and the proper custodians to each item of equipment. This should correct the problem of locating equipment.
ELIGIBILITY Inadequate Accounting Records Finding Control Number: FA-414-03-04
We concur with this finding. However, this program no longer exists at GDOE. We are waiting for a resolution from USDOE for this finding.
-4-

DEPARTMENT OF EDUCATION AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
PRIOR YEAR FEDERAL AWARD FINDINGS AND QUESTIONED COSTS CORRECTIVE ACTION/RESPONSES ELIGIBILITY Inadequate Accounting Records Finding Control Number: FA-414-03-05 We concur with this finding. However, this program no longer exists at GDOE. We are waiting for a resolution from USDOE for this finding. SUBRECIPIENT MONITORING Subrecipient Audit Reports Not Received Within the Required Time Period Finding Control Number: FA-414-03-07 We concur with this finding. The Department of Education (DOE) is responsible for tracking and reviewing the audits of local units of administration (LUA). However, the Department of Audits is required by state law to audit the LUAs because LUAs receive the majority of their funding from the state. In addition to the LUA audits, the Department of Audits has the responsibility to audit all state agencies, commissions, etc. The LUAs are audited after the state agencies, commissions, etc. Because the LUAs are audited last and the large number of LUAs to be audited, the Department of Audits cannot complete the audits in the time period required by 0MB Circular A-133. The U.S. Department of Education is aware of the problem, and realizes there is not currently a viable solution to the finding. The LUA audits are normally completed within a 15 to 18 month time period. DOE has a six-month resolution period to resolve findings in the LUA audits after being received from the Department of Audits.
-5-

SECTION Ill CURRENT YEAR FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
ACCOUNTING CONTROLS (OVERALL) Inadequate Accounting Procedures Finding Control Number: FS-414-04-01

Condition: Criteria:

As part of our examination, we performed certain procedures at the Georgia School for the Deaf (GSD). The nature of the procedures performed was based on allegations that possible fraudulent acts had been committed by three former managerial level employees of the school. The following activities were purportedly performed based on on-site interviews with current GSD employees and a review of various documents from certain cash accounts:
GSD maintenance employees performed certain maintenance tasks for the three former employees on State time.
Other GSD employees performed various personal tasks for the three former employees on State time.
One of the former employees removed various GSD supplies and equipment items from the GSD campus for personal use. The approximate total monetary value of the GSD items removed from the GSD campus by the former employee is $4,854.00.
Two of the former employees consumed alcoholic beverages on the GSD campus during work hours.
One of the former employees wrote three checks totaling $900.00 to three different GSD employees out of the GSD Miscellaneous Student Account. The former employee instructed the GSD employees to cash the checks and return the cash to the former employee. Receipts for goods purchased with this money totaled $380.70, leaving an undocumented/missing balance of $519.30.
One of the former employees instructed GSD maintenance employees to sell GSD scrap metal and bring the cash back to the former
employee. There is no evidence of this money being deposited into a
GSD bank account. The total amount of cash received from scrap metal sales unaccounted for is approximately $470.00.
Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, Paragraph 76, states in part: "If the auditor believes that misstatements are or may be the result of fraud, but the effect of the misstatements is not material to the financial statements, the auditor nevertheless should evaluate the implications, especially those dealing with the organizational position of the person(s) involved.... if the matter involves higher-level management, even though the amount itself is not material to the financial statements, it may be indicative of a more pervasive problem, for example, implications about the integrity of management".

-1-

DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
ACCOUNTING CONTROLS (OVERALL) Inadequate Accounting Procedures Finding Control Number: FS-414-04-01

Cause: Effect:
Recommendation:

These deficiencies are a result of the Department's failure to implement adequate internal control policies and procedures at the GSD.
The results of the on-site interviews and review of documentation suggest that fraud, waste, and abuse of state resources were committed by the three former managerial level employees of the GSD. It should also be noted that the working environment created at the GSD as a result of the activities described above, by these managerial level employees, could potentially lead to additional instances of fraud, waste, and abuse by GSD staff.
The Department should establish the necessary internal controls to ensure that the GSD's supply and equipment inventories are properly accounted for, that revenue generated from scrap metal sales is deposited timely into a GSD cash account and recorded on the general ledger, and that all cash disbursements are adequately documented. GSD employees should also be provided with training and procedures applicable to the improper use of state personal services resources.

CAPITAL ASSETS (GENERAL FIXED ASSETS) Inadequate Capital Asset Records Finding Control Number: FS-414-04-02

Condition: Criteria:

Our examination of the accounting records of the Department of Education disclosed that land and buildings (net of accumulated depreciation) owned by the Department are reported in the capital asset inventory at $10,130,908.00 and $59,411,264.20, respectively. The Department failed to provide an audit trail leading to documentation supporting the reported amounts.
The State of Georgia Capital Asset Guide requires that capital assets be reported by category at historical cost or estimated historical cost when actual records are not available. Donated assets should be reported at fair value at the time of donation. Capital assets, except for land and other inexhaustible assets, should be depreciated over their estimated useful life.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
CAPITAL ASSETS (GENERAL FIXED ASSETS) Inadequate Capital Asset Records Finding Control Number: FS-414-04-02

Cause: Effect: Recommendation:

These deficiencies are a result of management's failure to implement adequate policies and procedures to ensure that the Department's capital assets are properly maintained.
The dollar value reported for land and buildings may contain misstatements; however, the extent of these misstatements could not be determined.
Management should develop appropriate policies and procedures to ensure that all of the Department's capital assets are properly accounted for and reported in accordance with the State of Georgia Capital Asset Guide.

CAPITAL ASSETS (GENERAL FIXED ASSETS) Inadequate Capital Asset Records Finding Control Number: FS-414-04-03

Condition: Criteria: Information: Cause:

Our examination of the accounting records of the Department of Education (GDOE) revealed that GDOE failed to maintain adequate capital asset records for machinery and equipment.
The Accounting Procedures Manual for the State of Georgia, Section Three, Page 3-1-23 states in part: "all departments and public corporations are directed to maintain at all times a complete current inventory of real property under their jurisdiction."
In an effort to "clean-up" the capital asset records, the GDOE Property Manager, with approval from senior management and the Department of Audits, made a one time entry in fiscal year 2004 to write-off old equipment, valued at $13,665,697.53, that could not be located. This condition will not be reflected in subsequent year audits.
The deficiency described above is a result of management's failure to implement adequate policies and procedures to ensure that the Department's machinery and equipment capital asset records are properly maintained.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
CAPITAL ASSETS (GENERAL FIXED ASSETS) Inadequate Capital Asset Records Finding Control Number: FS-414-04-03

Effect: Recommendation:

Failure to maintain accurate capital asset records may result in inaccurate internal management reports and resulting decisions concerning current and future capital asset needs, and possible misappropriation of assets.
Management should develop appropriate policies and procedures to ensure that all of the Department's machinery and equipment capital asset records are properly accounted for and reported in accordance with The Accounting Procedures Manual for the State of Georgia.

CAPITAL ASSETS (GENERAL FIXED ASSETS) Inadequacies in Operation of Property Management System Finding Control Number: FS-414-04-04

Condition:
Criteria: Cause: Effect: Recommendation:

Our examination included a review of the internal accounting controls used by the Department of Education in maintaining their capital asset inventory and also included testing the system for compliance with State laws and regulations. A number of conditions relating to inappropriate accounting practices were found to exist and have been identified in detail within the Federal Award Findings and Questioned Costs, finding control number FA-414-04-01.
The Accounting Procedures Manual for the State of Georgia (Manual), Section Three, Page 3-1-23 states in part: "Accurate subsidiary capital asset inventory records must be maintained. Balances and additions to the capital asset inventory records should be reconciled periodically (monthly) to the general ledger."
The deficiency described above is a result of management's failure to follow capital asset accounting procedures as detailed in the Manual.
Failure to maintain accurate capital asset records may result in inaccurate internal management reports and resulting decisions concerning current and future capital asset needs, and possible misappropriation of assets.
The Department should establish the necessary internal controls and related procedures to ensure capital asset inventories are maintained in compliance with requirements of state law and the Manual.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Accounting Records Finding Control Number: FS-414-04-05

Condition:
Criteria: Cause: Effect: Recommendation:

Our examination included a review of the internal accounting controls utilized by the Department of Education in computing Pre-School Handicapped Program allocations to local units of administration (LUA). The Department was unable to provide supporting documentation for the calculations of fiscal year 2004 allocations to the LUAs.
The Department's policy is to allocate Pre-School Handicapped Program funds based on birth rates in each local school system.
Program personnel failed to follow the Department's policy for allocating Pre-School Handicapped Program funds. Program personnel used students served rather than birth rates as a basis for allocation, but were unable to provide supporting documentation.
A possible misallocation of the Pre-School Handicapped Program funds could occur.
The Department of Education should review its internal control procedures over allocation of Pre-School Handicapped Program funds to ensure compliance with Department policies and procedures.

EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Accounting Procedures Finding Control Number: FS-414-04-06

Condition: Criteria: Cause:

Our examination included a review of the internal accounting controls utilized by the Department of Education in maintaining the Pupil Transportation grant. Our review revealed that the Department failed to document supervisory review and approval of the allocation of state funds to local units of administration (LUA).
Department of Education policies and procedures require the Budget Director to review and approve the Pupil Transportation grant allocations to the LUAs.
The deficiency identified above was a result of management's failure to comply with Department policies and procedures to ensure that a system of supervisory review and approval is in place for the correct allocation of state funds to LUAs.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30. 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Accounting Procedures Finding Control Number: FS-414-04-06

Effect: Reoomrnendation:

A lack of supervisory review could result in the misallocation of state funds to LUAs.
The Department should adhere to its policies and procedures requiring a review and subsequent approval of the allocation of state funds to LUAs.

EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Accounting Procedures Finding Control Number: FS-414-04-07

Condition:
Criteria: Cause: Effect Reoomrnendation:

Our examination induded a review of the internal accounting controls utilized by the Department of Education in maintaining the Reading and Math Programs grant. Our review revealed that the Department failed to document supervisory review and approval of the allocation of state funds to eligible schools.
The Department's policies and procedures require that the Assistant Curriculum Director, Curriculum Director, Deputy Superintendent, and Superintendent review and approve the allocation of state funds to eligible schools prior to final approval by the State Board of Education.
The deficiency identified above was a result of management's failure to comply with Department policies and procedures to ensure that a system of supervisory review and approval is in place for the correct allocation of state funds to eligible schools.
A lack of supervisory review could result in the misallocation of state funds to schools.
The Department should adhere to its policies and procedures requiring a review and subsequent approval of the allocation of state funds to eligible schools.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Exceptions Related to Purchasing Card Finding Control Number: FS-414-04-08

Condition: Criteria:

The Department of Education failed to maintain adequate internal controls over the purchasing card program in compliance with the Department's Purchasing Card Policies and Procedures Manual.
Our review induded an examination of active cardholders and transaction documentation involving selected state purchasing card transactions. The following exceptions were noted:
Four instances were noted in which a cardholder exceeded his/ her single transaction limit.
Sixteen instances were noted in which Georgia sales tax was charged to the transaction.
Three instances were noted in which there was an indication of invoice splitting, possibly to avoid the single transaction limit.
Two instances were noted in which transactions were processed for improper items.
The State of Georgia Accounting Procedures Manual, Section Five, Page 5-1-2 states, in part: "1) Each state organization is responsible for adopting an internal control framework that is suitable for the type of service they provide ... 2) Each state organization has a responsibility to assess their internal control system and use this information to design, implement, and monitor internal controls that are suitable for their organization."
In addition, the State of Georgia Accounting Procedures Manual, Section Five, Page 5-4-2 states, in part: "1) Documentation involves preserving evidence to substantiate a decision, event, transaction or system. All documentation should be complete, accurate, and reported promptly. Documentation should contribute to achieving the State organization's mission, help managers in controlling their operations, and assist in analyzing operations."

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Exceptions Related to Purchasing Card Finding Control Number: FS-414-04-08

Cause: Effect:
Recommendation:

The Department of Administrative Services contract with the Bank of America to service state purchasing card transactions states, in part: "1) The card may be used to pay for all commercially available goods, supplies and services under the State required single transaction limit of $5,000.00 ... 2) The Bank of America Purchasing Card may not be used for cash advances, travel and entertainment expenses, motor vehide fuel, professional services, or personal purchases ... 3) Each Agency or Institution must designate a Purchasing Card Program Coordinator (PPC) who shall function as the Agency's or Institution's primary liaison to Bank of America and DOAS". Responsibilities of the PPC indude processing authorized requests for procurement cards, maintaining control over active cards, dosing accounts, establishing and maintaining accounting code and usage controls for each card, and periodically reviewing cardholder listings and summary reports to identify unauthorized use.
While the Department of Administrative Services contract with the Bank of America imposes certain restrictions, purchasing card controls could be affected by agency imposed limitations. The Department of Education's Purchasing Card Policies and Procedures Manual limits purchasing card transactions to that involving supplies, materials, equipment, subscriptions, registrations, school food, and school library books.
Management failed to comply with provisions of the Department's Purchasing Card Policies and Procedures Manual.
Violation of the Department's own Purchasing Card Policies and Procedures Manual, possibly resulting in the misappropriation of assets, misstatement of the financial statements, inaccurate decisions regarding current and future purchasing card decisions, and the lack of required information for reporting both to state and federal agencies.
The Department of Education should review current policies and procedures regarding the overall purchasing card process. In addition, the Department should establish controls to ensure compliance with their Purchasing Card Policies and Procedures Manual.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Local Five Mills Calculated Incorrectly Finding Control Number: FS-414-04-09

Condition: Criteria:
Information: Cause:

QBE Local Five Mills adjustment calculations are not being performed in accordance with OCGA 20-2-164, and as a result, incorrect QBE payments were made.
OCGA 20-2-164 states in part: "(a) The State Board of Education shall calculate the amount of local five mill share funds that each local school system shall be required to spend each fiscal year to participate in the Quality Basic Education Program as follows: (1) Unless the combined local five mill share total for all local school systems in the state, when calculated pursuant to this paragraph, exceeds 20 percent of the sum of the Quality Basic Education Formula amounts, as calculated pursuant to subsection (d) of Code Section 20-2161, the amount of each local school system's local five mill share shall be calculated as follows: (A) Determine the most recent equalized adjusted school property tax digest for the local school system less the amount attributable to timber calculated pursuant to paragraph (2) of subsection (b) of Code Section 485-274. multiply the difference by .4, and add to that product the amount attributable to timber calculated pursuant to paragraph (2) of subsection (b) of Code Section 48-5-274; (B) From the amount calculated in subparagraph (A) of this paragraph deduct the total amount calculated pursuant to subsection (g) of this Code section; and (C) Multiply the remainder calculated in subparagraph (B) of this paragraph by .005; or ..."
The same miscalculation of the Local Five Mills adjustment occurred in fiscal year 2003 as well. For fiscal year 2003, the Local Five Mills adjustment, before the midterm adjustment was made, was understated by $2,062,702.00, which means that in fiscal year 2003, GDOE paid out approximately $2,060,000.00 more in state funds for QBE than it should have.
The discrepancy identified above was caused by the Department's misinterpretation of OCGA 20-2-164.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Local Five Mills Calculated Incorrectly Finding Control Number: FS-414-04-09

Effect: Recommendation:

The fiscal year 2004 Local Five Mills adjustment was understated by $2,000,759.00, which means that GDOE paid out $2,000,759.00 more in state funds for QBE than it should have.
The Department should make the necessary changes to the Local Five Mills adjustment calculation to ensure that it is calculated in accordance with OCGA20-2-164.

FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
EQUIPMENT AND REAL PROPERTY MANAGEMENT Inadequacies in Operation of Property Management System Finding Control Number: FA-414-04-01

Condition:

Our examination included a review of the internal accounting controls utilized by the Department of Education in maintaining their capital asset inventory. This review also included testing the system for compliance with Federal laws and regulations. The following conditions relating to inappropriate accounting practices were found to exist:
1. Equipment additions were not reconciled to the general ledger expenditure accounts.
2. Equipment inventory records for additions were updated incorrectly. Testing of current year additions revealed twelve (12) additions that had been updated onto the equipment inventory records incorrectly by the amount of $141,486.74.
In addition, ninety-three (93) capital asset items [27 from the Department's Twin Towers location and 66 from the Georgia School for the Deaf (State School)] were selected to test the accuracy of the Department's property management records. These items contained a value of $24,952.876.20 (Twin Towers - $214,614.28; State School $24,738,261.92) out of a population of $25,591,604.82 (Twin Towers $853,342.90; State School - $24,738,261.92) and were selected for the purpose of locating the capital assets as recorded in the inventory records. The following deficiencies were noted:

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
CAPITAL ASSETS (GENERAL FIXED ASSETS) Inadequacies in Operation of Property Management System Finding Control Number: FA-414-04-01

Criteria: Cause: Effect: Recommendation:

At the Twin Towers location -
1. Two (2) items totaling $13,872.04 were transferred, but were not updated on the capital asset inventory records.
2. Two (2) items totaling $12,951.16 were surplused, but were not removed from the capital asset inventory records.
At the Georgia School for the Deaf -
1. One (1) item totaling $19,080.00 was missing.
2. Two (2) items were found but were not on the capital asset inventory listing.
The Department is required to maintain real property and equipment inventories in accordance with provisions of Title 34 CFR 80.31 Real Property and 80.32 Equipment (Office of the Secretary of Education), respectively.
The discrepancies identified above were caused by the Department's failure to follow guidelines for maintaining capital asset inventories.
Failure to maintain accurate capital asset inventory records causes internal reports to management to be misleading and can result in erroneous decisions by management concerning current and future capital asset needs.
The Department should establish the necessary internal controls to ensure that capital asset inventories are maintained in accordance with Federal regulations.

Federal Program/Award Affected: U.S. Department of Education
USDA State Administration for Child Nutrition - CFDA No. 10.560
Title I-Bl Reading First - CFDA No. 84.357

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
EXPENDITURES/LIABILITIES/DISBURSEMENTS Inadequate Accounting Records Reading Excellence (CFDA 84.338) Finding Control Number: FA-414-04-02

Condition:
Criteria:
Questioned Costs: cause:
Effect: Recommendation:

Our examination induded a review of the internal accounting controls utilized by the Department of Education in maintaining the Reading and Math Programs grant. The Department failed to implement an adequate review process to ensure that only eligible schools who submit high quality applications receive funding under the Reading Excellence Ad. Files for nineteen (19) schools out of a population of sixty (60) schools that received funds were selected to test the accuracy of evaluations completed by program readers. One school file was missing. Each of the remaining eighteen (18) school files were either incomplete or contained evaluations with scoring errors.
Program personnel are required to review school files to ensure that all reader evaluations are complete and accurate.
$751,652.00
The deficiencies identified above are a result of the Department's failure to implement adequate policies and procedures to ensure that school files contain complete and accurate reader evaluations.
Incorrect evaluation scores were entered into the database that is used to recommend funding to schools under the Reading Excellence Ad.
The Department should implement policies and procedures to ensure that school files contain complete and accurate reader evaluations.

SUBRECIPIENT MONITORING Subrecipient Audit Reports Not Received Within the Required Time Period Finding Control Number: FA-414-04-03

Condition:

As part of our examination, we reviewed tracking documents used by the Department of Education to determine the status of subrecipient audit reports for the year ended June 30, 2003. Of the two-hundredforty-eight (248) subrecipients identified on the tracking documents, two-hundred-twenty-three (223) had not submitted their audits within the nine-month period as required by Office of Management and Budget (0MB) Circular A-133.

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DEPARTMENT OF EDUCATION SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
SUBRECIPIENT MONITORING Subrecipient Audit Reports Not Received Within the Required Time Period Finding Control Number: FA-414-04-03

Criteria: Cause: Effect: Recommendation:

0MB Circular A-133 requires that subrecipient audit reports be submitted for review within nine months of the fiscal year end.
This noncompliance is due to subrecipient audits not being performed in a timely manner.
The condition identified above is in violation of 0MB Circular A-133.
The Department should review and strengthen its in-house monitoring function in an effort to bridge the monitoring gap for those subrecipients whose audit reports fail to meet the nine month deadline.

Maior Federal Program/Award Affected: U.S. Department of Education
Title I - Grants to Local Educational Agencies - CFDA No. 84.010 Improving Teacher Quality State Grants - CFDA No. 84.367 Special Education Cluster - CFDA No. 84.SEC
Federal Agencies With Other Affected Programs: U.S. Department of Agriculture Corporation for National and Community Service U.S. Department of Labor U.S. Department of Education U.S. Department of Health and Human Services

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