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STATE OF DELAWARE OFFICE OF AUDITOR OF ACCOUNTS KATHLEEN K. MCGUINESS, CFE, RPH ‘STATE AUDITOR June 5, 2019 Members of the Delaware General Assembly Legislative Hall Dover, DE 19901 RE: Odyssey Charter School Dear Members of the General Assembly: | would like to take the opportunity to clarify a number of misperceptions and mischaracterizations that have been spread through the media and social media regarding the Office of the Auditor of Accounts’ {AOA) authority in auditing charter schools and, specifically, Odyssey Charter School. ‘As is AOA standard procedure, our office reviewed the information provided earlier this year and the Delaware Code to determine AOA’s authority on the subject. Specifically, our auditors reviewed 14 Del C. §513 which outlines AOA’s ability to audit charter schools. We identified and determined the following: + 14Del. C, §513(4)(2) lists the thresholds that would trigger the AOA to “..conduct or contract for ‘an audit of the charter school’s business and financial transactions, records, and accounts...” following a charter school's submission of its annual audit.* Delaware Code permits charter schools to select their own auditor to conduct and submit financial statements annually. There is an inherent responsibility that the auditors selected perform their duties accordingly. Since the AOA does not have an administrative contract with the auditors selected by charter schools, the AOA does not have the ability to direct the auditors or review any work prior to the submittal of final annual financial statements. Delaware Code calls for AOA to examine the documents submitted by charter schools for the below listed items and initiate an audit only should any of the following appear in its annual financial statements: © Material exceptions; ‘© Agoing concern disclosure in the notes or in an explanatory paragraph related thereto; © Afinding of material weakness on either internal control or compliance. For purposes of this paragraph, “material weakness” means a deficiency, or a combinations of ‘This particular section of Delaware Code was amended in 206 by House Bil No. 435, sting specifi threshold events that would Iniate an aut by the AOA, 401 FEDERAL STREET + TOWNSEND BUILDING + 3© FLoor * DOVER, DE 19901 MAIN OFFice: 302-739-4241 deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the school/entity’s annual or interim financial statements will not be prevented or detected on a timely basis; © Failure to maintain a current status with Internal Revenue Service Form 990 filings, if said filings are required of that charter school; © Existence for a total of less than 5 years under its current and prior charter terms. ‘AOA re-examined Odyssey Charter Schoo'’s Financial Statements, dated June 30, 2018, and again found that none of the above conditions found in 14 Del.C. §513 (d)(2) were met to warrant initiating an AOA audit. ‘+ Upon further review of the legislative history of the Charter School law, Senate Bill No. 234 as ‘Amended by Senate Amendment No. 1, amended this section of code (14 Del.C. §513) in 2014 by deleting the word “audit” and replacing it with “review.” {c) The Department of Education, the State Board, and the approving authority may conduct financial, programmatic, or compliance audits-reviews of a charter school. In cooperation with the Department, the approving authority shall conduct such audits reviews no less often than every 3 years. The State Auditor shall conduct an audit of all charter school funds annually on the same basis as applied to regular school districts. Then, in 2026, along with the addition of the five criteria listed previously to initiate an audit, 14 Del.C. §513 was further amended via House Bill 435, as follows: {e){h) The Department of Education, the State Board, and the approving authority may conduct financial, programmatic, or compliance reviews of a charter school. In cooperation with the Department, the approving authority shall conduct such reviews no less often than every 3 years, The-State- Auditor shall-conduct-an-audit ofall charter school funds annually-on-the-same-basis-as-applied-to-regularschool-distriets.? Taken together, these two pieces of legislation establish parameters for AOA’s charter school oversight authority. ‘* Following AOA’s review of controlling statutes of Delaware Code, Odyssey Charter School's Fiscal Year 2018 Financial Statements, and the information and material provided by the Department of Education, our auditors recommended that the most appropriate authority to conduct further inquiry into this matter was the Department of Education's Charter School Office using its Organizational and Financial Performance Frameworks or other Department of Education review mechanism. AOA auditors recommended this because the materials and allegations provided were not specific and indicated a further need to delve into Odyssey's ‘management, areas that the Charter School Office was designed to provide oversight. '* While 14 Del. C. §513(h) does not expressly authorize AOA to unilaterally “..conduct financial, programmatic, or compliance reviews of a charter school,” we submitted to the Department of bese ena nies shim i olaware gous 5 48/en0397 shim Education a Memorandum of Understanding to pursue this inquiry into Odyssey Charter School (on behalf of the Department of Education. Given the controlling statute, we believe that this was the most appropriate path to take to work within the law governing charter schools, ‘Since this request was not one of the 70+ audits mandated in Delaware Code that AOA performs annually, combined with the resource challenges facing the AOA upon taking office (a 50% staff vacancy rate, unfinished audits, audits mandated by Delaware Code that have not been completed plus a budget that is below FY 2008 levels), we proposed that the Department of, Education offset the costs of the audit. This proposal is not unlike other audit arrangements historically performed by this office. The Department of Education declined AOA’s offer before we presented a detailed scope of work and cost estimate. To be clear, AOA’s authority in charter school oversight is constrained by Delaware Code, which has been changed since AOA initiated its last audit of a charter school in 2014, 14 Del. C. §513(d)(2) specifies limited criteria that authorize the AOA to audit a charter school following the submission of its annual audit, which we determined in this case have not been met. Further, as we noted previously, 14 Del. C. §513(h) specifies the entities authorized to conduct reviews of charter schools, which we offered to assist. Let me reiterate that throughout this process, AOA looked for ways to engage within the charter school controlling statute and through the limited resources AOA currently faces. Because of the legislative constraints placed upon this office which brought us to this place, the AOA is more than willing to work with members of the General Assembly to make legislative corrections in order to enable audits they feel are necessary to occur. We look forward to help find language, and work together, so we do not find ourselves in a similar situation in the future. Hopefully, this background provides clarity into AOA’s rationale and approach. As always, please contact me directly if you wish to discuss this matter further. Sincerely, MMe kathy McGuiness State Auditor cc: Delaware Department of Education Delaware State Board of Education

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