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An Audit Report on the CSCOPE Contract at Education Service Centers

June 2014

Report Number 14-034

Overall Conclusion

During the 2012-2013 school year, the 20 education service centers in Texas provided access to a curriculum management system known as CSCOPE to 70 percent of school districts in the state, according to information that the Texas Education Service Center Curriculum Collaborative (Collaborative) provided. Those education service centers reported they collected a total of $73.9 million in revenue from the sale of CSCOPE services to school districts, charter schools, and private schools from September 2005 through August 2013. For that same time period, the education service centers reported a total of $67.8 million in CSCOPE-related expenditures.

However, auditors were not able to verify the total amount that education service centers reported they paid for the development, installation, distribution, and marketing of CSCOPE because some of the education service centers did not separately track CSCOPE-related expenditure transactions. Some of them also did not separately track CSCOPE-related revenue transactions. As a result, auditors were not able to fully answer the audit objective to determine the amount of revenue and expenditures related to the development, installation, distribution, and marketing of CSCOPE.

According to the Collaborative, CSCOPE was designed to assist public school districts, charter schools, and private schools in teaching the State's required learning standards, Texas Essential Knowledge and Skills (TEKS), for kindergarten through grade 12.

While the education service centers have broad authority to provide services to Texas schools, there were no specific state funds appropriated for the development, implementation, and operation of CSCOPE. In addition, the education service centers do not have specific contract laws that they must follow to procure services such as the development and implementation of CSCOPE. The broad authority given to education service centers did not require that the procurement of CSCOPE have the approval of either the Texas Education Agency or the State Board of Education.

The education service centers used the provisions of Texas Education Code, Sections 8.053 and 44.031, to enter into the CSCOPE contracts. From 2006 through 2013, there were 7 CSCOPE contracts (see Appendix 2 for more information). However, auditors did not identify any documentation showing that the education service centers performed a best value assessment for (1) the contracts between the Region 8 Education Service Center (Region 8–Mount Pleasant) and CSCOPE vendor National Education Resources, Inc., or (2) the contract between the Collaborative and National Education Services, Inc., as required by Texas Education Code, Section 44.031.

Although the contracts for the development and implementation of CSCOPE were procured under the umbrella of applicable broad procurement and contracting laws, auditors identified deficiencies in the processes used to procure and monitor the CSCOPE contracts. The early contracts Region 8-Mount Pleasant executed lacked fundamental provisions to help protect the State's and taxpayers' interests. Unlike state agencies, education service centers are not required to comply with the contracting processes in the State of Texas Contract Management Guide. That guide provides a framework for public contracting practices that can help protect the State's and taxpayers' interests.

In addition, while the education service centers generally administered revenues and expenditures assessed or collected in compliance with applicable laws and rules, auditors identified deficiencies in the processes that the education service centers used to track CSCOPE-related revenues and expenditures.

The contracts between Region 8-Mount Pleasant and National Education Resources, Inc. from 2006 through 2011 lacked significant elements.

Region 8-Mount Pleasant asserts that it entered into an initial contract with National Education Resources, Inc. in 2005 to develop an online curriculum management system that would later become known as CSCOPE. From 2006 through 2011, the education service centers that subscribed to CSCOPE paid National Education Resources, Inc. $8.7 million. Region 8-Mount Pleasant was unable to provide its 2005 contract for the development and implementation of the curriculum management system because it destroyed all supporting documentation from the 2005-2006 school year based on its records retention schedule. Region 8-Mount Pleasant recorded payments totaling $73,750 to National Education Resources, Inc. for services related to the development and implementation of the curriculum management system during the time period during which the missing contract would have been in effect.

Auditors identified deficiencies in Region 8-Mount Pleasant's procurement of the CSCOPE contracts in effect from 2006 through 2011. Specifically, Region 8-Mount Pleasant did not publish a request for proposals; obtain bid proposals from vendors for the development of the curriculum management system; perform a needs assessment to identify the key elements needed from the vendor; or obtain a legal review of the contracts. The CSCOPE contracts between Region 8-Mount Pleasant and National Education Resources, Inc. for 2006 through 2011 were one page in length and lacked fundamental provisions and details. The contracts did not specify a price, include a description of how fees for services would be calculated, include specifications of deliverables, or provide details on ownership of intellectual property.

The early contracts between National Education Resources, Inc. and Region 8-Mount Pleasant (see Appendix 2) and the contract between National Education Resources, Inc. and the Collaborative included a provision for the CSCOPE vendor to pay Region 8-Mount Pleasant or the Collaborative a 12 percent rebate on all subscription fees paid for CSCOPE. Total rebates paid to the Collaborative were $1.16 million based on documents provided by the Collaborative. Auditors were not able to determine the total amount of rebates paid to Region 8-Mount Pleasant or the other education service centers.

The first 10 education service centers that offered CSCOPE formed the Collaborative in 2007 through an interlocal agreement.

According to the Collaborative, the 10 education service centers established the Collaborative under the provisions of Texas Government Code, Chapter 791, and Texas Education Code, Chapter 8. In 2007, each of the initial 10 member education service centers paid a $200,000 flat fee to join the Collaborative.

In 2009, the Collaborative filed to incorporate as a 501(c)(3) nonprofit corporation, citing authority from the Texas Non-profit Corporation Act. In 2010, the Collaborative began contracting on behalf of its members with National Education Resources, Inc. for CSCOPE services.

The CSCOPE contracts the Collaborative executed after 2010 were more closely aligned with state contracting requirements.

The CSCOPE contract between the Collaborative and National Education Resources, Inc. from July 1, 2010, through June 30, 2012, contained 16 of 22 important provisions recommended by the State of Texas Contract Management Guide. Those included provisions on pricing structure; specifications of expected deliverables; and details on ownership of intellectual property, including who owns the rights to related data, documents, and computer software. That contract replaced the contract with Region 8-Mount Pleasant and National Education Services, Inc. for the July 1, 2010, through July 1, 2011, time period.

In addition, the CSCOPE contract between the Collaborative and 3rdL Corporation from January 17, 2012, through June 30, 2016, contained 17 of the 22 important provisions recommended by the State of Texas Contract Management Guide. Those included provisions on pricing structure, specifications of deliverables, and details on ownership of intellectual property.

The Collaborative did not consistently comply with internal policies and procedures and Texas Education Agency guidance for financial transactions.

The Collaborative reported that it received $17.6 million in CSCOPE-related revenues (including $11.4 million in membership fees) from education service centers from fiscal year 2007 through fiscal year 2013. The Collaborative reported $15.6 million in CSCOPE-related expenditures during that same time period.

The Collaborative designated the Region 13 Education Service Center (Region 13-Austin) as its statewide fiscal agent. The Collaborative accounted for CSCOPE revenues in compliance with Region 13-Austin's policies and procedures and Texas Education Agency guidance for financial transactions. However, the Collaborative did not always account for expenditures in compliance with internal policies and procedures and the Texas Education Agency's financial guidelines. Specifically, of the 60 expenditure transactions tested, 14 (23 percent) lacked proper approvals, 13 (22 percent) did not include adequate support for the amounts, and 10 (17 percent) were not categorized in compliance with Texas Education Agency guidance.

After the Collaborative dissolved, the education service centers formed a new organization to facilitate continuing management of the curriculum management system.

On September 18, 2013, the Collaborative officially dissolved after legislative challenges to its authority to form. In its place, the education service centers formed a new entity through a shared services agreement called the Texas Curriculum Management Program Cooperative (TCMPC) to facilitate the continuing management of CSCOPE, now called the TEKS Resource System. According to TCMPC management, the Collaborative transferred all intellectual property, with the exception of instructional lessons, to TCMPC prior to the Collaborative's dissolution.

The education service centers generally administered the revenues and expenditures related to the development, installation, distribution, and marketing of CSCOPE; however, they were unable to identify all CSCOPE-related revenues and expenditures.

The 20 education service centers reported to auditors that they:

- Received a total of $73.9 million in revenues from school districts, charter schools, and private schools for CSCOPE-related services.

- Incurred $67.8 million in CSCOPE-related expenditures.

In contrast, the school districts, charter schools, and private schools that used CSCOPE any time from the 2006-2007 school year through the 2012-2013 school year reported they paid a total of $66.2 million to education service centers for CSCOPE-related services.

Auditors were not able to verify the total amount that education service centers reported they paid for the development, installation, distribution, and marketing of CSCOPE. Some of the education service centers did not separately record and track CSCOPE-related revenue and expenditure transactions. The education service centers also were unable to identify the type and amount of any in-kind contributions—such as personnel and staff resources, equipment, or supplies—that they may have provided toward the development and implementation of CSCOPE.

The Texas Education Agency’s Financial Accountability System Resource Guide provided to education service centers for financial guidance is not sufficient to address the programs and services they provide.

Auditors selected nine education service centers for on-site testing. However, weaknesses in the processes and related controls for financial transactions at the education service centers limited auditors' ability to verify the accuracy of CSCOPE transactions. Each of the education service centers audited stated that it used the Texas Education Agency's Financial Accountability System Resource Guide to account for its financial transactions. But that guide was designed for school districts and does not address many of the services provided by the education service centers. As a result, the methods for accounting for CSCOPE revenues and expenditures differed significantly among the nine education service centers audited. In addition, auditors identified weaknesses in the processes and controls for accounting for revenues and expenditures at the education service centers audited. That included one education service center that inappropriately classified 12 CSCOPE transactions totaling $856,759 as deferred revenue, which was characterized as a "rainy day fund" for CSCOPE. Those weaknesses contributed to the education service centers’ inability to document the total cost of their investment in CSCOPE or to determine whether the investment was a good value for taxpayers.

CSCOPE services, including related fees, varied widely among the nine education service centers audited.

School districts, charter schools, and private schools pay a service fee to the education service center that provides their access to CSCOPE. While the Collaborative provided guidance to the education service centers for calculating the technology fee due to the CSCOPE vendor, the Collaborative did not provide specific guidance on how the education service centers should calculate the support and development fees charged to the school districts, charter schools, and private schools. As a result, the nine education service centers audited did not use a consistent method for calculating the CSCOPE fees charged to the school districts, charter schools and private schools.

In addition, most of the education service centers offered additional CSCOPE-related support services to the school districts, charter schools, and private schools, such as additional days of training or specialized instruction. Only one of the nine education service centers audited did not charge additional fees for those support services. The other eight education service centers provided a variety of additional services with associated fees. For example, one education service center charged $45 for one person to receive content training, while another education service center charged $650 per day per presenter for additional instruction.

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