In Part 1, Miss Fortune examined “continuing disclosure” financial filings submitted on behalf of the Grand Traverse Academy between September 2011-March 2014 by its management company, Steven Ingersoll’s Smart Schools Management, Inc. — reports that revealed unexpectedly large fluctuations in amounts identified as accounts receivable and prepaid expenses.
The possible impact of that confusing pattern of inconsistent financial reporting requires a closer look.
Let's start with the Grand Traverse Academy's bond ratings.
BAD GRADES: IN 2012, STANDARD & POOR'S LOWERS LONG-TERM RATINGS; "TIGHT CASH FLOW"
In January 2012, S&P lowered its long-term rating on the GTA bond to “BB+” from “BBB-””. A S&P credit analyst cited the “GTA’s limited balance sheet resources and its growing dependence on state-aid anticipation notes to cover cash flow needs”. S&P called out Steven Ingersoll’s practice of “booking sub-lease receivables that are later netted against the (management) company’s higher fee for service” as inflating the Academy’s actual reserve position.
In the analyst’s opinion, the Grand Traverse Academy’s liquidity “is weaker than it appears and is more consistent with “BB-” rated charter school medians”.
In a word, “junk”.
In 2014, S&P revised its outlook to negative from stable, and affirmed its long-term junk bond rating.
Citing "two years of deficits" and the recent transition to a new management company earlier that year, S&P affirmed
its “BB+” rating.
It appears the financial statements have drawn critical attention of S&P, and the speculative-grade bond ratings could increase the Academy's borrowing costs.
DRILLING DOWN: YEAR-END NUMBERS PROVIDE INSIGHT...AS FINANCIAL DETAILS DISAPPEAR!
In Part 1, I reviewed the erratic, unexplained shifts in the figures variously identified as either "accounts receivable" and "prepaid expense".
Looking for consistency, I instead found inconsistency.
So I looked at the year-end financial statements — and found more questions.
For example, in 2009's report I discovered that none of the stated $3,049,957 "accounts receivable" was due from "other Governmental Units". Rather, it appears that the entire amount is due from Steven Ingersoll. In addition, 2009 shows another $514,733 classified as a "prepaid expense".
In 2010, even though figures wiggled around, the year-end report revealed that $1,523,087 was due from "other Governmental Units", with a pesky $2,715,251 "accounts receivable" showing up as an asset, along with $604,322.
Are you starting to see a pattern here?
In 2011, the "prepaid expense" balance grows to nearly $1.0 million dollars, with another $2.5 million dollar "receivable" sitting on the books. If you combed through the 2011 report, however, you would have found an important clue to this financial shell game — the first usage of the term "related party receivable".
And that relative? It appears to be none other than Steven Ingersoll.
Oh, would you look at 2012!
While so-called "prepaid expenses" dropped to just under $70,000, that "not-due-from-other-Governmental-Units" receivable just swelled from $2.5 million to over $3.5 million!
And the 2012 "Financial Highlights" section reveals that over half of the Academy's "net assets" were what the report called "$3.6 million in various receivables".
Keep in mind that the 2012 report was issued just months before the Academy board sat down with Ingersoll, at the request of then board president Mark Noss, to hear Ingersoll ask to have his $3.5 million debt classified as a "loan"!
That should give you a clue as to who Mr. Various might be.
Although Ingersoll and the Grand Traverse Academy board agreed to a “repayment” plan in 2013 that would allow Ingersoll to work off what the board termed his $2.38 million dollar “prepaid expense” balance, it appears that Ingersoll may have successfully “front-loaded” the application of the 2014 portion — $774,000 — against his outstanding balance and accelerated the reduction of his obligation.
Although I would have expected a consistent reduction representing an equivalent amount per month over the course of the year, the accounting was a little more...shall we say, creative.
During 2013/2014 fiscal year, the 1st quarter financial report reveals $289,752 was credited against the $2.38 million balance, with $267,360 in the 2nd quarter and $178,240 in the 3rd quarter for a total of $735,352 over less than nine months. (Didn't anyone bring a calculator to those board meetings?)
Ingersoll’s Smart Schools Management, Inc. was replaced in March 2014 by longtime business associate, Mark Noss, whose newly-formed Full Spectrum Management was awarded a no-bid, two year contract.
In addition, cash payments made during the year ended June 30, 2014, to Smart Schools Management, Inc. by the Grand Traverse Academy totaled $190,000.
For those of you who thought that $774,000 represented Ingersoll's entire management fee, you'd be wrong.
No, even though the Academy Board was aware of Ingersoll's $3.5 million dollar debt in 2013, it still agreed to shell out the equivalent of $902,960 for nine months work.
And, if you thought that was it, you’d be wrong!
The Academy paid Ingersoll’s “GTAS LLC” $97,689 for “janitorial services” in 2014, and it's unclear if GTAS is still on the GTA payroll.
COMING FRIDAY: Part 3- A Forensic Audit Q&A