UNBALANCED SHEETS, PART DEUX: Is The Bay City Academy Using Prepaid Management Fee Scheme To Boost Its Bottom Line? March 2019 Quarterly Report Reveals Mitten Education Management Prepaid Fee “Asset” Continued Its Upward Trajectory. Management Fees Paid Out Should Have Reduced Total; Instead, It's INCREASED By Nearly $85,000!

If you suspected (once again) that the budget figures in the Bay City Academy's most recent financial balance sheet would resemble cafeteria vegetables — cooked beyond recognition — you’d be correct. 

The Bay City charter school, founded and operated for several years by Steven J. Ingersoll, currently serving a 41-month sentence in a federal prison for tax evasion, is under the supervision of the State of Michigan's Department of Treasury. The school has been in deficit for more than five years and is required to provide quarterly “Deficit District Elimination” reports to the Department of Education. 

In the most recent report, dated March 1, 2019, reveals the Bay City Academy projects a negative June 2019 fund balance: -$889,981.


However, it appears the Bay City charter school may be using financial sleight of hand to juice its financials: taking a portion of the school's expenses that should have reduced its income, and avoiding this result by instead labeling those amounts as prepaid assets on the BCA's balance sheet.

First, a prepaid expenses accounting lesson: 

Prepaid accounts are assets that represent amounts paid to vendors in advance of receiving a benefit. 

Unlike a “current” expense, which is recorded on a company's income statement in the period in which it is incurred (and which reduces the company's earnings by the full amount paid), amounts that a company prepays are deferred. 

A prepayment is first recorded as an asset on a company's balance sheet. This does not affect a company's earnings. Companies generally recognize prepayments over some future period of time. 

They do so by reducing the value of the prepaid asset on the balance sheet and recording a corresponding expense on the income statement, usually in equal amounts over a defined period. 

It is only then that the company's earnings are reduced. 

In that scenario, a company's earnings are reduced by the amount transferred from the prepaid account to the expense account. 

Because prepaid expenses are recognized over time, rather than all at once like current expenses, this has the effect of avoiding large reductions in a company's earnings in one period for benefits the company will receive over multiple periods. 

But in the case of the Bay City Academy, the Prepaid Expense attributed to Mitten Educational Management at the beginning of this fiscal year grew instead of being reduced by the expenditure of $216,457.04 on management fees through the end of March 2019.

Hmmm? What gives?

At the end of the first quarter (September 30, 2018), the Bay City Academy listed a $173,238.82 asset attributed to a prepaid expense to Mitten Educational Management.

And although the school paid a total of $47,473.18 to Mitten Educational Management in the first quarter, it appears not to have been deducted from the asset in the second quarter.

In fact, the Prepaid to MEM line increased from $172,238.82 in the first quarter to $218,965.66 in the second quarter — an increase of nearly $47,000.

In addition, the Prepaid to MEM line jumped up in the third quarter, climbing by $36,851.51 to $255,817.17.

Keep in mind that the so-called asset (Prepaid to MEM) should have been reduced as the money was expensed.

But it wasn't.

And why hasn't anyone in Lansing noticed? Because they aren't looking.

(NOTE: This report was updated on May 9 to include the Michigan Department of Education's response to my Freedom of Information Act Request.)