A Report on On-Site Audits of Residential Child Care Providers
October 2006
Report Number 07-002
Overall Conclusion
The five residential child care providers (24-hour providers) we audited spent federal and state funds on items such as direct care staff, food, shelter, and clothing that were necessary to ensure the mental and physical well-being of children in their care. Providers deliver these services through unit rate contracts with the Department of Family and Protective Services (Department).
Under their unit rate contracts, providers are paid an amount per child per day for delivering services. The Department does not control how providers spend the payments, so long as the providers (1) spend these funds legally and (2) account for their expenditures accurately in cost reports they submit to the Health and Human Services Commission (Commission) for rate setting purposes. Expenditures reported as unallowable costs are not included in the cost data used to set unit rates. During calendar year 2005, the Department paid the five providers we audited approximately $22,465,574.
Each of the providers we audited engaged in related party transactions during 2005. Related party transactions are not unusual in the foster care environment, and the Department has established rules and provisions in its contracts regarding related party transactions. However, the Department's rules and contracts are ambiguous as to whether these requirements apply to (1) how providers actually spend funds on related party transactions or (2) how providers report these types of transactions on the cost reports they submit to the Commission. As a result of this ambiguity, there are inconsistencies in providers' compliance. Specifically:
- In 2005, one provider paid $92,572 in costs for goods and services provided by related parties that were above the actual costs incurred by the related parties. The Department's rule specifies that the costs providers pay on related party transactions must not exceed the actual cost incurred by the related party. As required by its contract, the provider reported those costs on the cost report it submitted to the Commission.
- The other four providers spent federal and state funds in a manner that was consistent with the intent of the Department's rules. In 2002, one of these providers took action to comply with the Department's rule so that a lease agreement would not be considered a related party transaction. However, the lease agreement then became a less-than-arm's-length transaction. The Department's rule specifies that lease costs paid through less-than-arm's-length transactions should not exceed the amount that would be allowed if the provider held title to the property.
In addition, the Department does not adequately monitor related party transactions and less-than-arm's-length transactions. The ambiguity in the Department's rules and contracts, combined with the lack of monitoring, creates the potential for providers to spend federal and state funds on unallowable costs. See Tables 1 through 5 in Chapter 1-B of this report for the related party transactions identified at the five providers we audited.
In addition, auditors identified the following:
- Four providers did not comply with their contracts with the Department. For example, providers did not consistently perform required criminal background checks on all of their staff. In addition, providers did not consistently ensure that all of their staff had received required training.
- Each of the five providers audited had insufficient documentation for (1) financial and administrative accounting processes or (2) automated systems.
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