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A Report on On-site Audits of Residential Child Care Providers

August 2013

Report Number 13-048

Overall Conclusion

Three of the five residential child care contractors (providers) audited did not consistently maintain documentation to demonstrate that they accurately reported funds they expended for providing 24-hour residential child care services. Those three providers were:

- Wings of Refuge, Inc. (see Chapter 1).

- Houston Wee Care Shelter, Inc. (see Chapter 2).

- New Encounters, Inc. (see Chapter 3).

The providers receive funds from the Department of Family and Protective Services (Department) for the delivery of goods and services—such as therapy, food, shelter, and clothing—that promote the mental and physical well-being of children placed in the providers’ care. Providers deliver those services through contracts with the Department and report their revenue and expenditures on annual cost reports.

Wings of Refuge, Inc. had serious weaknesses in its financial processes. Those weaknesses create a significant risk of misappropriation of federal and state funds. Wings of Refuge did not submit a 2012 cost report until July 2, 2013, which was 93 days after the Department's due date and after auditors were no longer on site. Because of this, auditors were limited in the scope of work that could be performed at that provider. In addition, auditors identified $62,031 in purchases and cash withdrawals during the 2012 cost reporting period that the provider made in California, although the provider is contracted to provide services for children in Texas. After audit fieldwork was completed, the Department notified Wings of Refuge, Inc. on August 1, 2013, that it would not exercise the renewal option in the provider's current contract for child placing services; therefore, the contract will expire on August 31, 2013.

Two providers audited generally had adequate documentation to demonstrate that they accurately reported the funds they expended for providing 24-hour residential child care services. Those two providers were:

- Refuge House, Inc. (see Chapter 4).

- Children of Diversity, Inc. (see Chapter 5).

Auditors identified internal control weaknesses at all five providers. Those control weaknesses are the responsibility of the providers and not the external accountants. Specifically:

- Two providers lacked detailed, written policies and procedures for key financial processes.

- Two providers did not have adequate segregation of duties.

- Two of the four providers that had external accountants did not conduct reviews of the financial information their external accountants prepared.

- One provider created its general ledger from bank statements instead of financial transaction documents such as revenue receipts, invoices, and purchase receipts.

Auditors also identified instances of noncompliance with cost-reporting requirements at three providers audited. As stated previously, one provider did not submit a 2012 cost report until audit fieldwork had been completed. In addition, all five providers fully complied or substantially complied with background check requirements.

Two of the three providers audited that are child placing agencies (Refuge House, Inc. and Children of Diversity, Inc.) generally paid their foster parents the required amounts according to the children's level of care and days of service. However, those two providers should improve their documentation of and compliance with foster parent monitoring requirements. Children of Diversity, Inc. did not conduct any unannounced foster parent monitoring visits and did not conduct all quarterly visits for 7 (70 percent) of 10 foster homes tested. The third provider that is a child placing agency (Wings of Refuge, Inc.) did not accurately calculate the reimbursement rates for foster parents for 21 percent of the items tested.

Auditors also communicated other, less significant issues separately in writing to each provider.

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