A new state audit slams a former child care provider for setting up a front company to avoid sanctions.

The report (PDF) by State Auditor Beth Wood says Where Dreams Come True, which at one time operated three day care facilities in Transylvania and Henderson counties, received $68,239 from a subsidized child care program for new enrollments after the front company was set up. The original owner would not have been entitled to the subsidies.

The provider was cited for 85 violations between June 2007 and April 2011, the report says. The violations were related to various matters, ranging from recordkeeping and direct child care issues.

Where Dreams Come True was cited in November 2010 for fraudulently misrepresenting attendance reports, resulting in a $5,280 overpayment of subsidy funds. The provider received a one-year sanction for violation.

Any subsequent sanction would have disqualified the facility permanently from participating in the subsidy program, the report says.

The former owner closed one of the facilities and attempted to transfer ownership of them to her husband. When she learned that the transaction would not exempt the business from further sanctions, in May 2011 she transferred ownership to an employee who had been teaching at one of the centers for 10 years. The original owner planned to continue operating the centers and she raised the teacher’s hourly pay from $10.66 to $13.50 for agreeing to the arrangement, the audit says.

When audit investigators talked to the teacher who became the operator of the front company, she told them, “I don’t know what to do. I really have been used.”

After speaking with subsidy program officials about the situation, the teacher turned in her child care license and closed the two facilities.

The audit also found that the original owner and her husband provided other false information to state officials, that the subsidy program policy is inconsistent with state administrative code regulations, and that local officials did not seek repayment of about $7,400 in subsidies improperly paid to the business for child care.

The auditor’s report recommended that the state’s Subsidized Child Care Program consider seeking additional information about change of ownership requests, especially for providers facing sanctions. It also recommended that officials overseeing food program management cite the former owner, her husband, and the new owner for violating federal regulations.

Other recommendations include requiring local officials to take legal action to recover overpaid subsidy funds from the former owner, and asking the Department of Health and Human Services revise policies relating to facilities that intentionally misrepresent their ownership.

In a response to the audit, DHHS Secretary Aldona Wos said the department would make policy and rule revisions related to ownership changes. She said policies relating to consistency with state rules already have been changed. In addition, Wos reported that local officials in Transylvania County have recouped $7,433.70 from the provider.

Findings in the audit have been reported to the Transylvania County district attorney, the State Bureau of Investigation, and the Federal Bureau of Investigation.

Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.