Columbus -

Columbus —

A federal audit is calling into question more than $5 million spent by the Council on Rural Services Programs Inc., which provides Head Start services in nine counties in the region.

Federal auditors said the Council on Rural Services should pay back $65,750 spent on department store gift cards issued to employees as holiday gifts as well as $944,654 in “less than arms length” lease payments.

Auditors also said the agency should either refund $4.29 million in inadequately supported executive and administrative compensation or work with the federal Office of Head Start to determine what costs were permitted.

Janet Julian, chairwoman of the Council on Rural Services board, said the agency disputes the auditors’ findings and is appealing it. “We have been through many audits and never had a problem,” she said.

She added, “We recognized well ahead of the OIG audit that more stringent financial reporting was being required of Head Start, and the organization was working to put improved financial controls in place prior to the audit. We are confident that our current system meets all requirements. As a result of the OIG Audit, the organization is working to implement process improvements. The administration and Board do not agree with the majority of the findings. We look forward to working through the process toward a positive outcome.”

Head Start is a $7 billion-a-year federally funded pre-school program for low-income children. The federal government distributes the money to local agencies to provide the services. The Council on Rural Services is a non-profit founded 39 years ago and provides Head Start services in counties including Greene, Darke, Champaign and Miami.

The U.S. Department of Health and Human Services audited the Council’s Head Start program, looking at how the non-profit spent $6.7 million between Jan. 1, 2009, and Dec. 31, 2011, on administrative payroll, lease and rental payments and miscellaneous administrative costs.

Shirley Hathaway, executive director of the Council on Rural Services, could not be reached for comment. She is scheduled to retire today after more than 35 years with the agency, said Julian.

The Council leased buildings in Piqua and Troy from A Learning Place Inc., which was formed in December 1998 by the Council’s executive director and a former board member. Auditors said the lease arrangement was “less than arms length,” because Hathaway concurrently served as director of both the Council and A Learning Place from 2001 through 2003; A Learning Place was heavily dependent on the Council for critical functions and revenue; and Hathaway had check writing and credit card privileges for both operations during the audit period. The Council also had guaranteed $1.7 million in loan debt for A Learning Place, and the Council used federal money to buy land that it later donated to ALP.

Auditors said the Council should pay back $944,654 in lease payments.

The Council also rented classroom space from ALP and used Head Start money to cover the rent even though the space was used for some non-Head Start activities. Auditors said the Council should pay back $59,489 in classroom rental costs.

The Council, which received funding from federal, state and local sources, failed to document how much staff time was spent on Head Start duties, auditors found. Head Start grant money accounted for 65 percent to 78 percent of the Council’s total revenue between 2009 and 2011.

“Using revenue percentages, we estimate that the grantee could have improperly received $1 million of Head Start funds for executive and administrative staff payroll costs that did not benefit the Head Start program,” the audit said.

The Council disagreed with the auditor findings, arguing that ALP and the Council separated business operations, and ALP did not rely on the Council for all of its revenue. The Council also objected to auditors findings on the classroom payments, gift cards and staff wages and benefits.

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