Revised Massachusetts Charter School Audit Guide

AAFCPAs Highlights Changes and Practical Considerations to Ensure Charter Schools Are Well-Prepared for Your Financial Audit

by John Buckley, CPA
In June of 2014, the Massachusetts Department of Elementary & Secondary Education (DESE) issued its revised Charter School Audit Guide, including significant changes to the financial reporting and audit requirements of charter schools.  This guide was last updated in 2010.  The DESE clearly states:  “It is the charter school’s responsibility to conform to the current reporting requirements of the Department.  Incomplete or incorrect annual audit reports will be rejected by the Department and will require resubmission.”
The Guide will be effective for all charter schools for the year ending June 30, 2015, with exception of Charter School Program Grant reporting requirements, and the removal of the surplus schedule, which both took effect for the fiscal year that ended June 30, 2014.
We have analyzed the full Audit Guide and provided the following summary of changes and practical considerations that school business managers should consider in preparation for your financial audit.

The following is a summary of changes and practical considerations.

Section 201 – Administering the audit
Section 201 contains a subtle but very important change as it relates to finalizing your audit by the DESE deadline.  The Board of Trustees is now authorized to delegate responsibility of accepting the audit to the audit or finance committee.  The committee is now able to sign the DESE Acceptance of Board of Trustees Letter on behalf of the full board.
Section 303 – Additional Reporting – Charter School Program (CSP) Funding
Effective FY14, schools with CSP funding passed through the Massachusetts DESE are now required to have their auditors test the CSP funding annually, regardless of the amount.  This may be done in one of two ways.  If the school is subject to a Federal audit under OMB Circular A-133, the auditors may test the CSP funding as a major program to satisfy the DESE requirement.  If the school does not meet the threshold for an A-133 audit or if  CSP money does not need to be tested as a major program under the A-133 guidelines, the auditors may issue an agreed upon procedure (AUP) report.  The DESE has specified the procedures the auditors must test if an AUP is performed. Schools and your AAF Partner should determine the most cost effective way to satisfy this requirement.

Section 701 – Component Unit Presentation
Most Commonwealth Charter Schools have a “related” foundation that carries on the fundraising activities of the school and may also be the owner of the school’s facility.  Under the Governmental Accounting Standards Board (GASB), a school must determine if the foundation is a “component unit” of the school (See Appendix D of the Charter School Audit Guide).  Section 701 has been updated to mandate that whether a component unit meets the criteria of a “blended” or “discreetly presented” component unit, a separate column must be shown for the component unit.  The purpose behind this new mandate is so the DESE can easily reconcile the audited financial statements back to the Charter School End of Year Financial Report (CSEOYFR).  If the foundation is a blended component unit then separate columns should be presented for the school, the foundation, eliminations and the total primary government.  If the foundation meets the criteria for a discreetly presented component unit, then columns should be presented for the primary government (school), component unit (foundation), and a memorandum total column (without intercompany eliminations). A component unit may also be a special purpose entity.
Section 702 – Considerations for a Network of Charter Schools
Section 702 is a new section which documents the way network schools (multiple schools governed by one board of trustees) report each school in their audit.  The financial information for each charter school in the network should be presented in individual columns in the financial statements in order to separately distinguish the balances and transactions of each charter school.
Section 806 – Required Disclosures – Notes to the Financial Statements
In addition to the disclosures required by GAAP, Section 806 specifically identifies additional disclosures DESE requires in the notes to the financial statements.

These disclosures include:

  • Management fees paid or received by the school and any amounts owed at year end.
  • Management fees paid or received must be shown as a separate line in the statement of revenue, expenses and changes in net assets.
  • Related party transactions – whether material or not.
  • Explanation in the Management Discussion and Analysis (MD&A) of any operating loss and if it was budgeted for.
  • Explanation in the MD&A of the methodology of how the school projected their budgeted tuition.

Section 807 – 20% Excess Carryover Calculation
As of FY2014, the supplemental schedule of 20% Excess Carryover Calculation is no longer required to be submitted with the audit.  It is, however, required to be submitted as part of the CSEOYFR. Note: It will still be very important to work with your AAFCPA auditor to perform the calculation before the issuance of the audit.  A board vote can be taken after the end of the fiscal year to set aside a capital reserve fund if desired.
Section 807 has been expanded to include detail on how to calculate the surplus. (For a complete guide of what is included in the calculation please refer to the audit guide.)

A few key elements to remember:

  • You can no longer carry forward a deficit from prior years. Unfortunately, you still need to carry forward surpluses from prior years.
  • Unrestricted contributions are subtracted from the calculation (among other non-tuition income). However restricted grants and contributions are not subtracted from the calculation.
  • Fundraising costs are added back to the calculation, however costs incurred to raise restricted grants do not need to be added back to the calculation.

Are you ready for your FY2015 Audit?

New Areas of Focus Which Auditors Will Test

The following sections include changes that your AAFCPA auditors will need to test.  It is important that schools become familiar with these new requirements to ensure they are compliant before the auditor begins testing.
Section 1002 – Record Keeping
Auditors will now need to test that network schools are properly tracking the costs of each school separately and that there are proper systems in place to do this.
Section 1003 – Related Party Disclosures
Certain requirements that were previously tested here have been moved to Section 1006, including testing financial disclosure forms.
Auditors will need to ensure that all related party transactions between network schools are properly disclosed in the financial statements.
Section 1004 – Reporting
There have been no changes in the testing that auditors must do, however there is clarification relating to the capital plan.  The capital plan must be included in the Annual Report and any funds designated for the capital plan must be voted on by the board of trustees prior to the finalization of the audit.
Section 1006 – Board of Trustees
Section 1006 has been expanded to now require the auditors to test for evidence of a Signed Certificate of Receipt of Open Meeting Law materials within two weeks of joining the board, examination of written acknowledgement of the conflicts of interest laws within 30 days of becoming a board member and on an annual basis thereafter, and evidence of completion of online training on conflict of interest laws within 30 days of becoming a board member and every two years thereafter.
Section 1008 – Procurement Policy
This section has been updated to state that the procurement officer does not need to be Massachusetts Certified Public Purchasing Official (MCPPO) designated; rather they need to receive a MCPPO certificate stating that they have successfully completed either the Public Contracting Overview seminar or the Charter School Procurement seminar.
The recommended audit procedure has also changed slightly.  In recognition of the long waitlist for these seminars, the audit procedures now allow a school official to have completed the course, or be enrolled or on a waitlist for the required seminar.
Section 1010 – Massachusetts Teachers Retirement System (MTRS)
It is recommended that auditors now test that new enrollees are enrolled in the MTRS within 30 days of employment.
Section 1011 – Charter School End Of Year Financial Report
Auditors are no longer required to test the accuracy of non-financial data.
Section 1012 – 20% Excess Carryover Calculation within the CSEOYFR
This section clarifies that the auditor is testing the prior year’s surplus calculation as it appeared in the prior year’s CSEOYFR.  Auditors must also test two new requirements: 1) any payments made back to the sending district were made in a timely manner, and 2) board of trustee’s minutes must reflect adherence to, or acceptable revisions to, the capital plan.
Section 1013 – Network of Charter Schools
Section 1013 is a new section and is only applicable to network schools (boards that hold multiple charters).

The new recommended audit procedures include:

  • Examine a written cost allocation plan for shared costs between network schools and disclosures of all such transactions in the notes to the financial statements.
  • Determine that shared costs that are not within the same district are allocated based on actual costs or that a reasonable allocation plan is consistently applied (reasonable basis of allocation includes: number of students, number of employees or some other reasonable basis as determined by management).
  • Determine that funding is not transferred among individual schools within the same network unless schools are located within the same sending district and all transfers are approved by the board of trustees.
  • All loans between schools must be documented in writing, stating the terms and conditions and be approved by the board of trustees.

Appendix B – Agreed Upon Procedures for CSP Funding
This new appendix documents DESE’s expectations for testing of the CSP money if it is not tested as a major federal program under A-133 requirements. This appendix also includes sample reports.
Appendix C – School Closeout Procedures     
The closure of a charter school may be very difficult for school stakeholders.  If your school is closing because of non-renewal, or through revocation, this new appendix clearly documents each party’s responsibilities.
Appendix D – Component Units
As stated in Section 701 – Component Unit Presentation, Appendix D includes documentation to assist schools in determining if a foundation, or other entity, is a component unit.


The basic charter school bargain is that of “autonomy for accountability.” As the charter school sector has grown, more public awareness has led to greater public scrutiny, demanding transparency and additional oversight and accountability regarding the use of public funds and charter school governance.
The revised Charter School Audit Guide reflects changes in Governmental Accounting Standards Board guidance and updates policies for schools operating as networks.  There are significant changes which business managers, treasurers and school leaders need to be aware of.
The key policies and procedures schools should consider are:

  • Written plan to document allocation of costs.
  • Board votes for all capital plans.
  • New signoffs, acknowledgements and training for board members on independence.
  • New employees must be enrolled in MTRS within 30 days of employment.

AAFCPAs considers the new requirements in the revised Charter School Audit Guide to be fairly straight forward. In preparation for your annual audit, please refer to the full Audit Guide for detailed information on the financial reporting and audit requirements for Charter Schools. Proper preparation will help ensure that you have no audit findings.
If you have any questions related to your Charter School audit, please contact your AAFCPAs Partner, or you may contact John Buckley at, 774.512.4039. *

*Please refer to the full audit guide for detailed information on the financial reporting and audit requirements for charter schools.
About AAF: AAFCPAs is an attractive alternative to the Big 4 and National CPA firms.  We provide best-value assurance, tax, business consulting, and information technology advisory solutions to nonprofit organizations, commercial companies, wealthy individuals, and estates.  Since 1973, AAF’s sincere approach to business and service excellence has attracted discerning clients along with the best and brightest CPA and consulting professionals.  AAF donates 10% of its net profits annually to nonprofit organizations.
Nearly half of all the charter schools in Massachusetts are satisfied AAF clients and strong proponents of our CPA firm. Many have been clients since the time they were granted their charter. We work with both start-up schools and multi-site proven providers, including some of the leading Charter Management Organizations (CMOs) in the country.  We know first-hand the unique challenges that charter schools face, including issues related to start-up and replication, funding, surplus calculations, and overcoming political opposition.  Our clients consider us a best-value CPA firm because we provide that ideal combination of expertise, service, and price.

About the Author

John Buckley CPA
John is the leader of AAFCPAs’ Educational Services practice, serving diverse academic and education services clients spanning independent schools, colleges/universities, special education schools, education services, charter schools and charter management organizations (CMOs). John chairs AAFCPAs’ Risk Committee and oversees the firm’s Enterprise Risk Management Program, ensuring proper practices are in place to surface, understand, and manage priority risks. Additionally, John performs various types of fraud audits for clients, including cash disbursement, credit card fraud, and falsifying employee reimbursement. He has been asked to serve as an expert witness for several attorneys involved in fraud cases.

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