And while the Academy board has publicly supported Ingersoll, perversely calling his years-long pattern of management fee overpayment and recording of non-existent rental income from Smart Schools Management to the Grand Traverse Academy a form of "philanthropy", Miss Fortune has discovered the Academy board must have been aware of Ingersoll's multi-year, systematic scheme to convert millions of taxpayer dollars to his own use — activity the board allowed to continue over at least a six-year period.
Although the Academy board officially replaced Ingersoll on March 19, 2014, (roughly one month before he was indicted on federal fraud and tax evasion charges) with his longtime business associate and former board president, Mark Noss, the board sat on the result of a 2013 forensic audit, whose shocking findings should have been released to the public.
The audit report reveals shocking details about Ingersoll's manipulation of the Academy's financial statements, including concealment of liabilities and overstating assets.
THE "E" WORD & THE "C" WORD?: SEPTEMBER 2013 FORENSIC AUDIT REPORT
In July 2013, Grand Traverse Academy board president Mark Noss received a "Forensic Audit Services" proposal from Traverse City-based public accounting firm Dennis, Gartland & Niergarth (DGN).
In the memo, DGN stated its understanding that Noss, on behalf of the Grand Traverse Academy, had been "advised to obtain an independent third party to verify the amount recorded as accounts receivable" on the Academy's financial statements by Steven Ingersoll's Smart Schools Management, Inc.
While there is no explanation as to who advised the Academy to seek the verification, it's likely that Lake Superior State University and the Michigan Department of Education each had a hand in forcing the review.
In an April 13, 2014 post, this blog broke the news days after Steven Ingersoll's federal fraud indictment that the Grand Traverse Academy’s financial report for the year ended June 30, 2013 (produced by DGN) revealed the Academy was “out of compliance” with the Michigan Uniform Accounting and Budget Act in several critical areas.
The audit exposed unsound financial practices that drove the Academy’s General Fund into a “deficit unassigned balance” of $1,378,971, primarily resulting from a “non-spendable fund balance of $2,338,980 for the prepaid balance with Smart Schools Management, Inc.”
DGN's memo to Noss and the Grand Traverse Academy indicated the firm would review "bank statements for all Grand Traverse Academy bank accounts" between July 2011 and June 2013. The verification process was estimated by DGN to cost approximately $5,000.
On September 10, 2013, DGN issued its "Forensic Report" to the Grand Traverse Academy's Board and then-Superintendent, Kaye Mentley.
The report summarized the procedures performed regarding the outstanding balance with Smart Schools Management, Inc. as of June 30, 2013 ($2,338,980), including DGN's correspondence with Steven Ingersoll.
There were five general ledger accounts, plus various payroll and related benefits accounts used to record the transfers and transactions with Smart Schools Management. According to DGN, the accounts used include accounts receivable, prepaid expense, lease of facilities, curriculum materials, and Smart Schools Management's Grand Traverse Academy management contract.
The DGN report reveals Ingersoll provided a "schedule of budgeted fees for the SSM management fee and curriculum development fee", for the years 2006-2013, which revealed that in addition to his management fee, Ingersoll was paid $300,000 for "curriculum development" for the year ended June 30, 2011.
DGN compared "budgeted amounts to the actual fees", and revealed a "cumulative downward adjustment" of $3,128,532, stating the downward adjustment was "part of a large receivable due from SSM and was recorded to prevent GTA from being in a deficit position".
The report identified another transaction contributing to SSM receivable, the "recording of rental income due from SSM". The amounts varied widely during the fiscal years ending 2006-2013, and the rental income was not budgeted for by the Grand Traverse Academy each year. Citing information provided by Ingersoll, DGN notes "there is no economic susbstance regarding the recording of rental income. SSM occupies a small office within GTA; however, rental income has ranged from between $0 and $1,100,000 per year for the years ending 2006-2013."
DGN provided the Grand Traverse Academy with recommendations on accounting for cash and expenses.
The procedures surrounding the movement of cash covered the fiscal years ending June 30, 2012 and June 30, 2013. DGN reported that it "summarized the cash withdrawals and transfers from the Traverse City State Bank and Fifth Third Bank statements for the two year period and compared the cash transactions to the accounting records for proper recording and classification."
DGN stated the firm "traced the cash transactions to the accounting records in all instances. There were no withdrawals or transfers unaccounted for in the accounting system."
However, DGN noted that there were "several cash transactions between SSM and GTA" during these periods. The cash transfers did not correlate with specific accounting transacations, but appear to be based on cash needs on any given day. The method of recording cash transfers, withdrawals and expenses was inconsistent for the two fiscal years.
DGN reported that SSM appeared to "retroactively adjust the QuickBooks records to record invoices for payroll, management fees and curriculum development fees for the fiscal year ended June 30, 2013".
For the year ended June 30, 2012, DGN's September 10, 2013 report claimed that "tracing transactions was much more difficult as the accounting for SSM transactions was recorded through various journal entries rather than deposits, checks or SSM invoices".
The DGN report identified seven major financial issues, each with a recommendation.
FORENSIC REPORT: ISSUES & RECOMMENDATIONS
1. The entire management fee is recorded on July 1 of each fiscal year. Smart Schools Management has not earned this fee on July 1
The annual management fee should be prorated each month, rather than expensing the entire fee on July 1.
2. Smart Schools Management withdraws funds (for its management fee) from the Grand Traverse Academy each year, prior to earning the revenue. Although the fee has been adjusted downward, the funds advanced have not been returned to the Grand Traverse Academy within the same fiscal year. This is an issue because a governmental unit is not permitted to advance funds for the benefit of a private entity.
GTA should not advance funds to SSM before the revenue is earned.
3. If GTA’s intent is to ultimately pay the originally established fees, there is no current accounting recorded for this transaction.
GTA should record a liability to SSM for the entire management fee if it is the intention of the GTA to pay the original fee budgeted for payment to SSM. The recording of this liability would account for the economic substance of the management fee being traced over the years. The recording of this liability would also result in a deficit fund balance and consequently a violation of state law and the bond convenant.
4. There is no economic substance regarding the recording of rental income. SSM occupies a small office within GTA; however, rental income has ranged from between $0 and $1,100,000 per year for the years ending 2006-2013. The recording of rental income cannot be a mechanism used by GTA to adjust fund balance each year to a level needed to meet the current bond covenant requirements.
A rental agreement for the use of office space by SSM should be agreed on, based on fair market rates, and documented in a lease contract. The use of office space should be paid for by SSM on a monthly basis as incurred.
5. The original management fee with SSM was based on 12% of annual revenue. The management fee agreement was revised at the time of the 2007 bond issuance because the management fee could no longer be tied to revenue with the bond in place. However, there is a general understanding between GTA and SSM that the management fee would remain at 12% of revenues. The revised contract with SSM simply states the management fee will not exceed $2.0 million. It has been explained that the actual management fee each year is determined by GTA’s need and documented by way of the final budget resolution. The management fee should not be used to manipulate the financial performance of GTA, as need to ensure bond covenant compliance or avoidance of a fund balance deficit in any given year.
The SSM management fee should be based on the value of services provided by SSM and determined each year and agreed to by GTA through a written contract with SSM. This contract should also specificially state the services that will be provided by SSM and provide detail of the functions to be performed by SSM. The detail of services would assist GTA with clear identification of the duties performed by SSM versus the Superintendent’s duties, for example. A written contract would provide documentation of the fee being charged and allow for proper budgeting of the fee. Of course, the contract can be negotiated and changed as necessary.
6. SSM has held GTA’s cash over many years without paying interest. GTA has also incurred State Aid Notes over the years to assist with cashflow requirements. The State Aid Note balances may have been larger than necessary if SSM had not received cash advances.
In order to be made whole, GTA should consider charging interest on amounts held by SSM to cover the use of GTA’s money. The interest charge would also assist in covering some of the interest paid on the State Note Aid balance that may have been inflated from GTA’s actual cashflow needs.
7. For 2013 the documentation for payroll expenses included monthly staffing invoices that listed out payroll and related benefits by account number and related dollar amounts for each account number. This documentation was prepared retrospectively by SSM. The monthly invoices equated to the annual payroll expense budgeted divided by twelve months. This documentation was not done timely and does not provide the level of detail necessary to allow GTA to properly monitor payroll expense and understand the teachers are being paid and their corresponding level of pay.
SSM should provide invoices to GTA for each pay period that correlates with the actual payroll incurred for staffing provided to GTA. The invoices should include the names of employees being paid and their corresponding rate of pay.
SMART SCHOOLS MANAGEMENT FINANCIAL PRACTICES "NOT PROPER ACCOUNTING"; "SSM HOLDING GTA'S FUNDS": DGN SUMMARY COMMENTS
The following is taken directly from DGN's September 10, 2013 forensic report to the Grand Traverse Academy:
SSM is hired to provide teachers and staffing, manage the school’s finances and annual budgeting and provide the school curriculum. It appears SSM takes cash advances for their management fee each year at the beginning of the school year based on the budgeted amount. At the time it is realized GTA cannot afford the management fee, the fee is adjusted downward in the school’s budget, but the advances are not repaid at that time.
The proper way to manage GTA’s budget, should revenue be insufficient, is to cut expenses. The recording of fictitious revenue, such as rental income, is not proper accounting.
As of June 30, 2013, the prepaid balance was $2,338,980. This suggests that GTA advanced funds to SSM for future services, when in actuality, the amount is the result of the downward budget adjustments. Another way to consider this amount is determining the collectibility of the funds. For example, should GTA decide to end its working relationship with SSM, is it likely the balance would be collectible? Does SSM have the ability to pay these funds back now?
We understand that it is not the Board’s intention to have prepaid the management fee and, in June 2013, the Board has demanded full repayment of the balance owed by SSM. (NOTE: A reference to the June 13, 2013 demand letter sent by Academy attorney Doug Bishop, seeking return of $3.5 million dollars from Ingersoll.)
By any objective measure, the fee arrangement lacks economic substance and accountability, provides an opportunity for abuse, and is structured to potentially become a benefit of a private party. It permits SSM to maximize their fee in good years and reduce their fee in poor years, leaving the impression that SSM is forgoing payment for the benefit of GTA; when in actuality, SSM is holding GTA’s funds in the process. The Academy Board is charged with governance, stewardship and accountability for public funds. As such, it should consider the substance of this arrangement and compare it to arrangements for other charter schools.
SO WHAT DOES THIS MEAN, MISS FORTUNE, AND WHY SHOULD I CARE?
"How Steven Ingersoll Embezzled Millions From The Grand Traverse Academy While The Charter School's Crony-Stuffed Board Of Directors Looked The Other Way"