Key Takeaways
- The FY25 audit season reinforced that technical accounting and reporting areas, especially going concern, lease accounting, functional expense allocations and SEFA reporting continue to be common pressure points for charter schools.
- Late identification of issues often results in audit delays, expanded testing and avoidable findings.
- In addition to technical accounting matters, recurring operational and compliance issues, including underenrollment, cybersecurity gaps, escrow noncompliance and documentation weaknesses, continued to affect audit outcomes.
Charter schools face tight scrutiny across almost all levels, including compliance with their charter agreement, federal grants compliance, financial and staffing challenges, structural changes and complicated accounting issues. The fiscal year 2025 audit season highlighted a number of recurring issues that affected audit timing, support and compliance across the charter school sector.
Accounting and Reporting
Going Concern
Going concern is the assumption that an entity will continue operating for the foreseeable future and be able to meet its obligations as they become due. Management is required to assess going concern each reporting period with a look-forward period of one year from the financial statement issuance date (or the date the financial statements are available to be issued). Disclosures are required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern, whether or not the substantial doubt is alleviated by management’s plans.
Common triggers of substantial doubt of a charter school’s ability to continue as a going concern noted during the fiscal year 2025 audit season include:
- Deficit/decrease in net assets
- Decrease in year-over-year revenue
- Low ending cash balance
- Current ratio of less than 1.0
- Negative cash flows from operating activities
Functional Expense Allocations and Reporting
Functional expense allocations can be a “pain point” for charter schools, as they rely on methodology and judgment. Common issues with charter school functional expense reporting included a number of positions (which should align to the related salary line) and accurate allocation of fundraising expenses.
Lease Accounting Under ASC 842
Recognition of new leases and lease modifications was a common area that caused delays during the audits, including proper lease classification (finance vs. operating), discount rate, inclusion of reasonably certain renewals, rent abatements, nonlease components, contingencies and lease incentives.
Schedule of Expenditures of Federal Awards (SEFA)
Common SEFA issues noted during the fiscal 2025 audits include:
- Inaccurate reporting of grant title, Assistance Listing Number, pass-through entities and pass-through identifying numbers.
- Combining federal awards for charter schools that operate more than one charter.
- SEFA expenditures not reconciled to the general ledger. It’s best practice to have a separate general ledger account for each federal award program.
Compliance and Operations
Cybersecurity
Common cybersecurity findings with charter schools include:
- No defined and documented IT disaster recovery/business continuity plan and/or policy
- No cybersecurity awareness program
- No formal process for approving, testing and documenting changes to IT resources
- No control implemented to force workstations to lock after a specified period of activity
Student Underenrollment
Many charter schools have faced underenrollment since the COVID-19 pandemic, with the trend continuing in the fiscal year 2025 audit season. In addition to charter compliance considerations, underenrollment can also pressure liquidity forecasts and going concern conclusions.
When charter schools are underenrolled, auditors generally inquire if the authorizer is made aware of the underenrollment and if there are plans to revise the approved enrollment to meet current or expected enrollment.
Escrow Noncompliance
Charter schools are required to maintain a minimum balance in their escrow account as described in their charter agreement. During the fiscal year 2025 audit season, it was noted that some balances in escrow fell below the required minimum and were not replenished to maintain compliance with the charter. Auditors will generally report a finding for noncompliance if the escrow account was not replenished to the required level per the charter agreement.
Other Common Issues in Charter School Audits
Other common issues noted during the fiscal year 2025 audit season include proper maintenance of student and employee files, support and approvals for credit/debit card transactions and general ledger maintenance.
What This Means for Charter Schools
Reviewing these areas in advance of the audit is important for efficient and effective operations, reliable financial reporting and meeting the charter school’s compliance requirements. In addition, ironing out issues in these areas will help to mitigate any potential findings to be communicated to the school and its audit/finance committee.
In our previous article, Charter School Audit Season: Planning for Fiscal Year 2026, we highlighted key areas charter schools should address now to prepare for a smooth and efficient fiscal year 2026 audit season.
Contact Us
The PKF O’Connor Davies Charter School practice has extensive experience in the charter school industry helping management and boards strengthen financial governance and audit readiness. If you have any questions, please contact your PKF O’Connor Davies client service team or:
Gus Saliba, CPA
Partner and Charter School Practice Leader
gsaliba@pkfod.com | 914.341.7022
Daniel Smolan, CPA
Director
dsmolan@pkfod.com | 646.449.6392