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New York State Comptroller Thomas P. DiNapoli today called on the State Education Department (SED) to increase scrutiny of special education contractors after an audit revealed SED has not conducted any on-site audits since 2007 and has no process to routinely review the hundreds of millions of dollars charged by these private providers annually.

DiNapoli’s office has uncovered widespread fraud and abuse by contractors providing services to children with physical, learning, developmental and other disabilities. The abuse has largely occurred because of lax oversight by SED due to inadequate resources, antiquated and complex processes and little follow-up.  Auditors have found numerous irregularities and instances of contractors who have cheated the system by using taxpayer funds to hire relatives at excessive salaries and to pay for personal expenses such as vacation homes, home entertainment centers and landscaping.

“Children with disabilities and taxpayers are being ripped-off and it has to stop,” DiNapoli said. “The State Education Department has much work to do to straighten out the special education program. A new and more effective system of oversight is urgently needed including the regular review and independent audit of these entities on a routine basis.”

SED oversees special education programs for students with disabilities between the ages of 3 and 21. In addition to services provided by local school districts, these programs include services delivered to about 75,000 students by more than 300 for-profit and not-for-profit entities at an annual cost of $1.3 billion.

DiNapoli’s auditors have identified fraud and improper use of funds, resulting in $13.2 million of disallowances out of a total of $139.8 million paid for by state and local governments. There have been several criminal referrals, felony arrests and hundreds of thousands of dollars in restitution made as a result of the audits. Six providers so far have been referred to law enforcement. In total, 30 special education contractors have been or are being audited.

A comprehensive review of SED’s oversight of the sector by DiNapoli found that the department provided no financial audit oversight of individual providers over the last five years.  In addition, SED performs just a limited number of program reviews of private special education providers and has no process in place to ensure all providers are reviewed periodically. Without this monitoring, there is a high risk that providers may spend state and local funds inappropriately, operate inefficiently and lack long-term financial viability.

SED’s fiscal oversight is limited to its rate-setting process, which uses self-reported information from each provider’s consolidated fiscal report (CFR) or financial statements to establish the amount each provider will be paid for services. The CFR preparation process is complex and difficult for providers to understand. It relies on self-reported financial information and manual processes that leave substantial room for human error, as well as possible willful misrepresentation. SED has less than 20 staff working with CFR data from more than 700 providers operating 1,400 programs, each of which can require several different calculations and adjustments.  Although rate-setting staffers review reported CFR information to develop rates, this process was never intended to scrutinize the accuracy of the information and it affords only limited capability to prevent and detect fraud.

DiNapoli’s auditors also found that the required certified public accountant certifications of provider CFRs have not been reliable, and that SED’s process to refer suspected CPAs to its Office of the Professions for potential disciplinary action needs significant strengthening. Additionally, there is no formal process in place for tracking, reporting and issuing warnings to CPAs exhibiting simple negligence in the certification of CFRs. Further, there is inadequate communication and coordination between the Office of the Professions and other SED units to ensure rate-setting staff are made aware of the disposition of the disciplinary actions they initiate.

DiNapoli recommends SED:

• Develop and implement a strategy, including necessary resources, for providing adequate onsite fiscal and program monitoring of special education providers;
• Establish a formal process for identifying and reporting CPAs who appear negligent in their certification of CFRs to SED’s Office of the Professions;
• Coordinate with other state agencies to develop a system to ensure that CPAs certifying provider CFRs demonstrate appropriate training, competence and performance;
• Review the CFR and rate-setting processes to identify opportunities for streamlining operations, updating technology and reducing complexity and the occurrence of errors;
• Assess the feasibility of meaningful monetary penalties for providers failing to provide an accurate and timely CFR;
• Formalize policy and procedures for sharing identified provider problems with other state agencies that are also funding the provider; and
• Reevaluate and enhance provider training requirements, including frequency, content and requirements for attendance.

SED officials generally agreed with the report.  SED has recently developed program reforms and sought approval from the state Board of Regents for increased funding in the 2013-14 fiscal year to improve oversight of special education providers and address many of the audit recommendations.

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