Subchapter C. INTERIM AUDIT STANDARDS

 (a)  The purpose of these audit standards is to ensure that revenues provided by the Commonwealth for students whose placement in the approved private school has been approved by the Department have been spent on the provision of education services, including residential services in some cases, to children who are residents of this Commonwealth and who have been approved by the Department under §  171.16 (relating to assignment).

 An approved private school shall maintain an accounting and bookkeeping system in accordance with the following standards:

   (1)  Accounts shall be kept in accordance with Generally Accepted Accounting Principles (GAAP) as defined by the American Institute of Certified Public Accountants, except as modified by §  171.205 (relating to exceptions to Generally Accepted Accounting Principles).

   (2)  Costs shall be properly assigned to a specific cost objective and indirect costs shall be allocated to direct costs. If multiple cost objectives are involved, financial information shall be segregated by cost objective in the bookkeeping records.

   (3)  Bookkeeping records must include the following:

     (i)   Cash receipts journal.

     (ii)   Cash disbursements journal.

     (iii)   General ledger.

     (iv)   Payroll journal.

     (v)   Fixed asset and depreciation listings.

   (4)  Adequate documentation to verify postings shall be maintained. The documentation must include the following:

     (i)   Purchase orders.

     (ii)   Customer invoices.

     (iii)   Vendor invoices.

     (iv)   Cash remittance advices.

     (v)   Employee expense reports.

     (vi)   Employee time records.

   (5)  A payroll shall be prepared and supported by appropriate documentation authorizing the rate of pay and employee time records, when necessary.

   (6)  A school shall maintain all pertinent financial records, including cost allocation worksheets, for 3 years after submission of the audit report.

   (7)  Schools shall submit audits to the Department by November 1 of each year.

 (a)  Related party transactions will be presented and disclosed in accordance with Generally Accepted Accounting Principles.

 (b)  Related parties include the following:

   (1)  Affiliates of the enterprise.

   (2)  Entities for which investments are accounted for by the equity method by the enterprise.

   (3)  Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management.

   (4)  Principal owners of the enterprise and its management.

   (5)  Members of the immediate families of principal owners of the enterprise and its management.

   (6)  Other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

 The schedule of expenses prepared by the school shall be presented in accordance with Generally Accepted Accounting Principles, with the exception of the following, which will not be included:

   (1)  Bad debts.

   (2)  Unsubstantiated related party costs.

   (3)  Cost of any individual insurance policies on the lives of officers, executives, administrators and other key staff.

   (4)  Expenses paid with funding from another governmental entity, other than funding from the Department for approved students.

   (5)  Fines, penalties, costs and damages assessed for failure to comply with Federal, State or local laws.

   (6)  Costs related to meal service for staff members who are not involved in direct supervision of students.

   (7)  Interest costs on loans from related parties at rates above the fair market rate available to the school.

   (8)  Lobbying efforts to influence the outcome of any Federal, State or local election, referendum, initiative or similar activity, or to promote the introduction, enactment, or modification of any current or future Federal or State legislation.

   (9)  Gains or losses on the sale of school assets.

   (10)  Rental costs in a related party transaction that are found to be above the fair market rental value of the property.

   (11)  Scholarships and discounts to students or their parents or other third parties.

   (12)  Administrative costs, as defined in §  171.206 (relating to administrative costs), in excess of 10% of total costs.

   (13)  Any money judgment, in excess of the deductible under an insurance policy, entered against the school or organization in administrative or court litigation and any settlement amounts, in excess of the deductible under an insurance policy, to avoid litigation.

   (14)  Costs associated with medical personnel that are not related to the provision of a student’s individualized education plan, except for costs related to a prudent level of oversight of students.

 (a)  Administrative costs are those costs that have been incurred for the operation of the executive and administrative offices of the organization and do not relate solely to any major function of the organization. This administrative expense category also includes its allocable share of fringe benefit costs, operation and maintenance expense, depreciation and use allowances and interest costs.

 (b)  Costs or expenses related to the following functions are considered as administrative and are subject to the 10% administrative cap except when and to the extent that the costs or expenditures are incurred as a result of providing educational services to children who are residents of this Commonwealth and who have been approved by the Department through the PDE-4010 process. To the extent that the following costs are for educational services, they are not subject to the administrative cap and are reported in the schedule of operating expenses:

   (1)  Activities of the board of directors.

   (2)  Executive management.

   (3)  Staff relations and labor negotiations.

   (4)  Activities or programs operated to improve or sustain relations between the community and the school.

   (5)  Activities concerned with the fiscal operations and purchasing activities of the school.

   (6)  Printing, publishing and duplicating administrative publications such as annual reports, school directories and manuals.

   (7)  Conducting and managing programs of planning, research development and evaluation for the school.

   (8)  Activities concerned with writing, editing and other preparation necessary to disseminate educational and administrative information to students, staff, managers and the public through direct mailing, the various news media or personal contact.

   (9)  Human resources activities, including recruiting, placement and staff transfers.

   (10)  Activities concerned with preparing data for storage or storing and retrieving data for management reporting.

   (11)  Activities concerned with acquiring, conducting and managing programs or planning, administration, implementation, coordination, reporting or evaluation of programs and projects that are State or Federally funded.

   (12)  Activities designed to assist executive management with administrative functions so that they might accomplish the duties quickly and efficiently.

 (a)  If the amount of reportable costs in 2004-05 is less than the amount of revenues received by the schools for 2004-05 from the Commonwealth for the provision of educational services to children who have been approved through the PDE-4010 process, the difference may be retained by the school for use in 2005-06.

 (b)  Beginning in 2005-06, if the amount of reportable costs in a year is less than the amount of revenues received in that year by the school from the Commonwealth for the provision of educational services to children who have been approved through the PDE-4010 process, the difference will be remitted to the Commonwealth. Those funds shall be deposited in the Audit Resolution Fund for the resolution of previous audits.