The Daily Record, January 2015

Charter schools were created to improve our nation’s public school system and offer parents another option to better meet their child’s specific needs. In charter schools, leaders are given the freedom to be more innovative in their methods of teaching; to do whatever it takes to help students achieve success. Since the first charter school was opened in 1992, many states have followed suit and charter schools have opened up in cities all around the United States. It is estimated that charter schools serve approximately 5% of public school students nationwide. The National Alliance for Public Charter Schools estimates there are approximately 6,440 charter schools, of which, 642 were opened this past academic year. While the concept of the charter school model seems like an attractive option for our children, this new model has also created a whole new venue for fraud. In May of 2014, a report was released by the Center for Popular Democracy and Integrity in Education, discussing charter school vulnerabilities to waste, fraud, and abuse. These organizations examined charter schools in 15 states, finding fraud and abuse cases totaling over $100 million in losses to taxpayers.                                                                                      

Where is the risk?

Although charter schools have been around since the early 90’s, no concrete legislation has been passed on how these schools should be governed, and what type of oversight is necessary. The main focus has been on creating an educational model to help children succeed. While this is an important feature, it is also essential to ensure the leaders in charge of the schools and financial aspect of the business model are running it properly. Since over $100 million in losses were found in just 15 states, it is clear that there are inadequacies in the system that need to be addressed. The biggest shortfall is in the governance of charter schools, which stems from the way in which the schools were organized. As noted above, charter schools were formed specifically to allow educators to explore new methods of teaching, and because of this, they were exempt from the majority of regulations governing traditional public schools. As a result, lawmakers in each state wrote their own charter school laws. Just like we see in other industries, the schools have fast outgrown their regulatory safety net. Without sufficient regulations to ensure public accountability, incompetent and/or unethical behavior can cause significant harm to the communities these schools serve. The report by the Center for Popular Democracy and Integrity in Education noted the following risk areas during their examination:

• Charter school operators using public funds illegally for personal gain: A number of instances were found where CEO’s of charter schools were using funds for down payments on houses, personal vacations, paying off credit card debt, and buying new cars. In the meantime, many of these schools lacked proper school supplies, computers, and text books.
• School revenue used to illegally support other charter operator businesses: A former CEO of a Pennsylvania charter school is in federal prison after admitting he stole over $500,000 in taxpayer money to open a restaurant and health-food store. Another director was sentenced back in 2011 for misusing more than $750,000 in state education dollars to fund a privately owned apartment complex. 
• Charters illegally requesting public dollars for services not provided: Many instances were noted where charter schools were collecting millions of dollars for services that were not ever provided, including reporting students who did not even attend the school. 
• Charter operators illegally inflating enrollment to boost revenues: Enrollment numbers were frequently inflated to increase the amount of taxpayer money received by the schools.

Due to the considerable lack of oversight at these schools, the leaders were able to get away with the situations noted above. In order to prevent these egregious acts of fraud from occurring, there needs to be an overhaul of the internal controls and oversight of the daily operations at the schools.                                                                                How to prevent the fraud  Having sufficient internal controls provides the checks and balances needed to help prevent errors and losses like the ones noted above. Some states have already recognized the need for better controls and have implemented new accountability laws to prevent fraud in charter schools. For example, the New York City Department of Education implemented an accountability cycle to monitor performance of their charter schools. This cycle consists of: requiring schools to submit an annual report of their students’ academic performance, having an independent financial audit on an annual basis, among several other reporting requirements. In addition, on April 1, 2014, New York City approved legislation that improved regulations for charter school operators.  The Federal Department of Education’s Office of Inspector General has also recognized the need for improved charter oversight, and continues to make an effort to create an effective mechanism to disrupt the fraud perpetrated by charter school operators. The Office of Inspector General has opened 62 charter school investigations, resulting in 40 indictments and 26 convictions of officials. To create more accountability and transparency in the schools, the following recommendations were issued by the Center for Popular Democracy and Integrity in Education:

• Establish an office to specifically oversee the operations of the charter schools. This office should oversee the daily operations and approve of decisions and transactions occurring at the school level.
• Governing boards should be required to include representation from the school’s educators and parents, and relatives of school administrators or anyone associated with the management of the organization should not be allowed to serve on the board.
• Charter school financial documents should be made available to the public annually. These documents should include detailed information about the use of both public and private funds by the school and its management entities.
• Full disclosure should be made about the source of private funds and the duration of the commitment of these funds.
• Require disclosure of all vendor or service contracts over a certain threshold and prohibit any vendor or service contracts to any entity in which the charter school operator or member of the board has any personal interest.

In addition to these recommendations, the following activities would also help to detect and prevent fraud from occurring:

Implement an internal fraud risk management program, including annual fraud risk assessment: This program would help identify the school’s exposure to fraud and where the internal controls may have limitations (i.e. collusion, management override of controls).

Annual audit of internal controls over financial reporting: An audit would help assess how well the controls are being implemented.

Regular audits conducted by oversight agencies: These audits would hold the schools accountable for their actions and ensure compliance with laws and regulations.

Fraud hotline for whistleblowers: A hotline would encourage and facilitate reporting of fraud. The purpose of charter schools was to allow teachers to create a unique environment for children to learn. Lacking the proper oversight and efficient internal controls, these schools will not succeed in providing our children with the education they deserve. As more schools come online, without improved oversight and accountability, the risk of greater losses looms larger.