GREAT HEARTS AMERICA - TEXASNon-Profit

Findings #2025-001 and #2025-002 – Significant Deficiency and Other Noncompliance. Applicable federal program: U. S. Department of Education, Supporting Effective Instruction State Grants, Assistance Listing #: 84.367A, Contract #’s: S367A230041 and S367A240041. Condition and context: During our testing of GAAP and FASRG coding, we identified 5 of 72 non- payroll transactions coded to the incorrect period, and 5 of 49 non-payroll transactions coded to the incorrect object or function code. Recommendation: Reemphasize current policies and procedures to ensure proper coding of disbursements based on the period and the organization’s chart of accounts and FASRG codes. Planned corrective action: Great Hearts America – Texas concurs with the findings. While the noted errors were immaterial, management recognizes the importance of consistent expense recognition and coding accuracy to ensure compliance with TEA, PEIMS and financial reporting standards. To strengthen controls, management has implemented the following actions: 1) Month-End Cutoff Procedures: The Finance Department will issue enhanced month-end closing guidance emphasizing invoice cutoff dates, accrual requirements, and proper period recognition. 2) AP Supervisor Review: The Accounts Payable Supervisor will conduct a secondary review of all significant invoices processed to confirm proper period recognition. 3) Coding Accuracy Checks: The Accounts Payable Supervisor will perform periodic sampling of expense transactions to verify correct Function, Object, and PIC coding. 4) Training: Refresher training will be provided to campus and department staff responsible for coding transactions to ensure understanding of chart of accounts structure. Responsible officer: Stacey Lawrence, Interim Chief Financial Officer. Estimated completion date: Procedures will be implemented during fiscal year 2026 month-end close and reinforced through staff training in January 2026.

Findings #2024-001 and #2024-003 – Significant Deficiency. Applicable federal programs: U. S. Department of Agriculture, Passed through Texas Department of Agriculture: School Breakfast Program, AL#10.553, Contract #’s: 202423N109946 and 202120N19946, National School Lunch Program, AL#10.555, Contract #’s: 202423N109946 and 202222N109946, U. S. Department of Education, Passed through Texas Education Agency: Special Education Grants to States, AL#84.027A, Contract #: H027A230008. Recommendation: Develop procedures to reconcile accounts payable batches to the related check run, restrict set up of vendors in the check processing application, and develop budget versus actual reporting for the corporate office. Planned corrective action: Management has already developed a process to reconcile accounts payable batches extracted from the Concur system to the related check run in the Ascender general ledger system. In addition, management will create a separation of duties for bank reconciliations and the setup of new vendors. Our financial analyst will also consistently develop budget versus actual reports for the corporate office as is done for the schools. Responsible officer: Kevin Byrne, Vice President of Finance. Estimated completion date: January 1, 2025.

Findings #2024-002 and #2024-004 – Significant Deficiency. Applicable federal programs: U. S. Department of Agriculture, Passed through Texas Department of Agriculture: School Breakfast Program, AL#10.553, Contract #’s: 202423N109946 and 202120N19946, National School Lunch Program, AL#10.555, Contract #’s: 202423N109946 and 202222N109946, U. S. Department of Education, Passed through Texas Education Agency: Special Education Grants to States, AL#84.027A, Contract #: H027A230008. Recommendation: Reemphasize the need for timely analysis and reconciliations of the balance sheet accounts. Planned corrective action: The School will perform timely analysis and reconciliation of the balance sheet accounts in accordance with the organization’s policies and procedures. Responsible officer: Kevin Byrne, Vice President of Finance. Estimated completion date: January 1, 2025.

Finding #2024-005 – Reporting – Significant Deficiency and Other Noncompliance. Applicable federal programs: All programs. Recommendation: Develop policies and procedures to identify and reflect all federal programs on the SEFA, reconcile the federal expenditures to the federal program revenue on a routine basis, and formalize the independent review process for the SEFA and grant billings. Planned corrective action: The Senior Director of Federal Programs is now reporting to the Vice President of Finance. She will work with the accounting team to identify and reflect all federal programs on the SEFA, including assuring the federal expenditures are reconciled to the federal program revenue on a routine basis, and she will perform an independent review process for the SEFA and grant billings. Responsible officer: Kevin Byrne, Vice President of Finance Estimated completion date: January 1, 2025.

Finding #2024-006 – Allowable Costs – Significant Deficiency. Applicable federal program: U. S. Department of Education, Passed through Texas Education Agency: Special Education Grants to States, AL#84.027A, Contract #: H027A230008. Recommendation: Provide additional training to employees on coding and the determination of allowable costs. Planned corrective action: The Senior Director of Federal Programs is now reporting to the Vice President of Finance. She will work with the accounting team to ensure only allowable costs are charged to the IDEA, Part B program. Responsible officer: Kevin Byrne, Vice President of Finance. Estimated completion date: January 1, 2025.

Finding #2023-002 – Significant Deficiency and Other Noncompliance. Recommendation: Reemphasize the need to adhere with policies and procedures to ensure retention of documentary evidence of teacher certifications. Planned corrective action: In November of 2023, Great Hearts America – Texas hired a Senior Director of Federal Programs. Prior to January 1, 2024, the Vice President of Finance will ensure, at a minimum monthly, that the finance department is meeting on a regular basis with Senior Director of Federal Programs to ensure compliance and documentation of federal programs such as Title I. Responsible officer: Kevin Byrne, Vice President of Finance Estimated completion date: January 1, 2024

Finding 2022-001 - Schedule of Expenditures of Federal Awards United States Department of Education Pass Through Entity: Texas Education Agency Federal Program: American Rescue Plan ? Elementary and Secondary School Emergency Relief (ARP ESSER) Assistance Listing Number: 84.425U Federal Award Number: S425U210042 Federal Award Year 2022 Repeat Comment: No Type of Finding: Material Weakness Condition: When reviewing the net assets released from restriction in the draft financial statements presented to the board, management determined and brought to the attention of the auditors the net assets restricted for pre-award costs for the ESSER federal program ($1,976,911) should have been released from restrictions during fiscal year ending June 30, 2022. The auditor, when tying the draft schedule of expenditures of federal awards to the updated schedules, determined the Organization had not included the pre-award federal expenditures related to the ESSER federal program. As a result, the initial testing of the ESSER major program did not include $1,976,991 in ESSER expenditures. When this was brought to management?s attention, the schedule of expenditures of federal awards was updated and the additional expenditures provided for testing. Cause: The additional $1,976,991 was related to ?pre-award? dollars awarded during fiscal year ended June 30, 2022, where allowable expenditures incurred in the previous year were permitted by the grant to be used for the ESSER funds awarded in the current year. Management was not aware of the requirement to include these amounts on the schedule of expenditures of federal awards. Recommendation: We recommend management of the Organization strengthen their internal controls to ensure all federal awards are included on the schedule of expenditures of federal awards. Corrective Action Plan: Prior to June 30, 2023, management will prepare an administrative procedure that requires the auditor to provide a draft financial and compliance report at least one (1) week prior to the meeting of the Board. In the procedure, management will require staff to reconcile the Schedule of Expenditures of Federal Awards to the Statement of Activities and other relevant accounting information to ensure the accuracy and completeness of the amounts disclosed. Person Responsible: Kevin Byrne, Vice President of Finance Anticipated Completion Date: June 30, 2023

Finding 2021-001?Procurement United States Department of Education Pass Through Entity: Texas Education Agency Federal Program: Charter School Program CFDA Number: 84.282 A Federal Award Number: U282A170018 Federal Award Year: 2020 Type of Finding: Material Weakness Condition: The Organization did not maintain documentation to support the history of procurement, as required by Uniform Guidance ?200.318. Cause: It appears that employees are making purchases in a very manual environment with no automated reviews or controls to ensure purchases are in compliance with the Organization?s policies. As such, the Organization appears to be relying solely on the employees to do the right thing. In our sample sections, employees did not maintain the adequate procurement documentation for purchases. As a corrective action from the Organization?s fiscal year 2020 single audit procurement finding reported, issued in December of 2020, in January of 2021 the Organization updated its policies and procedures governing procurement and provided training to applicable personnel. However, such policies and training were not completed until seven months into the current year and were not able to address procurement practices prior to the training or address the manual environment. Recommendations: We recommend the Organization investigate and consider implementing a formal procurement system. This would enable the Organization to automate the procurement process and workflow to strengthen the up-front review and approval of purchases and increase the likelihood of the Organization following proper policies and procedures. We also recommend the Organization continue with employee training of its policies and procedures and look to add further controls to help improve compliance. Corrective Action Plan: On January 27, 2021, Great Hearts provided a training session by Mr. Joe Hoffer from Schulman, Lopex, Hopper & Adelstein, LLP to key staff members. The training consisted of procurement/purchasing policy, Federal procurement and fiscal accountability and responsibility. The training was taped and is available on our Operations Share Point web site. Great Hearts has posted a Grant Accounting Manager to assist with the process and compliance of grant awards. In addition, Great Hearts Texas will investigate what is required to implement a formal procurement system and decide in early 2022 regarding implementation. In the interim we will continue to emphasize the importance of obtaining and retaining quotes. Person Responsible: Hector Santiago ? Sr Director of Finance (finalize policy revisions and implement changes Anticipated Completion Date: Grant Accounting Manager hiring - end of January 2022.

2020-001

Finding 2021-002?Procurement United States Department of Education Pass Through Entity: Texas Education Agency Federal Program: Charter School Program CFDA Number: 84.282 A Federal Award Number: U282A170018 Federal Award Year: 2020 Type of Finding: Material Weakness Condition: The Organization did not maintain documentation to support the history of procurement, as required by Uniform Guidance ?200.318. Cause: It appears that employees are making purchases in a very manual environment with no automated reviews or controls to ensure purchases are in compliance with the Organization?s policies. As such, the Organization appears to be relying solely on the employees to do the right thing. In our sample sections, employees did not maintain the adequate procurement documentation for purchases. As a corrective action from the Organization?s fiscal year 2020 single audit procurement finding reported, issued in December of 2020, in January of 2021 the Organization updated its policies and procedures governing procurement and provided training to applicable personnel. However, such policies and training were not completed until seven months into the current year and were not able to address procurement practices prior to the training or address the manual environment. Recommendations: We recommend the Organization investigate and consider implementing a formal procurement system. This would enable the Organization to automate the procurement process and workflow to strengthen the up-front review and approval of purchases and increase the likelihood of the Organization following proper policies and procedures. We also recommend the Organization continue with employee training of its policies and procedures and look to add further controls to help improve compliance. Corrective Action Plan: On January 27, 2021, Great Hearts provided a training session by Mr. Joe Hoffer from Schulman, Lopex, Hopper & Adelstein, LLP to key staff members. The training consisted of procurement/purchasing policy, Federal procurement and fiscal accountability and responsibility. The training was taped and is available on our Operations Share Point web site. Great Hearts has posted a Grant Accounting Manager to assist with the process and compliance of grant awards. In addition, Great Hearts Texas will investigate what is required to implement a formal procurement system and decide in early 2022 regarding implementation. In the interim we will continue to emphasize the importance of obtaining and retaining quotes. Person Responsible: Hector Santiago ? Sr Director of Finance (finalize policy revisions and implement changes Anticipated Completion Date: Grant Accounting Manager hiring - end of January 2022.

2020-002

Finding 2020-001?Procurement (Internal Control) United States Department of Education Pass Through Entity: Texas Education Agency Federal Program: Charter School Program CFDA Number: 84.282 A Federal Award Number: U282A170018 Federal Award Year: 2020 Type of Finding: Significant Deficiency Condition: The Organization did not maintain documentation of the required number of quotes to support the history of procurement as required by Uniform Guidance ?200.318 for 6 transactions selected for testing. Recommendations: We recommend the Organization provide training to anyone involved with purchases utilizing federal awards to ensure adequate supporting documentation is obtained and maintained in accordance with Uniform Guidance and the Organization?s procurement policy. Corrective Action Plan: On October 21, 2020 we contacted our legal counsel to provide some guidance after the initial findings from RSM on non-compliance and internal control deficiencies in our procurement process. We are taking the following actions to remediate the issue: ? Have purchasing policy under review ? Informed all stakeholders of the need for three quotes for any purchases made from grant funds and instructed the proper way to use ?Buyboard.? ? In process of scheduling training with stakeholders by early January in the following areas: o Purchasing law o Federal procurement standards o Fiscal accountability and responsibility Person Responsible: Hector Santiago ? Sr Director of Finance (finalize policy revisions and implement changes) and Rachel Rogoff - Senior Project Manager (schedule and manage training of key stakeholders) are the lead team responsible to implement corrective action. Anticipated Completion Date: Training and policy revisions ? end of January 2021.

Finding 2020-002?Procurement (Compliance) United States Department of Education Pass Through Entity: Texas Education Agency Federal Program: Charter School Program CFDA Number: 84.282 A Federal Award Number: U282A170018 Federal Award Year: 2020 Type of Finding: Noncompliance Condition: The Organization did not maintain documentation of the required number of quotes to support the history of procurement as required by Uniform Guidance ?200.318 for 6 transactions selected for testing. Recommendations: We recommend the Organization provide training to anyone involved with purchases utilizing federal awards to ensure adequate supporting documentation is obtained and maintained in accordance with Uniform Guidance and the Organization?s procurement policy. Corrective Action Plan: On October 21, 2020 we contacted our legal counsel to provide some guidance after the initial findings from RSM on non-compliance and internal control deficiencies in our procurement process. We are taking the following actions to remediate the issue: ? Have purchasing policy under review ? Informed all stakeholders of the need for three quotes for any purchases made from grant funds and instructed the proper way to use ?Buyboard.? ? In process of scheduling training with stakeholders by early January in the following areas: o Purchasing law o Federal procurement standards o Fiscal accountability and responsibility Person Responsible: Hector Santiago ? Sr Director of Finance (finalize policy revisions and implement changes) and Rachel Rogoff - Senior Project Manager (schedule and manage training of key stakeholders) are the lead team responsible to implement corrective action. Anticipated Completion Date: Training and policy revisions ? end of January 2021.