Report: RISKING PUBLIC MONEY: CALIFORNIA CHARTER SCHOOL FRAUD - 3 stories, the report, the CCSA response + smf’s 2¢

LOS ANGELES TIMES

Report calling for more oversight to prevent charter school fraud draws rebuke

03/25/15

California lawmakers must strengthen financial oversight of charter schools to stem cases of fraud and mismanagement that have already cost taxpayers $81 million, according to a new report from several advocacy groups.

The report by the Center for Popular Democracy, the Alliance of Californians for Community Empowerment Institute and Public Advocates Inc., said state and local leaders rely too heavily on self-reporting through whistleblowers or audits paid for by charter school operators. Local leaders also lack the staff and training to monitor charter schools and identify fraud, according to the report.

http://www.latimes.com/local/lanow/la-me-ln-report-charter-school-fraud-20150324-post.html

LA SCHOOL REPORT

Report finds lack of proper fraud oversight at charters in state

MARCH 24,, 2015

California is extremely vulnerable to fraud at charter schools and as a result can expect to lose $100 million in wasted tax money in 2015, a new report released today finds.

The report from the Center for Popular Democracy, Alliance of Californians for Community Empowerment and Public Advocates found that there are “structural oversight weaknesses” in the state’s charter system.

http://laschoolreport.com/

WASHINGTON POST

California charter schools vulnerable to fraud, report says

Journalists, auditors and other investigators have turned up more than $80 million in charter school fraud in California to date, according to a new report by a coalition of left-leaning organizations, which argues that lax oversight of the state’s charter schools is leaving taxpayer dollars vulnerable to abuse.

http://www.washingtonpost.com/news/local/wp/2015/03/24/california-charter-schools-vulnerable-to-fraud-report-says/

 

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from the center for popular democracy | http://bit.ly/1BrpJ3J

Risking Public Money: California Charter School Fraud

Mar 19, 2015

Executive Summary

In 1992, California became the second state in the nation to pass legislation authorizing the creation of charter schools. Since the law’s passage, which originally authorized 100 charter schools, the number of charter schools in California has grown rapidly. Today, California is home to the largest number of charter schools in the country, with over 1100 schools providing instruction to over half a million students. In the 2013-14 school year, California charter schools received more than $3 billion in public funding.

Download the full report here.

Despite the tremendous investment of public dollars and the size of its charter school population, California has failed to implement a system that proactively monitors charters for fraud, waste and mismanagement. While charter schools are subject to significant reporting requirements and monitoring by oversight bodies, including chartering entities, county superintendents and the State Controller, no oversight body regularly conducts audits.

In 2006, California took a step in the right direction by amending the Charter Schools Act to permit county superintendents who suspect fraud or mismanagement at charter schools to request an “extraordinary audit” from the Financial Crisis and Management Assistance Team (FCMAT), a state agency charged with helping local educational agencies fulfill their financial and management responsibilities. Although FCMAT only conducts an audit when requested to do so, its findings reveal internal control deficiencies and various forms of mismanagement ranging in severity and form—from inappropriate self-dealing by charter school staff to the spending of thousands of public dollars without documentation. Even after 2006, charter schools in California continue to operate year in and year out without regulator-level audits that are designed specifically to determine whether the public dollars funding these privately managed schools are being spent properly. This lack of appropriate government audits is a problem, especially given the findings of FCMAT’s audits.

The number of instances of serious fraud uncovered by whistleblowers and the FCMAT suggests that the fraud problem is likely not isolated to the charter operators that have been caught. In fact, California’s charter oversight system’s deficiencies suggest that the $81,400,000 in fraud, waste and abuse by charter operators that has been uncovered to date is likely just the tip of the iceberg. Based on conservative estimates, California stands to lose more than $100 million to charter school fraud in 2015. The vast majority of this fraud perpetrated by charter officials will go undetected because California lacks the oversight necessary to identify the fraud. In this report we describe three fundamental flaws with California’s oversight of charter schools:

• Oversight depends heavily on self-reporting by charter schools or by whistleblowers. California’s oversight agencies rely almost entirely on audits paid for by charter operators and complaints from whistleblowers. Both methods are important to uncover fraud; however,neither is a systematic approach to fraud detection, nor are they effective in fraud prevention.
• General auditing techniques alone do not uncover fraud. The audits commissioned by the charter schools use general auditing techniques rather than techniques specifically designed to detect and uncover fraud. The current processes may expose inaccuracies or inefficiencies; however, without audits targeted at uncovering financial fraud, state and local agencies will rarely be able to detect fraud without a whistleblower.
• Oversight bodies lack adequate staffing to detect and eliminate fraud. In California, the vast majority of charter schools are authorized by local school districts that lack adequate staffing to monitor charter schools and ferret out fraud. Staff members who are responsible for oversight often juggle competing obligations that make it difficult to focus on oversight and identify signs of potential fraud and abuse.

To address these serious deficiencies in California’s system, we recommend the following reforms:

Mandate Audits Designed to Detect and Prevent Fraud

• Charter schools should be required to institute an internal fraud risk management program, including an annual fraud risk assessment.
• Charter schools should be required to commission an annual audit of internal controls over financial reporting that is integrated with the audit of financial statements charter schools currently commission. These integrated audits should require auditors to provide an opinion on the quality of internal controls and financial statements.
• Oversight agencies, such as the State Comptroller’s Office and Fiscal Crisis and Management Assistance Team (FCMAT), a state agency, should conduct audits on charter schools once every three years.
• Auditing teams should include members certified in Financial Forensics trained to detect fraud.

Increase Transparency & Accountability

• Oversight agencies should create a system to categorize and rank charter audits by level of fraud risk they pose to facilitate public engagement.
• Oversight agencies should post the findings of their annual internal assessments of fraud risk on their websites.
• Oversight agencies should determine what steps charter school nonprofit governing boards and executives have taken to guard against fraud over the past 10 years and issue a report to the public detailing theirs findings and recommendations.
• Charter school authorizers should take fraud risk assessments into account when evaluating whether to renew a school’s charter.
• Until the state implements the oversight mechanisms described above, authorizers should only approve new charters that commit to the fraud controls recommended above.

Given the rapid and continuing expansion of the charter school industry and the tremendous investment of public dollars, California must act now to reform its oversight system. Without reform, California stands to lose millions of dollars as a result of charter school fraud, waste, and mismanagement.

Download the full report here.

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from the California Charter School Association |  http://bit.ly/1BMObfG

Response to Report "Risking Public Money: California Charter School Fraud"

March 24, 2015  ::  This report does nothing to point to an issue in CA's fraud prevention, detection and resolution. It refers to examples that are not only dated but that were resolved in a way to prevent further financial issues from arising, since the schools closed or made management systemic changes. These are in fact all examples (see list below of examples from report and their current status) of the charter school system working how it's supposed to. In a charter sector the size of California's surfacing so little, and making estimates based on global assumptions calls into the question the credibility of the report and the organizations that published it. This is not the first time that CCSA has had to respond to a report by this organization that was simply inaccurate.

While we don't presume to understand the motives behind this report we do know that California is a state where the charter school sector, authorizers and legislators have come together to put into place real solutions. It is unfortunate that we continue to have similar distractions for a sector that the report itself suggests is demonstrating to be responsible users of precious public funds in addition to serving a half a million public school students well.

• We agree that inappropriate use of public dollars intended for public school students should be prevented.
• We believe that the system that CA has very carefully and thoughtfully implemented does just that.
• For a report of this nature to have found so few and very old examples in a charter school sector the size of CA's sector suggests that CA's fraud detection and resolution system is working.
• This report is not only based on old examples many of which resulted in real solutions and indeed changes in CA's laws, but it also does not accurately report on how financial reports and audits are conducted, reviewed and reported in the state, including the extensive oversight already in place by multiple agencies for charter schools.
  • For example, the report cites a 2002 BSA report which is over 13 years old and does not acknowledge that the next year the law changed creating specific greater authorizer responsibilities. In other words, the issue identified by that report was resolved.
  • The current regulatory funding determination process for nonclassroom-based charter schools was specifically enacted to address these issues identified in the CATO and Sierra Summit examples. In other words, the issue identified by those examples was resolved.
  • Some of the reports cited and suggested to be "audits" were not in fact audits (e.g., the LAUSD OIG conducted a "financial review" of Magnolia as part of the LAUSD's oversight function and the report references findings from a state audit that has not yet been issued).
• To assume that there is a greater risk at charter schools than school districts, particularly in light of all the real time oversight on financial reports, is simply unfounded.
• And the report's estimate of charter fraud by simply applying a 5% assumption of fraud based on some "global assumptions" without any specific analysis, simply calls the whole report into question. Frankly a similar percentage could easily be applied to school districts and indeed the organizations that released the report and have the same level of credibility.
• The fraud-prevention mechanisms work exactly the same for traditional public schools as for charters - neither the safeguards nor the outcomes are unique to charters - why charters are being singled out here belies a different motivation than more accurately representing the challenges of fraud prevention in the public school SECTOR.
• One can only conclude that the absence of accurate information, more recent examples, the inclusion of how the system actually works, and the involvement of charters and organizations such as CCSA working on charter related issues in the report preparation and publication was intended for a purpose other than actually solving anything.

Details on Financial Reporting for California Charter Schools:

• The report not only provides no evidence of a systemic issue, it does not do justice to the system already in place and that is actually more rigorous for charter schools than for other LEAs in the state (e.g., school districts).
  • For example, charter schools already provide real time financials (e.g., quarterly financial reporting to authorizers and county offices of education, independently conducted audits, etc.)
  • Furthermore, financial information is already required of charter public schools and must be made available under federal tax filings (Form 990) annual reports, which are available online, and can be obtained directly from any nonprofit public benefit corporation, and in annual independent financial audits required by state law.
  • Every charter school in California is also required to have an annual independent audit, which must be submitted to the charter school authorizer in addition to annual budgets and financial statements. This requirement, while clear in California law, is not always required in other states.
• The system in place in CA for charter audits for example is essentially the same process used for all LEA's (e.g., school districts). These audits are completed per the audit guide by independent auditors. There is no state agency auditing LEA's and to assume that there is a greater risk at charter schools than school districts, particularly in light of all the real time oversight on financial reports, is simply unfounded.
• The majority of the examples cited in this report are old, from schools that have since closed, and reflect old laws that were updated to provide even greater protection.

Schools Listed as Examples in the Report and their Current Status:

• California Charter Academy- Closed in 2004; legal action taken
• Ivy Academia Charter School - school open, Board restructured, legal action taken
• LA Academy - report cites "fake charter schools invented" and legal action taken
• Center for Excellence in Education - Closed in 2004
• American Indian Public Charter II - school open after school and authorizer resolved issues (CCSA took a public position that schools should close)
• Cato School of Reason - Revoked 1997
• Magnolia Charter Schools - all issues addressed by school and authorizer, renewed recently by LAUSD, following OIG investigation and referral to state auditor (results expected in April 2015).
• Wisdom Academy of Young Scientists - Revoked 2014
• El Portal Leadership- Academia Calmecac - Closed in 2009
• Westwood Charter School - school is still open, restructured
• Oak Hills Academy - Revoked in 2007
• Albor Charter School - Closed in 2006
• Sierra Summit Academy - Revoked 2001
• Challenge Charter School - Closed 2009
• Children's Conversation Academy* - Closed 2005

*Please note this is a misprint in the report, we believe the school they are referring to is the Children's Conservation Academy.

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“These are in fact all examples of the charter school system working how it's supposed to.”   OK: First the grammar police: “…working as it’s supposed to!”

These are fifteen examples of wrongdoing that were caught, charters revoked, suspended or governing boards restructured and/or legal action taken. There are examples here where folks went to jail …and that’s the system working how  as it’s supposed to?  Really??  The exception is Magnolia – where a deal was reached behind closed doors: So much for the increased accountability-in-exchange-for-flexibility promised under the charter law. 

Someone posed this challenge to me  today – and let me put it out there:  Name one instance where a California Charter School has served as an incubator for reform and shared its best practice/lessons learned to benefit the traditional public school community.