Comptroller Stringer Finds Financial Reporting Deficiencies at Success Academy Schools

(New York, NY) – Comptroller Scott M. Stringer today released an audit of Success Academy Charter Schools-NYC’s financial controls, which found financial reporting deficiencies. The audit, which covers Fiscal Years 2013, 2014, and 2015, makes 28 recommendations to ensure Success Academy is in compliance with its own financial rules, as well as those of its charter authorizer and other oversight agencies.

Since 2014, the Comptroller’s Office has audited the City Department of Education (DOE) ten times, with ten additional audits currently ongoing, for a total of 20. This is the Comptroller’s fourth charter school audit to ensure taxpayer dollars were used appropriately. The charter schools were selected based on objective criteria, including geography, size, and publicly available financial data.

The audit of Success Academy Charter Schools-NYC found the following:

• Duplicative and questionable payments from Success Academy schools to the Success Academy management “Network,” which are inconsistent with the terms of their contract.
• An inability to demonstrate that some special education services were actually delivered to students, despite Success’s billing the DOE. The audit calls for the DOE to be reimbursed.
• Reporting inconsistencies, which make administrative costs appear lower to the public and oversight agencies – and in-classroom expenditures appear higher – than was actually the case.
• Lax record-keeping and missing documentation for loan agreements worth millions of dollars, which may have never been put in writing by Success.
• Noncompliance with Success Academy’s own fiscal controls over credit card and other spending.
• Clear violations of the internal financial rules under which Success claims to operate.

“Any entity receiving taxpayer dollars must operate efficiently and follow the rules. We found irregularities in this audit of Success Academy that raise serious concerns. Billing the DOE for special education services without records to verify that they were provided, financial reports that made administrative costs seem lower than they actually were, ineffective fiscal controls over credit card and other spending, missing loan agreements for millions of dollars — all were findings uncovered by this audit, ” Comptroller Scott M. Stringer said. “We found situations in which Success Academy was violating its own standards, or those of oversight agencies. We hope Success Academy will embrace our recommendations and adjust its practices. This isn’t about district versus charter schools—it’s about protecting taxpayer dollars and following the rules.”

Success Academy Charter Schools-NYC operated 24 charter schools in New York City, which served 8,715 students in Fiscal Year 2015 (FY 2015). The schools collectively maintain a “management agreement” with a legally separate entity formally known as “Success Academy Charter Schools, Inc.,” also known within the Success Academy organization as the “Network.”  Under the management agreement, the Success Academy Network provides management services, including financial-reporting services, to the Success Academy schools in exchange for a management fee of 15 percent of the per-pupil revenue that the Success Academy schools received from the City DOE. In FY 2015, the Success Academy schools collectively paid the Network a management fee of $18.3 million. The audit focused specifically on Success Academy Harlem 3, which necessitated examining some Network finances.

The audit found the following:

Duplicative Payments from the Success Academy Schools to the Success Academy Network

The audit found that in FY 2015, Success Academy schools paid the Success Academy Network an extra $624,342 for services that the Network should have provided in exchange for its $18.3 million management fee.  The services included staff training and “professional development,” printing, copying, and student assessments.

Incorrectly Classified Expenses Allowed Success to Overstate Spending on Students

The audit found that Success Academy classified its management fee expense inconsistently and incorrectly in its FY 2015 certified financial statements and its 2015 “Report Card” submitted to its authorizer, the State University of New York, creating the appearance that Success Academy was spending more money on educating students – and less on administrative costs – than was actually the case.

• In their certified financial statements, charter schools are required to report spending for both “program services,” meaning money spent directly on educating students, and “supporting services,” including administrative costs. The auditors found that Success Academy reported widely inconsistent versions of how much of its management fee went toward educating students – from none of it, to half, to 92 percent.
• In Fiscal Years 2013 and 2014, Success Academy reported its entire management fee – 100 percent – as “supporting services expenses.” During those two fiscal years, an average of 80.65 percent of Success Academy’s overall spending went to “program services,” while 19.35 percent went to “supporting services,” according to its certified financial statements.
• However, in its FY 2015 financial statements, Success Academy reported only 8 percent of its management fee as “supporting services expenses,” an about-face that created the appearance that more than 92 percent of its spending went directly toward educating students.
• Separately, the audit found, in its FY 2015 Annual Charter School Report Card to SUNY, Success Academy reported that half — 50 percent — of the same management fee was an “administrative expense.”
• The auditors determined that had Success Academy followed a consistent reporting method, it would have reported a lower amount of its overall spending — approximately 81 percent instead of 92 percent — went directly towards educating students.
• As a result, auditors determined that Success Academy understated its “supporting services expenses” by as much as $16 million – or 61.2 percent – which masked its true management and operational costs in its financial statements.

Charging the DOE for Special Education Services That May Not Have Been Provided

The audit found the Success Academy billed the DOE more than $50,000 for special education services that its records did not show it provided.

• In six of 21 sampled special education students at Success Academy Harlem 3 – or 28.6 percent – the audit found billing for a greater level of services or a longer duration of services than were documented as having been provided to the students.
• Based on a review of Individualized Education Programs (IEPs) and Success Academy records, the school failed to provide certain mandated special education services to 10 of the 21 sampled students – or 47.6 percent.
  • For five students, the DOE was incorrectly billed for more than $49,000 for services that were either not provided at all or not fully delivered.
  • In one case, Success Academy improperly calculated the length of time that one student received special education services (resulting in overbilling of nearly $1,500).
• On December 16, 2016, in response to a draft of the audit report, Success Academy provided additional documentation to support its special education billing, which did not significantly alter the report’s findings.  Although Success Academy’s newly-produced records arguably support the billing for special education services provided to one of the six students the auditors sampled, representing a combined total of $10,390 of the $50,825 in questioned billing, the auditors could not adequately establish their reliability because they were not produced during the audit, when Success Academy claimed they were “unavailable.”
• The audit recommends that Success Academies reimburse the DOE for special education services that were not provided.

Untimely and Missing Employee Background Checks

• New York State Education Law requires that all charter school employees be fingerprinted and undergo a criminal background check. When auditors examined files for a sample of 44 employees at Success Academy Harlem 3, they found that 61 percent – or 27 individuals – began working in the school before those checks were completed.
• In one case, an employee worked at Harlem 3 for four years and eight months before these checks were finished.

A Failure to Document or Obtain Required Approvals for Loan Agreements Totaling $8.5 million

• Success Academy schools borrowed $8,500,000 from the Network, but failed to record written loan agreements for $2,700,000 of those funds. The proceeds were used to finance operations at 15 schools.
• Success Academy provided auditors with six agreements for loans with balances totaling $5,800,000 that were signed by the then chairs of the boards of trustees of the charter school-borrowers.  However, Success Academy stated that it could not locate agreements for loans with balances totaling $2,700,000 (of which $250,000 was attributable to Harlem 3).  Moreover, Success Academy stated that it believed that agreements for the loans totally $2.7 million never existed in written form.

Among other findings:

• Success Academy did not maintain adequate controls over its fixed assets inventory as required by its charter. In its FY 2015 financial statements, Success Academy Harlem 3 reported that it had property and equipment valued at $24.8 million. The NYSED Fiscal Oversight Guidebook states that charter schools must inventory all assets and should maintain “complete, up-to-date inventory records.” Success Academy’s inventory records were deficient in several ways. For example, expensive equipment such as computers, smartphones, and cameras were not clearly assigned to an employee or place, and Success Academy did not conduct annual inventory inspections as recommended by the NYSED guidebook. Inventory controls are essential to reduce the possibility of waste, misuse, and theft and to ensure that public funds are being spent appropriately.
• Success Academy did not comply with its own fiscal policies and procedures to ensure that purchases made by network and school employees on behalf of schools were reasonable, appropriate, adequately supported, and properly authorized. Of $320,431 in sampled purchases, auditors questioned purchases totaling $312,088 – or 97.4 percent—based on Success Academy records that showed that Success’s own rules were not followed.  For example, Success Academy purchased services such as advertising, website design, and software support for sums exceeding $25,000 without competitive bidding or the specific justifications and management approval that its own rules require.
• In other instances, credit cards were used for purchases exceeding $500 without a record of the business purpose or that the purchase could not be paid by check, which would reflect a violation of Success’s own rules.
• Under New York State law, charter schools receive per-pupil funding from students’ school district of residence. Accordingly, Success Academy requires its schools to keep students’ proof of residency on file. When auditors reviewed records for 71 sampled students at Success Academy Harlem 3, they found that the school did not obtain appropriate proof of residency for 13 students – or 18 percent of the sample. The City DOE was billed $168,178 for those students, and auditors could not determine whether the charges were appropriate based on Success Academy’s records.
• On December 16, 2016, in connection with its formal, written response to the draft report, Success Academy provided the auditors with additional documentation that includes acceptable proof of residency for 5 of the 13 students cited in the report.

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