Friday, September 19, 2014
THE RED HERRING REVIEW PART 2: There's Something Fishy Going On--Oh Look, A Squirrel!
Part 1-Oh look, a shiny thing!
OVERLAP: Official documents reveal potential conflict of interest-Mark Noss continued to serve on Grand Traverse Academy board after signing two-year management contract
Part 2-Oh look, a squirrel!
OPTICS & SEMANTICS: It doesn't matter what you call it, $1.67 million dollars is gone...and the board's not lifting a finger to get it back.
The Grand Traverse Academy's recent attempt at "make it go away" crisis PR, designed to remedy the school's earlier lack of communication and transparency regarding repayment of an outstanding $1.67 million dollars owed to the Traverse City charter school by Steven Ingersoll's Smart Schools Management, Inc., has fallen far short its goal: to convince you that it's a "common accounting practice" to call a seven-figure loss a "rebate" and keep it on the books as an asset.
In an interview this week with Interlochen Public Radio, Full Spectrum Management's Mark Noss objected to the generally accepted accounting principles (GAAP) term "prepaid expense", calling it "a terrible description of what that money is."
For an optometrist, Noss is a poor judge of what politicians call "optics".
WHAT IS A PREPAID EXPENSE?
The standard framework of accounting principles, standards and procedures that companies use to compile their financial statements includes prepaid expenses. Prepaid expenses and deferred charges appear on a company’s balance sheet as 'other assets'.
Both categories apply to a situation where a client pays in advance for a good or service. When you see the words "expense" and "charge", you might wonder how these times belong in an asset account.
Expenses belong on the income statement, right?
Well, GAAP dictate that expenses that are paid before they're due belong on the balance sheet. Whenever a company pays expenses in the current period that won't be matched with services until subsequent periods, the expense is a "prepaid expense" or "deferred charge".
Doesn't sound so terrible to me.
GRAND TRAVERSE ACADEMY/SMART SCHOOLS MANAGEMENT, INC. PREPAID EXPENSE HISTORY
As the 2001-2013 financial snapshot shows (left), the Grand Traverse Academy has a history of ending its fiscal years with a "prepaid expense" balance.
Beginning in fiscal year 2005 (ending June 30), the Academy's annual audits began to show a pattern of ending each year with prepaid expense balances that ranged from $25,882, topping out in 2013 at $2.38 million.
While the early audits may have been performed by a more compliant, less rigorous CPA firm, the Academy's 2013 audit drew much closer scrutiny of its "prepaid expense" balance by Traverse City public accounting firm Dennis, Gartland & Niergarth.
In the auditor’s report, 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”.
Funny, I don't see any mention of a "rebate" or "pledge" or "teacher pay cuts"--just an acknowledgement by Steven Ingersoll that Smart Schools paid itself in advance for services it agreed to deliver later.
In fact, the audit also outlines the "repayment" plan agreed to by Smart Schools and the Grand Traverse Academy: in plain language, the Academy would simply deduct the $2.3 million overcharge--in three installments--from Smart Schools' expected future management fees.
According to the 2013 financial audit, the prepaid management fee “reductions” were scheduled to be received from Ingersoll's Smart Schools Management, Inc. as follows:
However, as I revealed on this blog, the Academy board did not amend the Smart Schools Management contract to reflect the deal, neglecting to put in writing the deal that was outlined and agreed to in the 2013 fiscal audit.
OVERSIGHT...OR TURNING A BLIND EYE?
In the IPR interview, Noss claims that another management company with "no understanding of who we are" could have destroyed the school.
In addition, the story reveals that board attorney Kerry Morgan claimed that the "board did nothing wrong when it hired Mark Noss."
But according to newly-released Academy documents, obtained through a Freedom of Interest Act request, Noss continued to serve on the Academy board for weeks after he signed a two-year management contract, a potentially serious conflict of interest.
As even the appearance of conflict is a serious allegation, I have forwarded the documents, along with a link to my story, to the Michigan Department of Education for official reaction.
I will provide an update as soon as it becomes available.
PHILANTHROPIST OR THIEF...OR BOTH?
With his federal fraud trial on the docket for December 2, it's likely that we'll learn much more about Ingersoll's financial activities, including his "debt" to the Grand Traverse Academy.
So is Steve Ingersoll, the man who stopped paying his Bay City property taxes in early 2012, really a philanthropist?
Or is he just another robbin' hood?