}

Sunday, July 20, 2014

I AIN'T AFRAID OF NO GHOST: Who Ya Gonna Call?

The Ghost of Prepaid Expenses Past
SPECTRAL STASH OF CASH CAUSES CORPOREAL CONSTERNATION!

"Do we sue Smart Schools or take it to court? What are our options?,” board chair Brad Habermehl said. “The $1.6 million has been haunting us for over a year now.” 
-July 18, 2014
Traverse City Record-Eagle
 
"There was never an advancement 
or more money provided 
to Smart Schools that they weren't entitled to, " Mark Noss said.
 -April 26, 2014
Traverse City Record-Eagle


While you contemplate that confusing comment made by the current president of the Grand Traverse Academy's board, head ghostbuster Brad Habermehl, it appears that the next move in L'Affaire Ingersoll is... more pondering.

As the Traverse City Record-Eagle reported on July 18, the Academy board is still trying to "find out more about the $1.6 million that’s owed to them by their federally indicted founder and head of their former management company." The board met last Friday to discuss, among other agenda topics, Steven Ingersoll's overpayment (to his Smart Schools Mangement, Inc.) of $2.38 million dollars and subsequent refusal to return the money to the Academy.

Board members voted to seek bids for legal counsel.

While the missing millions were classified in the Academy's 2013 fiscal audit report as a "prepaid expense", that creative accounting trick no longer applies in the 2014 fiscal year. As I discussed in a post titled, "You Can Roll A Baby In Flour, But That Doesn't Make It A Polar Bear", there's absolutely no remaining value for future accounting periods. 

When Steven Ingersoll tipped off the Academy board that he was about to be indicted by the feds, paving the way for Mark Noss to take over his operations, that money ceased being considered an asset (described in the audit report as a "non-spendable fund balance of $2,338,980") and became a liability.

However, it appears that the Academy board is reluctant to accept reality, and continues to flail around like a panicked swimmer frantically looking for a pool float.

Miss Fortune takes yet another look at the Academy's problem, starting with prepaid expenses and related party transactions.

PREPAID EXPENSES 101: AN ACCOUNTING TUTORIAL

Prepaid expenses are classified as assets that become expenses as they expire or get used up. At the end of each accounting period, adjusting entries are necessary to recognize the portion of prepaid expenses that have become actual expenses through use or the passage of time.

However, although the Michigan Revised School Code prohibits local school districts, including public school academies, from advancing monies to private entities, the Academy's contract with Ingersoll's Smart Schools Management, Inc. apparently included a clause that enabled the Board to continue that prohibited practice for years. (See grid below.)

And as I reported on this blog, the no-bid, multi-year, multi-million dollar contract awarded on March 19 to Mark Noss' Full Spectrum Management, LLC continues that practice, allowing the board to "advance funds" to Full Spectrum Management for "expenses associated with the Academy's operations."

And although Habermehl read a prepared statement into the July 18 Academy board meeting minutes wistfully recalling Ingersoll's purported "rebating" during the early years of Smart Schools' association with the Academy, the board more than made up for any "loss" on Ingersoll's part with a new management contract in 2009 that increased his fee by nearly 235 percent over the previous year.

 2013/2014 BUDGET: SO WHERE IS THAT $774,000 "REDUCTION"?


A proposed 2013/2014 budget, shown at left, dated June 7, 2013 (before the Academy's 2013 fiscal audit report revealed Ingeroll's overpayment and outlined the "repayment" plan) notes a projected expenditure of $1,319,040 for the line item "Executive Administration" or management fee.

The budget provides a baseline measurement to help determine expected "savings" provided by utilizing the plan outlined in the Academy's 2013 fiscal audit report.

As you can see at left, Ingersoll's
$2,338,980 overpayment was to be returned to the Academy in fee reductions over three years.

However, it appears from subsequent 2013/2014 budget updates posted on the Academy's website those promised "reductions" may not have occurred.


A 2013/2014 budget update, dated May 2, 2014 (after the Noss takeover of the Grand Traverse Academy) shows an increase in "Executive Administration", going from $1,319,040 to $1,410,617. The increase may be attributed to the roughly $100,000 paid to Noss's Full Spectrum Management, LLC during April.

However, based on the "plan" agreed to in the 2013 audit, I would have expected to see a baseline expenditure closer to $572,234, reflecting the $774,000 reduction in Ingersoll's management fee proposed in the audit. From these reports, it appears that Ingersoll may still have been "paid in full" during the 2013/2014 fiscal year ending June 30.

The budget reports raise even more questions: just how much money did Steve Ingersoll's Smart Schools Management, Inc. receive from the Academy in management fees through June 30, 2014 for this fiscal year?

And how long was the "overlap" between Smart Schools and Full Spectrum Management? Was Ingersoll being paid during the "hand-off" to Noss, and what service did Ingersoll provide during that time?

During a June 27 special board meeting, Academy board members asked Mark Noss to reconsider top employees who were also currently employed by Smart Schools. The board approved a resolution urging Noss to "reconsider any employees, especially those in management" with close ties to Smart Schools. 

The resolution singled out Kaye Mentley, the Academy's then-director, as a potential target of "appropriate action", while acknowledging (in a high-flying demonstration of corporate speak) certain "ambiguities" among the school and its former and current management company. 

Mentley, fired on July 2, got a 12 hour PR jump on flat-footed Noss by sending out her own email blast announcing the departure. 

And four months after forming Full Spectrum Management, LLC, Noss still employs Ingersoll’s daughter in-law, Gretchen Ingersoll, to handle the Grand Traverse Academy's finances...from the home she shares with husband Josh in Grants Pass, Oregon. In addition to her "part-time job" with Mark Noss, Gretchen Ingersoll is also currently employed by Steven Ingersoll's Smart Schools Management, Inc.

But the Record-Eagle reports Noss said he’s "in the process of transitioning her out" of one of her part-time jobs.

"ADVANCES STEVEN INGERSOLL HAD MADE TO HIMSELF...FROM FUNDS BELONGING TO THE GRAND TRAVERSE ACADEMY"


Let's look at what got this big, sticky ball rolling way back on April 10: Steven Ingersoll's federal indictment on a nut cluster of charges, including bank fraud and tax evasion.

What piqued my interest was this excerpt from the indictment (above), which alleged that Ingersoll had used some of the nearly $1.0 million dollars he'd diverted from a bank loan to "reduce his indebtedness to the Grand Traverse Academy resulting from advances Steven Ingersoll had made to himself from funds belonging to the Grand Traverse Academy."

Keep in mind that the allegations detailed in the April 10 indictment occurred during 2010 and 2011, which could mean there's a lot more than just the missing $1.6 million dollars at stake.


While the indictment provides no details on the amount Ingersoll "advanced to himself" from the Grand Traverse Academy's coffers, or the amount he may have repaid, Ingersoll's upcoming trial may reveal a significant lack of financial controls by the Academy's board that could jeopardize the school's future.

If it's proven in court that Ingersoll "dipped into" the Academy's funds to support his lifestyle (for example, Ingersoll's own gastric bypass procedure and wife Debbie's breast augmentation surgery), then Kaye Mentley's published statement (scrubbed from the Grand Traverse Academy website on July 4) claiming Ingersoll's federal charges did "not involve the Grand Traverse Academy" will be as hollow as it was when it first appeared back in early April.


And what about the Academy's legal exposure? How long will it continue to "haunt" the school and its board?



Ask its ghostbuster, board president Brad Habermehl.

He seems to be the go-to haunting guy.

Friday, July 18, 2014

YOU CAN ROLL A BABY IN FLOUR, BUT THAT DOESN'T MAKE IT A POLAR BEAR: Grand Traverse Academy's Classification Of Missing $2.38 Million As "Prepaid Expense" Debunked; Ingersoll Overpayment Has No "Future Value"

GRAND TRAVERSE ACADEMY BOARD MEETING FRIDAY, 
JULY 18 at 12:30pm

While Steven Ingersoll's $2.38 million dollar overpayment to his Smart Schools Management, Inc. during the 2013 fiscal year was classified in last year's Grand Traverse Academy financial audit report as a "Prepaid Expense", that creative accounting trick no longer applies.

Here's why: there's absolutely no value for future accounting periods. Although I disagree with the classification of a multi-million dollar overpayment as a "prepaid expense", I'm not an accountant.

However, when Steven Ingersoll tipped off the Academy Board that he was about to be indicted by the feds, paving the way for Mark Noss to take over operations, the money ceased being considered an asset described in the audit report as a "non-spendable fund balance of $2,338,980" and became a liability.

Even if you accept the repayment scheme cobbled together by the Board in the wake of the overpayment disclosure, it still leaves at least $1.6 million dollars unpaid.

So when the "Prepaid Plan" shows up on today's agenda, and the pussyfooting begins, you'll know that the repayment plan is not current.

And with the feds announcing a plan to seek assets, post conviction, in a superseding indictment filed April 23 in the Ingersoll case, it's highly unlikely that any money will be recovered from the head of Smart Schools Management, Inc.

Ingersoll allegedly used part of the construction loan proceeds, backed by the U. S. Department of Agriculture and diverted to his joint, personal Fifth Third Bank account, to "reduce his indebtedness to his Traverse City charter school, the Grand Traverse Academy." It's expected that because those "tainted assets" would be considered "readily available" under applicable federal statutes (for example, in a Grand Traverse Academy bank account) they would be subject to a clawback by the feds.

So when you're listening during this afternoon's Board meeting, ask yourself this question: is it really a polar bear...or just a floury baby?

Thursday, July 17, 2014

To Catch A Liar, You Have To Ask The Right Questions

GRAND TRAVERSE ACADEMY BOARD MEETING FRIDAY, 
JULY 18 at 12:30pm

Despite a promise to clean the school house, things don’t appear to have changed much at Grand Traverse Academy. About one month before Steven Ingersoll’s impending indictment, Mark Noss, Ingersoll’s twenty-year business associate and a former board president, filed incorporation paperwork to form another education management firm, Full Spectrum Management, LLC.

The very same day, Grand Traverse Academy announced its switch to Noss’ company.

Even though Noss worked with Ingersoll for twenty years and headed the board that allowed Ingersoll’s company to collect advanced payments year after year (and a multi-million dollar overpayment in 2013), he claimed he had no knowledge of Ingersoll’s alleged wrongdoing. 

“With my deep understanding of GTA’s history and operations, and my thorough knowledge and alignment with the school’s model,” Noss explained in an April 28 email, “I am confident that Full Spectrum will be a great asset to Grand Traverse Academy.” 

And if that isn't chutzpah, then I don't know what is!

The classical definition of chutzpah comes from Leo Rosten, who put it this way: "that quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan."

And chutzpah could be the reason the Grand Traverse Academy's Board continually refers to the missing millions as "prepaid expenses", somehow thinking that you'll never notice the misleading euphemism. (At least they didn't use "significant undercount"!)

For those of you just joining the circus, here's a recap:

On April 13, this blog broke the news that federally-indicted Steven Ingersoll had racked up a $2,338,980 "prepaid expense/expenditure balance" for management fee overpayments he made from the Grand Traverse Academy's bank accounts to his Smart Schools Management, Inc.

The story has never been publicly refuted by either the Academy board or Steven Ingersoll. The Academy's June 2013 audit report revealed that Smart Schools Management agreed that it “owed Grand Traverse Academy an amount classified as a prepaid balance” ($2,338,980), and worked out a repayment plan with the Academy. The plan called for Smart Schools to "work off the prepayment" by “partially reducing cash transfers for future management fees through June 2016”.


Notice that phrase: "an amount classified as a prepaid balance", and you'll see where the manufactured confusion stems from. While the 2013 audit explained that while Ingersoll's Smart Schools Management, Inc. regularly prepaid its own fees, it also "overpaid" itself by $2,338,980.


Below is an excerpt from the 2013 audit, showing that a management fee of $1,347,234 was prepaid to Ingersoll's Smart Schools. In addition, Ingersoll advanced himself an additional $2,338,980 during the year, and "withheld" repayment.

A "prepaid expense"  is listed within the current assets section of the balance sheet until the prepaid item is consumed. Once consumption has occurred, the prepaid expense is removed from the balance sheet and is instead reported in that period as an expense on the income statement. If the total ending balance in the prepaid expenses account is quite small, it may be aggregated with other assets and reported within an "other expenses" line item in the balance sheet.



 
Prepaid expenses are an accounting concept that refers to an asset that has been paid for, but the full benefit has not yet been received. The Academy supposedly makes a one-time payment for the asset, but receives the full value of it over time...except when it doesn't.

Calling the missing $2,338,980 a "prepaid expense" allows it to be recorded as an asset rather than an expense, obscuring what appears to be a staggering amount of financial misappropriation.

QUESTIONS: 

So here's a question for the Academy's Board: how did Steven Ingersoll manage to overpay himself nearly $2.5 million dollars in one year without anyone noticing?

And here's a follow-up: once it discovered the massive "prepaid expense" plunder, did the Board notify the Michigan Department of Education's Office of Audits, as required when there's a possibility of fiscal fraud? 

No? How about after Ingersoll was indicted?


Even before Ingersoll was indicted, the Board's specious "repayment plan" allowed him to continue receiving payment from the Academy--even with a multi-million dollar debt hanging over his head.

Let's move on to the "new management team".

In a July 3 Record-Eagle article, Board President Brad Habermehl was quoted musing rhetorically about how the Academy could be "moving forward with a new team when we have all the same high management employees running the show with Mark." 

Habermehl said he noticed after Ingersoll's indictment that correspondence about the school's finances came from Gretchen Ingersoll, Steven Ingersoll's daughter-in-law.

“After inquiring what the relationship was and what was going on, it came up she was still doing the books, and had been doing the books for Smart Schools,” said Habermehl, a Flint-based optometrist.


Habermehl said the GTA board hoped Gretchen Ingersoll would leave, as well as any other employees who "crossed over" from Smart Schools management.

Habermehl still hasn't figured out Full Spectrum Management is Smart Schools with another name?

How could it be possible, when Gretchen Ingersoll has worked for Smart Schools for nearly three years, that former Board Treasurer Habermehl would just be noticing where financial reports came from?

QUESTIONS: 

And what about that overlap--Gretchen Ingersoll was handling finances for Smart Schools and Full Spectrum...at the same time?  

Here's another question for the Board: have you requested a complete list of Full Spectrum employees, along with their titles and job descriptions?

If not, when will you do that?

And, finally, if the Board insists that "GTA prepaid Smart Schools its management fee, and is still owed $1.6 million from the company", ask them if they're concerned.

The last person who said she "wasn't concerned" was just sent packing...with what could be a sizable severance package.

FINAL QUESTION

If you get a chance to ask a question, see if you get an honest answer to this one: how many fingers am I holding up?

And hold up at least two fingers.

As the Grand Traverse Academy shows, it often seems as though charters schools are great assets to their managers...not the other way around.