DiNapoli: Special education providers shortchanging special needs children

Comptroller's annual report on preschool audits

Finds fraud and inappropriate billing, $20 million in questionable costs in 2014

Audits of special education providers across New York state have uncovered a disturbing pattern of mismanagement that cost taxpayers nearly $42 million in the last decade, including $20 million in 2014 alone, according to a report released by New York State Comptroller Thomas P. DiNapoli.

In conjunction with the report, DiNapoli released 11 new audits that identified more than $6.7 million in public funds that special education providers misspent or misused, including cases of possible fraud that have been referred to law enforcement for further investigation.

"Special education providers play a crucial role in our education system, but some unscrupulous contractors have taken advantage of lax oversight to game the system, rip-off children and taxpayers, and line their own pockets," DiNapoli said. "Over the past year, we've aggressively audited these providers and found $20 million in questionable costs and blatant abuse of taxpayer money. It is time for this to stop, and my office will do everything we can to make sure that students with special needs and their parents get all the help they deserve."

About 81,000 preschool students with disabilities receive special education itinerant teacher services in New York annually at a cost of more than $1.4 billion to the state and localities, according to the State Education Department. Unlike in other states, preschool special education services in New York are predominantly provided by for-profit and not-for-profit private contractors rather than the school districts themselves.

SED, which approves providers to operate in New York, reimburses providers for eligible costs. There are currently about 320 approved private preschool special education providers in the state.

In June 2012, DiNapoli announced a new special education audit initiative involving a broad look at the special education sector as well as multiple individual providers. The effort found numerous cases of waste, abuse and, in some cases, criminal conduct.

As a result of these findings and at the request of DiNapoli, the state enacted legislation requiring the comptroller to audit the expenses reported to SED by every program provider of special education services for preschool children with disabilities at least once by March 31, 2018. Investigations related to these audits have resulted in 10 arrests and five criminal convictions and the recovery of more than $5 million in stolen public funds.

In 2014, the comptroller finished 19 audits of expenses submitted to SED by special education providers. This included audits of the expenses submitted by three providers with school-age-only programs and audits of the expenses submitted by 16 providers with preschool programs. Under the legislation, the comptroller was provided $2 million to hire new auditors.

In 2014, DiNapoli's auditors identified more than $20 million that was misspent. In total, the comptroller has completed 40 such audits over the past decade, finding nearly $42 million in questionable or fraudulent expenses.

"Taxpayers rightly expect that the state comptroller's office will hold those doing the people's business accountable," DiNapoli said. "Our auditors did their job and gave taxpayers results and a return on their investment. As we continue to audit these providers, it is my hope that we will see a significant change in how these providers operate."

Of the 11 new audits released, auditors found:

•In Buffalo, auditors disallowed $2.4 million spent by Gateway-Longview. The school, which provides special education and other services to children from 3 to 21 years old, spent nearly $2 million on non-competitive contracts with companies that had ties to members of the school's board, and more than $100,000 on food, flowers, personal expenses and gifts for staff, which are prohibited uses of public funds.

DiNapoli noted the audits of four providers released - Circle of Friends and Early Childhood Education Center in Albany County, Aspire of Western New York in Erie County and Bright Star Pediatric Services of Monroe County - did not contain any major findings, and he commended these organizations for their financial management practices.

The audits released, along with other recently completed SEIT audits, can be viewed at: http://www.osc.state.ny.us/audits/auditAgencyList.htm under the heading "State Education Department."
Thirty-seven of the 40 audits completed have been released. Three are pending review by law enforcement and have yet to be released. Of the audits released:

•Fifteen audits found pay bonuses that violated SED rules.

•Nineteen audits found payroll records were not properly maintained.

•Nine audits found payroll expenditures that could not be substantiated.

•More than half of the audited providers (21 of 37) sought to reimburse their personal expenses and purchases using state funds.

•At least $1.7 million of taxpayer dollars was diverted for personal use, including spending on vehicles, travel, apartment rentals, jewelry, entertainment and cell phones.

•In several instances, DiNapoli's audits discovered providers claimed state funds to reimburse themselves for renovations, landscaping and furniture at their personal residences.

Many of the audits also found:

•Lack of due diligence by the certified public accountants who are supposed to examine providers' financial statements and certify that their claims are done in accordance with SED guidance;

•Providers claimed expenses from SED for programs that were not part of its SEIT work and incorrectly allocated costs among programs;

•Inadequate oversight by boards of directors;

•Errors in accounting methodologies used for depreciation, amortization and accruals; and

•Undisclosed less-than-arm's-length transactions.

SED has agreed to implement all the recommendations in the comptroller's special education expense audits. Specifically, SED has reviewed recommended disallowances, made adjustments to reimbursable costs, recalculated tuition rates and recovered overpayments. In addition, SED undertook a comprehensive examination of preschool special education programs, services and costs and explored specific measures to enhance its oversight and monitoring of private providers.

As a result of this initiative, SED has taken numerous actions to strengthen the fiscal oversight and accountability measures of preschool special education providers.

The full report can be found at: SEIT annual report.