Thursday, February 19, 2015
THE "LOCAL REVENUE" SHELL GAME PART 1: The Bay City Academy
A Michigan charter school is subject to an independent financial audit, either on its own or as an entity of a school district. But here in the state, schools operated by private management contractors may be exempted from important aspects of uniform financial reporting that are normally required of public schools.
Although Michigan officially refers to its charter schools as “public school academies”, charter schools in the state run by independent management companies do not have to comply with several parts of the state’s Freedom of Information Act, sharply limiting the usefulness of uniform financial reporting.
The lack of detail in charter school independent financial audits seriously limits their usefulness for many aspects of financial accountability.
Independent audits have at least three objectives:
-Financial statements. Present the school’s financial position (assets and liabilities) and results of operations (revenue and expenditures) at the end of the fiscal year.
-Internal control system. Assess the school’s implementation of internal controls (e.g., who can sign checks) for authorizing financial transactions and safeguarding assets.
-Compliance. Determine the school’s compliance with applicable laws, regulations, administrative rules and guidelines governing the school
As Steven Ingersoll’s federal fraud trial continues next week in Bay City, Miss Fortune takes a look at an unusual method of “creative bookkeeping”: the possible budget manipulation of “local revenues”.
THE SHELL GAME?
A regular reader of this blog called my attention to what appeared to be unusual financial activity at Steven Ingersoll’s owned-and-operated charter school, the Bay City Academy.
In the fiscal year ending June 30, 2012, the Bay City Academy budgeted $150,000 in “local revenue”, later amending the budget down to $21,000. The actual 2012 fiscal year local revenues total was $18,562.
In 2013, the amounts were $120,000, $412,915 and $439,864 respectively.
In its most recent fiscal report (FY 2014), the Bay City Academy originally estimated $252,000 in local revenues, before adjusting its estimate upwards to $420,255 and ending the year with an actual amount of $438,197.
While the Bay City Academy’s 2012 financial statement does not include an explanation of those “local revenues”, its 2013 report begins to reveal tantalizing hints under “Subsequent Events”:
The Academy received a $420,000 contribution from SSB through lease expense forgiveness for the same amount. This amount is included as a contribution receivable and revenue at June 30, 2013.
Companies are less likely than independent charter schools to enter the charter school business for altruistic reasons. Management fees are linked to revenue and usually to the surplus (the difference between revenues and expenditures) so private companies have an incentive to maximize revenues and reduce costs.
In the Bay City charter school owned and managed by Steven Ingersoll’s Smart Schools, that appears to be the case. And, in order to dodge a Michigan Department of Education deficit reduction plan, the books need to balance.
In the report for the year ending June 30, 2014, again under “Subsequent Events”, is this explanation:
In August 2014, the Academy received a $430,000 cash contribution from SSB which is included as a receivable from management company and local revenue at June 30, 2014. The Academy also received a $420,000 cash refund from SSB for property lease payments made during the fiscal year that were subsequently forgiven. The refund is included as a receivable from management company and a reduction of lease expense at June 30, 2014. Furthermore, the Academy received a $52,228 cash refund from SSB for management fees that were paid at June 30, 2014 and recorded as a receivable from management company at year-end.
During August 2014, funds totaling $930,000 were paid from the Academy bank account to SSB during the same timeframe as receipt of the June 30, 2014 receivable from management company occurred.
Full disclosure: I am not an accountant, but this explanation appears to show a series of adjustments that may have been designed to alleviate a potential budget deficit—and a financial review by the state of Michigan.
Preliminary 2014-2015 Bay City Academy school count numbers indicate an 11% decline in the student population, and it appears the school's “creative accounting” continues.
On June 20, 2014, the Bay City Academy’s Board of Directors adopted a 2015 fiscal budget with $296,506 in “local revenues”, predicated on combined state and federal funding of $4,413,994.
However, on January 28, 2015, the Academy Board adopted a budget amendment boosting the “local revenue” figure to $550,000—a big, round number. Combined state and federal funding dropped from $4,413,994 to $3,860,688.
Short of loan proceeds, ISD revenues, and earnings on investments, where could those “local revenues” be coming from?
PART TWO: TOMORROW
Miss Fortune answers that question tomorrow, and examines the “local revenues” of another charter school Steven Ingersoll formerly managed, the Grand Traverse Academy.