Delaware charters: More trouble coming?

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Delaware’s General Assembly considers proposed legislation aimed at fixing the charter auditing system.

In the past year alone, Delaware’s State Auditor has accused five charter schools of mismanaging taxpayer money…and there may be more to come.

The auditor’s office is investigating “quite a number” of charter schools, Chief Administrative Auditor Kathleen Davies told NewsWorks/WHYY in early February.

Among them is the recently closed Delaware Met High School in Wilmington. Davies declined to name any others, but said some schools under investigation have been named in past auditor reports.

Those past reports have arrived in a flurry over the last 12 months. They describe a range of misdeeds, including poor documentation of expenditures, inadequate internal controls, and outright theft. The three highest-profile cases each revolved around high-ranking administrators who spent thousands in taxpayer money on personal items.

“It’s not that charter schools are bad,” Davies said. “It’s that bad people are coming to charter schools in Delaware and getting away with it.”

The uptick in charter school inquiries has surprised the auditor’s office, Davies added.

“There’s more of it than we ever expected,” she said.

Kendall Massett, executive director of the Delaware Charter Schools Network, said she’s aware the state auditor is “looking at some of our charter schools as well as district schools” regarding September unit counts. Schools submit enrollment data every September and state funding is allotted based on that data.

Meanwhile, Delaware’s General Assembly is mulling two bills that would tweak the charter auditing process in hopes of catching future wrongdoers earlier–before they blow through tens of thousands in taxpayer money.

The first, sponsored by Representative Kim Williams, D-Newport, would put the state auditor’s office in charge of picking the outside firms who conduct the annual financial audits charter schools must receive. The second, sponsored by Senator Dave Sokola, D-Newark, would change the criteria those outside firms must meet, but allow the charters to continue picking their own firm.

“We do know the current system we’re using for charter schools is not working,” Williams said. “We can see over the last couple of years that it’s not working.”

Below we break down both proposed bills and tackle the big question: Would either help prevent future charter school misdeeds?

Proposal #1: A new sheriff in town

Williams’ proposal–otherwise known as HB 186–makes just one major change.

Right now, each charter school gets to pick the outside firm that conducts its annual financial audit. Williams’ bill would ban charters from picking their own firms. Instead, the firms would be picked by the state auditor’s office.

Charters would still have to pay for the audits, but they’d have to pay whatever rate the assigned firm charges. They wouldn’t be able to control the cost or the process of picking the auditor.

Why might this work?

Advocates for this proposal argue a charter school shouldn’t be in charge of picking the firm that polices its finances.

If a charter picks its auditing firm, they argue, isn’t that firm beholden to the charter? Will they really want to dig deep and uncover wrongdoing if the discovery could compromise their relationship with the charter–or worse, result in the charter being shuttered?

But if the outside firms worked for the state auditor, they’d be motivated to dredge up any financial improprieties. Failure to do so could cost them future business with the state auditor.

I asked Kathleen Davies with the state auditor’s office whether having this system in place would have made a difference in any of the recent cases where charter leaders misused taxpayer money. She said it would.

She said the firms selected by the charters didn’t do a thorough enough job. Because of those firms’ failings, fraud that should have been caught quickly lasted years.

She isn’t saying the outside firms should necessarily have caught the fraud itself. A standard financial audit isn’t designed to track every purchase a school makes and check if that purchase was legitimate. But Davies said the auditors should have noticed that many of the schools lacked basic internal controls. Those observations should have been noted in their reports, but, in some cases, weren’t.

The state auditor’s office believes it would pick higher-quality accounting firms and that those firms would have more direct reporting relationship with the state auditor. That way, all involved could detect malpractice before it metastasizes.

Davis also intoned that her office would be unlikely to pick the auditing firms used by the troubled charters, and would be more likely to go with pricier, higher-quality firms.

“I’m not looking for cheapest,” Davies said. “You get what you pay for.”

A bad case of deja vu?

Williams’ bill rests on one premise: The state auditor will pick better, more-qualified firms than the ones charter schools are picking right now.

But here’s the catch: Many of the firms currently doing charter school audits in Delaware were selected by the state auditor’s office. The firms that the state auditor’s office now accuses of being asleep at the wheel are the same exact same firms the state auditor’s office put behind the wheel in the first place.

Here’s the back-story.

When Delaware charters first emerged in the late 1990s, the state auditor’s office conducted each school’s annual financial audit. The system held until eventually there were too many charters for the state auditor’s office to handle (some say this shift started in the late 1990s, others at the state auditor’s office place it in the mid-2000s).

In 2007, according to e-mails obtained by NewsWorks/WHYY, the state auditor’s office polled the state’s 17 charter schools and asked: Do you want us to find an audit firm for you or would you like to find one on your own? Eleven of the schools chose to find one on their own. Six schools, however, asked the state auditor’s office to perform a search on their behalf.

Essentially, the state auditor’s office was filling the exact same role it would assume if Williams’ bill were to pass.

The state auditor picked firms for Family Foundations Academy, Kuumba Academy, Providence Creek Academy, Odyssey Charter School, Pencader Charter High School, and Sussex Academy of Arts and Science. If recent history is any indication, they did a remarkably bad job.

Pencader closed in 2013 amid acute financial woes. The first three schools listed–Family Foundations, Kuumba, and Providence Creek–were all named in state auditor’s office investigations over the past year. And in each case, all three were using the same outside firms originally assigned to them by the state auditor’s office.

In other words, three of the five charter schools found to be out of compliance were contracting with outside firms handpicked by the state auditor.

Family Foundations and Providence Creek Academy were both assigned a firm called SB & Company. It was later discovered that administrators at each school used tens of thousands of dollars in taxpayer money on personal items.

The state auditor’s office counters this charge by pointing out that government auditing standards require contractors to review a firm’s work every three years. It’s unfair, officials said, to hold the state auditor accountable for contracts awarded almost a decade ago.

“It was not [the Auditor of Accounts’] judgement to continue the contracts with those CPA firms year after year,” wrote Davis in an e-mail. “It was the Charter Schools that made the call.  We were not involved in their decision process.”

Still, it’s worth noting that the State Auditor who awarded those original charter audit contracts, Thomas Wagner Jr., is still State Auditor. In essence, the state auditor’s office is saying it can pick better, more qualified firms–even though less than a decade ago it picked the very firms that were unable to detect wrongdoing at several Delaware charters.

Proposal #2: Raise the bar

The second bill, proposed by Senator Dave Sokola, makes five major changes to the charter auditing process.

1.) It requires all auditors hired by charters to be peer-reviewed by the American Institute of Certified Public Accountants (AICPA) within the last three years and for the auditor to have received an “unqualified opinion” during its most recent review.

2.) It requires all auditors to hold a certified public accounting permit to practice in Delaware.

3.) It requires the audit itself to “meet the requirements and standards of generally-accepted government auditing standards.”

4.) It allows the state auditor’s office or the charter school to make specific requests about the nature of the audit in advance. For example, the state auditor could require the auditor to take a deeper look at a charter school’s credit card transactions if it suspects some wrongdoing.

5.) It requires charter schools to put their annual audits up for public bid every five years.

Why might this work?

Backers of Sokola’s bill argue the new criteria would ensure better auditors, and thus better audits. They say it’s better to change the screening process for auditors than to simply change who picks the firms.

Sokola’s measure, known as Senate Bill 171, also gives the state auditor’s office a more active role in steering the direction of each audit, which could help that office catch problems before they mushroom.

Most important to the charter community, the measure maintains charter school autonomy. Many in the charter camp are wary of added government oversight and red tape. They believe it contradicts the very purpose of charter schools.

Charters “were created to be independent,” Head of School at Providence Creek Academy Chuck Taylor said, one of the schools where the state auditor’s office investigated wrongdoing. “You’re going against the spirit of the law.”

Sokola’s bill could help maintain charter independence while raising the standard for future charter audits.

But would it make a difference?

It certainly sounds impressive to require auditors be peer-reviewed and certified to practice in Delaware. But would those two filters actually be meaningful? Or to ask it another way: Would either of those requirements have disqualified firms that are already contracting with Delaware charters?

A NewsWorks/WHYY review of charter school audits found just five firms currently working with Delaware charters, they are: SB & Company; Maillie, LLP; Barbacane, Thornton, and Company; Gunnip and Company; and Haggerty and Haggerty.

Of those five, four have passed the AICPA’s peer-review process within the last three years. One of those firms, Haggerty and Haggerty, is listed in the AICPA’s master file and was peer-reviewed in 2014. The AICPA website does not say, however, whether the firm passed. Multiple attempts to contact the firm for this article were unsuccessful.

As for the other filter, NewsWorks/WHYY found partners at each of the five firms hold a valid certified public accountant permit to practice license in Delaware. All would be permitted to conduct Delaware charter school audits under the new measure.

Long story short, it’s unlikely the criteria embedded in Senate Bill 171 would prevent any of the firms currently working with Delaware charters from continuing their work.

So, what would make a difference?

Chuck Taylor of Providence Creek Academy doesn’t believe legislative changes to the charter auditing process will guard against future fraud.

“People steal, and you can’t catch every one of them,” Taylor said.

If government has any role to play, it’s on the enforcement side, many say. They believe past charter administrators accused of fraud should stand criminal trial.

“There’s bad people no matter what happens,” Taylor said. “That’s why we have prisons. That’s why we have a justice system.

NewsWorks/WHYY reached out to the Delaware Attorney General’s office to ask if there are plans to charge any of the charter leaders named in recent state auditor’s investigations. The response over the last few months has been consistent: We’re looking into it.

“The Office of Civil Rights and Public Trust in our department is investigating and working with other agencies on the issues identified in state audits of the Academy of Dover, Family Foundations Academy, and Providence Creek Academy in order to determine if there should be additional action,” wrote Department of Justice spokesman Carl Kanefsky in an e-mail.

Others say meaningful change must come at the school level, charter boards need to be more vigilant about how their administrators spend taxpayer money. Though it is difficult to enforce legislatively, an engaged governing board, some say, may be the best safeguard against charter fraud.

“You can’t legislate common sense and you can’t legislate honesty,” Taylor said. “You just can’t do that.”

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