Professional Documents
Culture Documents
November 2014
its legislative and policy expertise with grassroots organizing, AQE advances
Executive Summary
Sixteen years following the passage of New Yorks Charter School Act, the number of charter schools
in New York has grown dramatically. Over the last 10 years, charter student enrollment has increased
by 530 percent.1 Charter schools enroll over 90,000 students in New York State,2 80,000 of whom
attend charter schools in New York City.3 For the school year 201415, New York charter schools will
receive over $1.5 billion in public funding.4
Despite the tremendous investment of public dollars, New York has failed to implement a system
that adequately monitors charters for fraud, waste, and mismanagement. While charter schools
are subject to significant reporting requirements and monitoring by oversight bodies, only the New
York State Comptrollers Office (Office) audits charter schools with any regularity. While the Office
has audited fewer than half of all charter schools, they have exposed some form of internal control
deficiency or mismanagement in 95 percent of their audits.5 The majority of charter schools in New
York are left to operate year in and year out without regulator-level audits, specifically audits that
are designed to determine whether these publicly funded, privately managed schools are spending
public dollars properly. Given the findings of the limited audits the State Comptroller has performed,
this system of irregular regulator audits poses a serious problem. In all but three of the Comptroller
audits, auditors exposed internal control deficiencies and various forms of mismanagement ranging in
severity and formfrom inappropriate trips to the Bahamas by charter school staff to undocumented
spending of thousands of public dollars.
These findings indicate that many of the unaudited charter schools likely suffer from internal control
deficiencies as well. Based on conservative estimates, New York could stand to lose $54 million
in charter school fraud in 2014 alone.* The vast majority of this fraud will go undetected because
New York lacks the oversight necessary to detect it. In this report we identify two fundamental flaws
with New Yorks oversight of charter schools:
Oversight depends heavily on self-reporting by charter schools or the reports of
whistleblowers. New Yorks oversight agencies rely almost entirely on audits paid for by
* Using the methodology employed by the Association for Certified Fraud Examiners 2014 Report to Nations on Occupational Fraud
and Abuse to determine the total amount of fraud globally, we estimate New Yorks charter schools may have experienced $54 million
in fraud in 2014 alone. Assumes 5 percent of total revenues lost to fraud. Calculation uses total New York charter school revenue for
2014 at $1.08 billion. Total revenue is derived from the 2013/2014 preliminary estimate for state aid published by the New York State
Department of Education. Total fraud, waste, and mismanaged funds found in audits examined for this report totals $28.2 million.
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charter operators and complaints from whistleblowers. While important to uncover fraud,
neither method systematically detects or effectively prevents fraud.
General auditing techniques alone do not uncover fraud. The audits commissioned by
the charter schools use general auditing techniques designed to expose inaccuracies or
inefficiencies. Without audits specifically designed to detect and uncover fraud, however,
state and local agencies will rarely detect deliberate fraud without a whistleblower.
To address these serious deficiencies in New Yorks system, we recommend the following reforms:
Center for Popular Democracy & The Alliance for Quality Education
Introduction
In December 1998, New York passed the Charter School Act, authorizing the creation of 100 charter
schools across the state.6 Now, over 250 charter schools operate in New York. Since 2010, charter
student enrollment has increase by 106 percent.7 Today, charter schools enroll over 90,000 students
in New York,8 80,000 of whom attend charter schools in New York City.9 This expansion shows little
sign of slowing; the State recently approved the creation of 17 more charters in New York City.10 For the
school year 201415, New York charter schools will receive over $1.5 billion in public funding.11
To help ensure that charter schools are held accountable to students, families, and taxpayers, state
lawmakers have enacted laws that require monitoring of charter schools by oversight agencies and
extensive reporting by charters to their authorizers and other government agencies. Under these
regulations, every charter school is required to submit an annual report to its authorizer and the State
Board of Regents. The annual report must include:
A report card that measures the academic and fiscal performance of the school; and
A certified financial statement summarizing the revenue and expenditure of the school for the
previous year, including a copy of the schools most recent independent audit and any audit
conducted by the New York State Comptroller.12
The external monitoring of charter schools is conducted by authorizers, the State Board of Regents,13
and as a result of recent amendments to the Charter School Act, both the New York City and New
York State Comptrollers.14 Only the New York State Comptroller has exercised its authority with
regularity.15 It should be noted that the New York City Comptroller did not have authority to audit charter
schools until 2014. Notably, the State Comptroller exposed some form of internal control deficiency
or mismanagement in 95 percent of their audits. These internal control deficiencies and various forms
of mismanagement, catalogued in Appendix A, range in severity and formfrom charter school staff
using public dollars for inappropriate trips to the Bahamas to spending thousands of public dollars
without documentation.
Given the relative infrequency of state-led audits and the consistent findings of internal control problems
during the audits that are conducted, a large gap likely exists between the known amount of fraud,
waste, abuse, and mismanagement and the true figure. Using the methodology employed by the
Association for Certified Fraud Examiners 2014 Report to Nations on Occupational Fraud and Abuse,
we estimate New Yorks charter schools may have experienced $54 million in fraud in 2014 alone.
New York is not alone. Recent reports of charter school fraud in other states, including states with
stronger oversight systems than New York, have uncovered millions in fraud committed by charter
officials. In May 2014, the authors of this report released a national study of 15 large charter school
markets that found over $136 million in losses to taxpayers due to fraud, waste and abuse cases that
had already been detected and reported publicly.16 The millions being lost to fraud has not escaped
the attention of the federal government. In 2010, the federal Department of Educations Office of the
Inspector General issued a memorandum to the Department of Educations Office of Innovation and
Improvement. The OIG stated that the purpose of the memorandum was to, alert you of our concern
An authorizer is the entity that grants a charter school their charter. Authorizers also monitor charter schools for compliance with the
provisions within their charter.
Using the methodology employed by the Association for Certified Fraud Examiners 2014 Report to Nations on Occupational Fraud
and Abuse to determine the total amount of fraud globally, we estimate New Yorks charter schools may have experienced $54 million
in fraud in 2014 alone. Assumes 5 percent of total revenues lost to fraud. Calculation uses total New York charter school revenue for
2014 at $1.08 billion. Total revenue is derived from the 2013/2014 preliminary estimate for state aid published by the New York State
Department of Education.
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about vulnerabilities in the oversight of charter schools.17 The report went on to state that the OIG
had experienced, a steady increase in the number of charter school complaints and that state level
agencies were failing to provide adequate oversight needed to ensure that Federal funds [were]
properly used and accounted for.18 Some of the reports of abuse in New York include:
YEAR 19
DESCRIPTION
2007
KIPP Academy Charter School, located in the Bronx, paid nearly $70,000 to send
49 staffers on a five-day trip to the Bahamas and 21 staffers on a five day trip to the
Dominican Republic, with per-person costs as high as $1,119. While school officials
claimed that the trips were for educational purposes, they provided little to no
documentation of any staff development activities during the trips. 20
2008
At Amber Charter School, located in East Harlem, the State Comptroller found several
troubling financial practices: a school official kept the schools petty cash funds in
her personal bank account; school officials used incorrect ledger balances for a year,
failing to properly reconcile bank statements and leading to monthly discrepancies in
actual and reported balances as high as $100,000; school officials paid the phone bill
of an employee who made over 70% of calls during evenings and weekends. 21
2008
At Family Life Academy Charter School, located in the Bronx, auditors found control
weaknesses in many areas and either noncompliance with procedures or a failure to
establish sound basic control procedures over the operations. For example, auditors
found that the Academy needs to better monitor controls over its equipment and the
use of school computers by school staff and students. Auditors judgmentally selected
11 out of approximately 85 computers used by employees and students and found
that individuals had accessed or attempted to access inappropriate and sexuallyrelated Internet sites on three of them. 22
2011
Brighter Choice Charter School for Boys in Albany failed to audit several claims,
resulting in overpayment to vendors by almost $9,000. 23
2012
Brooklyn Excelsior Charter School agreed to pay $46.23 per square foot to lease
school building space obtained by its management company despite an independent
appraisers $32 per square foot assessment and the fact that the building lacked a
cafeteria or space for assemblies. As a result, the school paid over $800,000 above
market value for the space, ensuring that the management company recouped more
than the full cost of its building acquisition and development in under ten years of the
schools operation. 24
2013
2014
Oracle Charter High School, located in Buffalo, entered into a 15-year building lease
with Oracle Building Corporation (OBC), a nonprofit affiliated with the school. Under the
lease, the school agreed to pay OBC more than $5 million at a 20% interest rate. Despite
statements to the contrary, the board failed to produce documentation that it seriously
considered alternate sites, including any of the potentially less expensive state-owned
vacant sites listed annually by the New York State Office of General Services. 26
2014
Eugenio Maria de Hostos Charter School, located in Rochester, failed to enter into
any competitive bidding processes for several instruction contracts. Instead, the
school awarded several contracts to board members, relatives, and other related
parties. For example, the school agreed to pay a community nonprofit run by a board
member $220,000 to provide physical education classes, $57,000 to a nonprofit run
by a board member for music instruction, and $13,000 to a construction company run
by a close friend of the board president. 27
Center for Popular Democracy & The Alliance for Quality Education
whether schools have adequately strong internal controls in place to prevent such misconduct.
A detailed overview of fraud audit methodology can be found in Appendix B.
Regularly scheduled general audits conducted by authorizers would be a good first step to improving
oversight of charter schools in New York. Fraud controls on the school level and targeted fraud audits
by oversight bodies, however, would better protect the sizable public investment in charter schools.
Center for Popular Democracy & The Alliance for Quality Education
Fraud Audits
While state law requires charter schools to submit
independent annual financial audits as part of
their annual reports, oversight agencies can and
should broaden the parameters of their oversight
by conducting risk based targeted fraud audits
that are designed specifically to detect asset
misappropriation, financial reporting fraud, and
corruption.39 These fraud audits should begin with
a review of the internal fraud-control system itself.
While fraud can occur in organizations with strong
or weak internal control mechanisms, studies show
that the organizations with the best track record of
preventing and detecting fraud are those with
the strongest internal control fraud risk
management programs.40
For charter schools with stronger internal control
systems, oversight agencies can use a fraud
risk assessment to identify areas of particular
vulnerability and target areas for the fraud audit.
Where internal control systems are weaker,
authorizers can conduct broader fraud audits. In
order to facilitate fraud audits across oversight
agencies, the agencies should coordinate to identify
possible fraud schemes, how they occur, and what
symptoms they exhibit.
In addition, we recommend that the New York
City and State Comptrollers, who have authority
to investigate the financial operations of charter
schools within their jurisdiction, regularly conduct
audits every five years.
Fraud Tree
The Association of Certified Fraud Examiners (ACFE) has diagrammed a fraud tree to explain the distinction
between the three major types of fraud.41 Asset misappropriation fraud is the most common type of fraud committed
within corporations, and it is also the type of fraud most commonly found in charter schools. This type of fraud
involves the misuse or theft of assets belonging to a company.42 According to a 2014 global fraud study conducted by
the ACFE, 85 percent of all internal fraud schemes involved asset misappropriation.43
Asset
Misappropriation
Corruption
Illegal
Gratuities
Financial
Statement Fraud
Conflicts
of Interest
Bribery
Economic
Extortion
Illegal
Gratuities
Economic
Extortion
Purchasing
Schemes
Invoice
Kickbacks
Timing
Differences
Timing
Differences
Sales
Schemes
Bid
Rigging
Ficticious
Revenues
Understated
Revenues
Concealed
Liabilities and
Expenses
Overstated
Liabilities and
Expenses
Improper Asset
Valuations
Understated
Revenues
Improper
Disclosures
Inventory and
All Other Assets
Cash
Theft of
Cash on Hand
Theft of
Cash Receipts
Cash
Larceny
Skimming
Sales
Receivables
Unrecorded
Write-off
Schemes
Understated
Lapping
Schemes
Refunds
and Other
Unconcealed
Fraudulent
Disbursements
Misuse
Billing
Schemes
Payroll
Schemes
Expense
Reimbursement
Schemes
Check
Tampering
Register
Disbursements
Shell
Company
Ghost
Employee
Mischaracterized
Expenses
Forged
Maker
False Voids
Non-Accomplice
Vendor
Falsified
Wages
Overstated
Expenses
Forged
Endorsement
False
Refunds
Personal
Purchases
Commission
Schemes
Fictitious
Expenses
Altered
Payee
Multiple
Reimbursements
Authorized
Maker
Larceny
Asset
Requisitions
and Transfers
False Sales
and Shipping
Purchasing
and Receiving
Unconcealed
Larceny
Recommendations
Self-policing independent audits commissioned by charter schools routinely fail to identify
deficiencies, and oversight agencies fail to routinely audit charter schools to ferret out fraud. As
a result, significant risk is built into the current charter sector in New York. The limited number
of oversight agency audits that have been conducted since New York passed its charter school
law suggest that fraud, waste, and mismanagement may be widespread among charter schools.
Oversight agencies must better protect the investments of over $1 billion by State of New York and
local school districts in charter schools.
The detection and deterrence of fraudand the potential millions in taxpayer dollars auditors will likely
uncover in past and current fraudwill likely offset the investment of resources in effective charter
school oversight.
In order to uncover existing fraud schemes and deter future fraud, we recommend that every charter
school be required to conduct a mandatory fraud risk assessment and update the assessment
annually. Charter schools should be required to use an external fraud risk assessment consultant with
expertise in applicable standards, key risk indicators, anti-fraud methodology, control activities, and
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Center for Popular Democracy & The Alliance for Quality Education
detection procedures to assist charter school governing boards and management in their fraud
risk assessments.
We also recommend that charter schools be required to commission an annual audit of internal
controls over financial reporting that is integrated with the audit of financial statements that charter
schools are already required to do on an annual basis. These integrated audits should require auditors
to provide an opinion on the quality of internal controls and financial statements. Charter schools
should include the audit of internal controls in their annual report, which state law already requires
them to post on their websites.
In addition to the above measures, we recommend every charter school institute a fraud risk
management program, which will involve:
Taking proactive steps to educate all staff and board members about fraud;
Ensuring that one executive-level manager coordinates and oversees the fraud risk
assessment and reports to the board, oversight bodies, and school community;
Implementing reporting procedures that include conflict disclosure, whistleblower protections,
and a clear investigation process;
Undergoing and posting a fraud risk assessment conducted by a consultant expert in
applicable standards, key risk indicators, anti-fraud methodology, control activities, and
detection procedures; and
Developing and implementing quality assurance, continuous monitoring, and, where
necessary, corrective action plans with clear benchmarks and reporting.
We recommend requiring the New York City and the New York State Comptrollers to be
adequately resourced to conduct audits of charter schools once every five years, with audits
posted on their websites within 60 days of completion. They should also design a system that
indicates the level of risk uncovered at each school. Oversight agencies should also create a
dedicated charter school fraud hotline for whistleblowers. In addition, the Comptrollers should
determine what steps charter school nonprofit governing boards and executives have taken to
guard against fraud. The investigation should involve requests for exhaustive information from each
charter school detailing their fraud risk assessments and management program over the past 10
years. The investigation should be presented to the public in a report detailing the findings and
recommendations based on the investigation.
We recommend that the Comptrollers auditors assigned to charter schools be certified in fraud
examinations by the Association of Certified Fraud Examiners and in financial forensics by the
American Institute of Certified Public Accountants, or by an equivalent certification body. If current
auditors do not have this certification, they should be provided the time and funding to acquire it. If
auditors lack certain critical elements in their fraud auditing team, such as a forensic fraud computer
expert, we recommend they be required to contract with an independent firm or be required to
collaborate with another auditing body to fill that capacity need. Lastly, we recommend that charter
school authorizers take fraud risk assessments into account when evaluating whether to renew a
schools charter.
Conclusion
While New York has made some efforts to deter and uncover fraud, it needs to do more. As
the limited number of audits by the New York State Comptroller demonstrate, there is systemic
mismanagement among New Yorks charter schools that must be prevented and remedied. Charter
schools, authorizers, and oversight bodies have not adopted and implemented systems specifically
designed to expose fraud, waste and mismanagement. Until the recommendations found within this
report are implemented, the state cannot bear the risk of adding new charter schools to an already
inadequate oversight system. If the State of New York believes, taking the risk of undetected fraud
detailed in this report into account, that continuing to authorize new charter schools is likely to lead
to a worthwhile, quality-enhancing investment of limited taxpayer education dollars, we recommend
lifting the moratorium 12 months after all charter schools have undergone a fraud risk assessment
and established fraud risk management programs that conform to the recommendations found within
this report.
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Center for Popular Democracy & The Alliance for Quality Education
School purposes. Also, the School paid six claims totaling $85,215, of 51 claims examined, later than the 60-day time
period that its purchasing policy required claims to be paid within. For example, the School paid a $15,462 invoice for
health insurance 93 days after the invoice was dated. By not paying claims within the timelines outlined in the policy, the
School risks missing vendor discounts associated with timely bill payment and/or risks incurring late fees for
untimely payments.
Source: http://osc.state.ny.us/localgov/audits/schools/2011/brighterchoice.pdf
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Center for Popular Democracy & The Alliance for Quality Education
Board approval. The Board did not approve 31 of these payments totaling $507,878. School officials provided Board
minutes from prior years showing the approval of certain purchases in the past; however, School officials could not
provide us with Board minutes approving the purchases made during our scope period.
Source: http://osc.state.ny.us/localgov/audits/schools/2012/achievementacademy.pdf
TROY
Ark Community Charter School
City of Troy
State Comptroller Audit (2012)
Auditors found internal control deficiencies.
Auditors found weaknesses in the internal controls over IT. The Board did not develop a disaster recovery plan to
minimize disruption of operations in the event of a catastrophic event.
Auditors found that the Board did not adopted policies and procedures for remote access and server room security.
Source: http://osc.state.ny.us/localgov/audits/schools/2012/arkcommunitycharter.pdf
BUFFALO
Oracle Charter School
City of Buffalo
State Comptroller Audit (2014)
Auditors found that the Board did not demonstrate that it used an appropriate process to ensure it obtained a
suitable building site at a reasonable cost.
School officials did not document that the Board performed an appropriate cost analysis of the selected site or
alternative sites. Consequently, the School agreed to an arrangement requiring it to pay more than $5.1 million for the
acquisition and renovation of its building financed at a 20 percent interest rate. Auditors found that the building was
acquired and renovated for approximately $1.4 million, and that a developer fee and interest costs will total more than
$3.7 million over the term of the Schools 15-year lease. As a result of a recent decision to prepay a portion of the debt,
the School was able to save approximately $136,000.
Auditors found that charter school maintained inaccurate records.
The business office did not maintain accurate and supported leave accrual records for all School employees. The School
does not require that all employees submit leave request forms. Those employees required to submit forms did not do
so consistently, and the forms did not always include evidence of required approvals.
Source: http://osc.state.ny.us/localgov/audits/schools/2014/oraclecharter.pdf
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14
Center for Popular Democracy & The Alliance for Quality Education
15
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Center for Popular Democracy & The Alliance for Quality Education
NIAGARA
Niagara Charter School
Town of Wheatfield, Niagara County
New York Times (2010)
A report by the New York State Education Department concluded that the Niagara Charter School in Buffalo suffered from
the pervasive appearance of financial mismanagement and less-than ethical behavior on the part of the Board of Trustees
and the school administration. Public funds provided to the school during its first years were apparently spent on plane
tickets, restaurant meals and alcohol. More than $100,000 was spent on no-bid consulting contracts. The investigation
also questioned the schools relationship to another local charterEnterprise Charter Schoolwhich apparently shared the
same chief executive and several board members.
Source: http://www.nytimes.com/2010/05/26/education/26charters.html?_r=0&adxnnl=1&pagewanted=all&adxnn
lx=1397606483-HRfkrEDtpvRD/2RLuUadhA
ROCHESTER
Eugenio Maria de Hostos Charter School
City of Rochester in Monroe County
State Comptroller Audit (2014)
Auditors found School entered into the leases without any process for determining the fair rental value of
the buildings.
Auditors reviewed four building leases and 12 service contracts entered into by the School and found that the
School entered into the leases without any process for determining the fair rental value of the buildings. Similarly,
although competitive bidding is not required, auditors found that the School only sought competition for one of the
service contracts. These findings are of particular concern because the leases and contracts were entered into with
organizations having various types of business or occupational relationships with members of the Board or their family
or friends. Under these circumstances, it is questionable whether the leases and contracts were in the best interest of
the School.
Auditors found charter School failed to establish a written contract for services paid for.
The School paid for use of a building and for certain services without having entered into written agreements.
Auditors found charter School lack IT infrastructure.
The School also lacked appropriate information technology (IT) policies and procedures. The School did not properly
control user access rights to the IT system and did not properly establish a disaster recovery plan.
The School lacked accurate IT inventory records.
Source: http://osc.state.ny.us/localgov/audits/schools/2014/eugeniomariadehostoscharter.pdf
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Center for Popular Democracy & The Alliance for Quality Education
support purchasing decisions and payments. As a result of this weakness, auditors reviewed 76 disbursements totaling
$320,000 to determine if the disbursements were for school purposes, properly supported by a detailed original receipt,
and, where applicable, to ensure compliance with the Schools charter. Auditors found that the School used restrictive
practices in some of their purchases, which undermined the intent of true competition.
Source: http://osc.state.ny.us/localgov/audits/schools/2013/rochesteracademycharter.pdf
SYRACUSE
Southside Academy Charter School
City of Syracuse
State Comptroller Audit (2014)
Auditors found that charter School Board of Directors approved budget without adequate information.
The Board contracted with National Heritage Academies (NHA) to be responsible for the administration, operation
and performance of the School in accordance with the Schools Charter and subject to the oversight and authority
of the Board. The agreement transfers all School revenues to NHA, and the revenues are to be expended by NHA
in accordance with the approved budget, and as otherwise authorized by the Board. NHA provides the Board with
projected budgets, budget amendments and quarterly financial statements for its review. Although the Board
reviews and approves budgets and budget amendments, the budgetary information and the quarterly financial
statements lack transparency to allow the Board to identify the fee for services paid to NHA and to distinguish
indirect from direct costs, and how indirect costs are allocated by NHA to the School. For example, $2.9 million in
indirect costs have been allocated to the School by NHA but the Board has not received support for how the costs
are allocated. As a result, this limits the Boards ability to adequately monitor NHA and verify indirect costs allocated
to the School are accurate and appropriate.
Source: http://osc.state.ny.us/localgov/audits/schools/2014/southsideacademycharter.pdf
ITHACA
New Roots Charter School
City of Ithaca
State Comptroller Audit (2012)
Auditors found School lacked Board approval documentation for transactions.
Auditors identified six contracts and three purchases totaling approximately $917,900 that required Board approval. However,
no documentation exists to show the Board approved six of these nine transactions, totaling approximately $172,000.
Source: http://osc.state.ny.us/localgov/audits/schools/2012/newroots.pdf
Source: http://osc.state.ny.us/audits/allaudits/093007/06s50.pdf
Center for Popular Democracy & The Alliance for Quality Education
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Auditors found that School officials were not always soliciting multiple bids to ensure that the best value is obtained.
For example, auditors found no evidence that required telephone or written quotes were obtained for 8 purchases the
auditors tested. The total value of these purchases was $8,432.
Source: http://osc.state.ny.us/audits/allaudits/093008/07s103.pdf
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Center for Popular Democracy & The Alliance for Quality Education
Auditors found that Academys Operations Manager has too many responsibilities in both the procurement and payroll
areas and there is no independent oversight over these functions.
Auditors found Academy needs to better monitor controls over its equipment and the use of school computers by
school staff and students. Auditors judgmentally selected 11 out of approximately 85 computers used by employees and
students and found that individuals had accessed or attempted to access inappropriate and sexually-related Internet sites
on three of them.
Source: http://osc.state.ny.us/audits/allaudits/093008/07s102.pdf
Auditors also identified significant weaknesses in the controls over KIPP Academys payroll operations. For example,
special bonuses, special stipends, pay increases, overtime payments and other types of payroll transactions were not
adequately documented. As a result, there was less assurance such transactions were always authorized and appropriate.
Source: http://osc.state.ny.us/audits/allaudits/093008/06n15.pdf
Center for Popular Democracy & The Alliance for Quality Education
signature on certain checks valued at $1,447 while the business manager was on leave. Although these expenditures
were for school items, checks should be signed only by authorized personnel.
Auditors found that payments for certain purchases were split so the employees at the school could circumvent the
required purchase order process. To account for equipment properly, perpetual inventory records should be maintained
and a physical inventory performed at least once a year.
Auditors found that Sisulu officials neither maintained a complete inventory listing nor conducted an annual physical
inventory. As a result, auditors testing found that eight items with a total value of $10,628 were unaccounted for.
If a student wishes to attend a charter school free of charge, the parents or legal guardians are required to reside within
the district. Students who live outside the district may be able to attend such schools if the students family pays tuition.
Auditors found that one student continued to attend Sisulu free of charge even though her parents had relocated to New
Jersey from New York State. The school had requested $17,670 in State aid for this student even though her parents
now lived in another state. In addition, auditors found that Sisulu officials failed to collect $3,415 in school lunch charges
because they did not bill students parents in a timely manner.
All personnel who work at the school should be fingerprinted and subjected to background checks. However, auditors
found that security personnel at the school had not been fingerprinted nor subjected to background checks.
Source: http://osc.state.ny.us/audits/allaudits/093007/06s52.pdf
purchases. In the absence of a properly approved purchase request form or other required prior approvals, TRCS officials
have less assurance purchase transactions are valid, appropriate and necessary. Further, in the absence of a receiving
report, TRCS officials have less assurance the school has gotten what it paid for. These control weaknesses have
additional significance, because TRCSs purchasing duties are not adequately separated among different employees due
to limited staff (i.e., the individual responsible for issuing purchase orders also prepares the documents submitted for
payment processing). It is therefore critical that TRCS officials ensure that all required prior approvals are obtained before
purchase orders are issued and receiving reports are obtained before payments are made.
Source: http://osc.state.ny.us/audits/allaudits/093007/06n5.pdf
Center for Popular Democracy & The Alliance for Quality Education
between July 2004 and May 2006. There was no evidence of a review or approval process for charges, no receipts were
available, explanations were minimal or missing, and the bills were paid directly from the statements.
The Board did not routinely receive the required reports to effectively monitor the financial condition of the school. For
example, the Board did not review and approve the budget, approve any budgetary transfers, or receive budget status
reports. It also did not discuss audit findings of the independent auditor or approve corrective action plans to address
specific findings; did not discuss and authorize conference attendance; and did not review bank accounts annually,
authorize required accounts, or recommend closure of unneeded accounts.
The Schools Director of Operations is responsible for many functions, which raises some concerns with the adequacy of
controls, including separation of duties. This individual opens mail; handles all cash receipts; is solely responsible for the
internal accounting system; preparation of financial statements; monitoring of staff attendance for payroll purposes; and
preparing, signing, and mailing checks.
Source: http://www.oms.nysed.gov/oas/Audit_Report/Charter_Schools/Reports/HTCSFinalReporCH-01061withresponse.pdf
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YONKERS
Charter School of Educational Excellence
City of Yonkers
New York the State Education Department, Audit Office of Audit Services (OAS) (2012)
Auditors found significant internal control deficiencies.
The CSEE was not in full compliance with all of the terms of the Charter. The Board of Trustees (Board) did not maintain
sufficient documentation of Board meetings, did not establish a required escrow account at the appropriate level, and did
not always publicly post its annual report.
Two Trustees failed to properly disclose organizational conflicts of interests.
The Board minutes that were available did not always indicate the Trustees that were not present and did not always note
how particular Trustees voted on resolutions.
The Charter states that the school agrees to establish an escrow account of no less than $75,000 to pay for legal and
audit expenses that would be associated with dissolution should it occur. The Board did not comply with their Charter by
failing to set up this escrow account.
Two Trustees were directors in an educational firm that does business with CSEE. In their June 2008 DFIs, which
were part of the renewal charter, these Trustees indicated that they were affiliated with the Center for Educational
Innovation (CEI) a firm that provides professional development and other services for CSEE. However, neither Trustee
disclosed this relationship with CEI in their annually updated DFIs which were signed on August 10th and October 18th
of 2010 and included in the annual report. Both individuals are listed on CEIs current website, one as a Senior Fellow
and one as a Director. Auditors could not determine if these two Trustees disclosed their relationship with CEI to the
Board because of missing and incomplete minutes.
CSEE could not support $6,159 in federal grant expenses.
Internal controls were weak for incoming checks, petty cash, inventory, and purchasing.
CSEE does not have supporting documentation that all special education students received their prescribed
educational programs.
Source: http://www.oms.nysed.gov/oas/Audit_Report/Charter_Schools/Reports/CSEEFinalReport_CH_0911_01.pdf
HUDSON
Austin L. Carr Charter School
Columbia County (Hudson)
New York the State Education Department, Audit Office of Audit Services (OAS) (2001)
Auditors found significant internal control deficiencies.
The audit found that the Schools financial position is unstable.
The School does not have any material source of funds other than its planning grant, the Schools accounting records are
incomplete and inaccurate, and the School has an operating deficit.
The audit also found that the Schools Board did not implement the necessary management controls, has not fulfilled its
governance role and has not adhered to its Charter.
The Board did not collectively possess or obtain the fiscal expertise to ensure the Schools resources were being used
efficiently and effectively and properly safeguarded, nor did it monitor the Schools financial status or prevent conflict of
interest transactions.
The School did not comply with the terms of its grant, incurred non-reimbursable and questionable expenditures,
overspent grant funds, and must make restitution of $14,582 to the Department representing overpayment of grant funds.
Source: http://www.oms.nysed.gov/oas/Audit_Report/Charter_Schools/Reports/AustinLCarrfinal_CH-1101-1.pdf
28
Center for Popular Democracy & The Alliance for Quality Education
LONG ISLAND
Roosevelt Childrens Academy Charter School
Roosevelt New York, Nassau County
State Comptroller Audit (2014)
Auditors found charter school board of directors did not adequately monitor the schools operations.
The Board did not adopt realistic budgets or routinely monitor financial operations. School officials created an
expenditure code entitled building fund and budgeted $4.8 million in the 2010-11 fiscal year, $5.2 million in 2011-12,
and $2.6 million in 2012-13 even though School officials had no expectation of any outflow of cash for such expenses.
The Board is not monitoring the annual budget and has not established a Budget and Finance Committee as required by
School by-laws.
Auditors found charter school paid board members violation of by-laws or policy.
The School also paid for Board member expenditures that were not authorized by the School by-laws or policy. Of
$31,630 in Board expenditures, $26,444 was not authorized.
Auditors found the charter school failed to competitive bid out projects.
The School paid four vendors a total of $521,197 for significant public work and purchase contracts without fair
competition, did not seek competitive price quotes when procuring goods and services totaling $16,028, and
engaged six professional service providers, paid a total of $478,264, without soliciting competition. The School paid
an information technology consultant $118,182 more than the agreement provided, and did not have an applicable
agreement for paying $25,713 for security services.
Source: http://osc.state.ny.us/localgov/audits/schools/2014/rooseveltchildrensacademy.pdf
29
Analytical Steps:
Step 2:
Identify Possible
Frauds That
Could Exist
Step 1:
Understand
The Business
Technology Steps:
Step 4:
Use Technology
To Gather Data
About Symptoms
Investigative Steps:
Step 3:
Catalog Possible
Fraud Symptoms
Step 5:
Analyze
Results
Step 6:
Investigate
Symptoms
Automate
Detection
Procedures
Follow Up
Step 1: Understand the BusinessDevelop a firm understanding of the business being examined. Having a detailed
understanding of the business underlies the entire strategic fraud detection process.45 This step includes:
a. Inclusion of an experienced business employee on detection team
b. Tour the business
c. Interview key personnel
d. Analysis of financial statements
e. Work with auditors/security personnel
Step 2: Identify Possible Frauds that Could ExistOnce fraud examiners feel confident that they understand the
business, they determine what possible frauds might exist or could occur in the operation being examined. This risk
assessment step requires an understanding of the nature of different frauds, how they occur, and what symptoms they
exhibit.46 This step includes:
a. Divide business unit into individual functions
b. Determine the players
c. Determine types of interactions between insiders and outsiders
d. Ask questions such as:
a. How could employees commit fraud alone?
b. How could vendors commit fraud alone?
c. How could vendors/employees collude?
e. Develop a list of possible frauds specific to this business unit
Step 3: Catalog Possible Fraud SymptomsThis step involves the cataloging of frauds identified in Step 2. A matrix,
tree diagram, or brainstorming map can be created that correlates specific symptoms with specific possible frauds.47
a. Analytical anomalies
b. Document or record symptoms
c. Internal control symptoms
30
Center for Popular Democracy & The Alliance for Quality Education
d. Lifestyle symptoms
e. Behavioral symptoms
f. Tips and complaints
Step 4: Use Technology to Gather Data About SymptomsOnce symptoms are defined in Step 3, supporting data
is extracted from company databases and other sources. While traditional audit procedures call for limited transaction tests,
such as those currently employed by authorizer auditors, technology-based fraud-detection queries are run against full
transaction populations. Because even significant frauds can occur in very few transactions, the use of sampling potentially
misses fraudulent records (sampling error) and circumvents the ability of computers to quickly analyze full populations.48
This step includes:
a. Pulling data from company databases.
b. Creating custom data warehouses to store data.
Step 5: Analyze and Refine ResultsOnce relevant data are retrieved, they are compared against expectations and
models. Computerized algorithms examine records and highlight anomalies, unknown values, suggestive trends, or outliers
that should be analyzed directly by examiners. This step includes: 49
a. Analysis using time algorithms, statistical queries, and other tools.
b. Conducting iterative runs to hone results.
Step 6: Investigate SymptomsOnce anomalies are highlighted and determined to be indicators of fraud, they are
investigated either using traditional or technology-based approaches. Investigation of leads are only done on anomalies that
cannot be explained through continued analysis. This step includes: 50
a. Use computer-based analyses for efficiency
b. Work with auditors and/or security personnel
c. Refine algorithms and queries from steps 4 and 5
Additional Activities After Process: Fraud examiners then follow up on all identified symptoms. While
finding fraud is certainly the primary objective, the process often highlights control weaknesses, ineffective systems,
undocumented policies, and data errors. Each of these anomalies should be corrected to make company processes more
efficient and effective. This step includes: 51
a. Follow-up on suspected frauds
b. Automate detection procedures
c. Use lessons learned to cycle through the process again
31
Notes
1
10
http://www.nydailynews.com/opinion/jamesmerriman-finally-shred-charter-school-caparticle-1.1986372
11
12
13
14
15
16
http://populardemocracy.org/news/charter-schoolvulnerabilities-waste-fraud-and-abuse
17
Source: https://www2.ed.gov/about/offices/list/oig/
invtreports/x42k0002.pdf
18
Source: https://www2.ed.gov/about/offices/list/oig/
invtreports/x42k0002.pdf
19
20
http://osc.state.ny.us/audits/allaudits/
093008/06n15.htm
21
http://osc.state.ny.us/audits/
allaudits/093008/07s101.pdf
22
http://osc.state.ny.us/audits/
allaudits/093008/07s102.pdf
23
http://osc.state.ny.us/localgov/audits/
schools/2011/brighterchoice.pdf
24
http://osc.state.ny.us/audits/allaudits/
093013/11s14.htm
25
http://osc.state.ny.us/localgov/audits/
schools/2013/albanycharter.htm
26
http://osc.state.ny.us/localgov/audits/
schools/2014/oraclecharter.htm
27
http://osc.state.ny.us/localgov/audits/schools/
2014/eugeniomariadehostoscharter.htm
28
32
30
31
44
http://www.gsaig.gov/assets/File/other-documents/
Background-SixStepApproach.pptx.pdf
45
http://www.business.umt.edu/Portals/0/Libraries/
seminar_series/f04-strategic_fraud_detection.doc. &
http://www.gsaig.gov/assets/File/other-documents/
Background-SixStepApproach.pptx.pdf
46
Ibid.
47
Ibid.
48
Ibid.
49
Ibid.
50
Ibid.
51
Ibid.
32
33
34
http://www.newyorkcharters.org/wp-content/
uploads/The-Academy-Audit-2010-11.pdf
35
http://www.gsaig.gov/index.cfm/news/first-blogentry/?keywords=proactive%20fraud%20detection
36
http://www.acfe.com/uploadedFiles/ACFE_Website/
Content/documents/managing-business-risk.pdf
page 8
37
http://www.acfe.com/uploadedFiles/ACFE_Website/
Content/documents/managing-business-risk.pdf
page 20
38
http://www.acfe.com/uploadedFiles/ACFE_Website/
Content/documents/managing-business-risk.pdf
page 8
39
https://ic.globaliia.org/
SessionInformationDownloadDocuments/CS%20
5-2_Rasha%20Kassem_vs%202.pdf
40
https://ic.globaliia.org/
SessionInformationDownloadDocuments/CS%20
5-2_Rasha%20Kassem_vs%202.pdf page 44
41
42
http://www.fraudessentials.com/assetmisappropriation/
43
https://ic.globaliia.org/
SessionInformationDownloadDocuments/CS%20
5-2_Rasha%20Kassem_vs%202.pdf page 33