5 Common Audit Findings for Charter Schools

For charter school leaders, audit season can be stressful. But the truth is, many audit findings are preventable with the right systems and awareness. After working with dozens of charter schools, we've identified the most common issues auditors flag, and more importantly, how you can avoid them.

1. Inadequate Documentation for Grant Expenditures

What auditors find: Missing receipts, incomplete timesheets, or lack of detailed justification for how grant funds were spent. This is especially common with federal grants like Title I, IDEA, and E-Rate.

Why it happens: Schools often focus on getting the work done rather than documenting it. Staff may not fully understand what level of documentation is required, or they're using systems that don't capture the necessary detail.

How to avoid it: Create a documentation checklist for every grant expense before it's paid. Train staff on what constitutes adequate documentation. Use accounting software that allows you to attach source documents directly to transactions. For personnel costs, ensure timesheets clearly show which grant funded each activity and that they're signed and dated.

2. Weak Internal Controls Over Cash Handling

What auditors find: The same person who collects cash also records it in the system, or there's no regular reconciliation of cash receipts. Petty cash funds that aren't properly documented or reconciled.

Why it happens: Small schools often operate with limited staff, making separation of duties difficult. There's a tendency to trust staff and skip formal controls.

How to avoid it: Implement segregation of duties wherever possible. If you can't fully separate roles, add compensating controls like surprise cash counts, executive director review of all transactions, or requiring dual signatures on checks above a certain amount. Document your control procedures and train all staff involved in financial processes.

3. Misclassification of Expenses

What auditors find: Expenses coded to the wrong function (instruction vs. administration), or costs split incorrectly between restricted and unrestricted funds. Administrative expenses recorded as instructional costs, inflating the percentage spent on direct student services.

Why it happens: Staff don't fully understand the functional expense categories required for charter schools, or they're using convenience coding rather than proper allocation. Accounting systems may not have the right chart of accounts structure.

How to avoid it: Develop a clear chart of accounts that aligns with your state's requirements. Create a coding guide with examples for common expenses. Review your functional expense allocation at least quarterly, not just at year-end. When in doubt, consult with your accounting firm before finalizing coding decisions.

4. Incomplete or Inaccurate Board Meeting Minutes

What auditors find: Missing documentation of key financial decisions, lack of formal approval for contracts or major expenditures, or minutes that don't clearly show board members reviewed financial reports.

Why it happens: Board administrators may not realize what level of detail is needed in minutes, or they focus on operational discussions rather than governance actions. Sometimes approvals happen via email rather than formal board votes.

How to avoid it: Use a standard template for board meeting minutes that includes sections for financial reports, contract approvals, and policy decisions. Ensure all formal votes are recorded with the actual motion and vote count. Have board members approve minutes at the next meeting. Keep a separate tracking document for contracts and their approval dates.

5. Late or Incorrect Payroll Tax Filings

What auditors find: 941 forms filed late, mismatches between payroll records and tax filings, or penalties assessed for late payment of payroll taxes.

Why it happens: Schools handle payroll in-house without proper expertise, or they miss filing deadlines during busy periods. Sometimes there's confusion about filing requirements when staff work in multiple states or for multiple entities.

How to avoid it: Use a reputable payroll service that handles all tax filings automatically. If you process payroll internally, create a calendar of all filing deadlines with reminders set two weeks in advance. Reconcile payroll tax accounts monthly, not just annually. When you hire your first employee in a new state, consult with a payroll specialist about registration and filing requirements.