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einstein[KHTS] – A county-requested Extraordinary Audit final report released Tuesday alleged violations in Einstein Academy’s charter school petitions, “significant deficiencies” with the schools’ internal controls and a lack of written accounting policies.

Albert Einstein Academy for the Letters, Arts and Sciences operates a K-6 charter school in Newhall, which is chartered by the Acton Agua Dulce Unified School District, as well as a high school in Valencia, which is chartered through the William S. Hart Union High School District.

“The report speaks for itself,” said Kostas Kalaitzides, spokesman for the Los Angeles County Office of Education.

He declined further comment.

Einstein officials did not immediately respond to a request for comment.

The charter schools’ officials faced several local denials for its petition to operate a k-6 charter school in the Santa Clarita Valley, which led the school to seek permission from the Acton Agua Dulce Unified School District.

AADUSD officials granted the petition, which prompted a lawsuit from the Newhall School District against Einstein Academy and AADUSD, claiming the school was usurping Newhall’s local control, among other legal concerns.

The presiding judge in the lawsuit named Newhall as the prevailing party, set aside the previously approved charter and is now asking Einstein to re-seek permission from AADUSD to operate a charter school in the Santa Clarita Valley.

Acton Agua Dulce Unified School District officials are now considering the move, which must be approved by the governing board. A decision by the board is expected in the coming weeks.

According to the findings on “Internal Controls” section of the report:

“Based on the findings of the FCMAT extraordinary audit, the team concludes that significant deficiencies exist with the internal control structure, particularly with monitoring procedures, internal controls over operations and management’s ability to override internal controls.”

The first recommendation in the report to the county’s superintendent of education, who requested the Extraordinary Audit, was: “Notify the governing board of AEALAS that insufficient documentation exists that fraud, misappropriation of charter funds and/or assets or other illegal activities may have occurred and that the county office has concluded its review.”


Why the Einstein Academy audit was conducted

The financial review was requested by the county’s Office of Education, after alleged indications of fraud and commingling funds within the AEALAS organization were presented to county Superintendent Arturo Delgado, the draft states.

The report didn’t find substantiation for the fraud claims. It acknowledges the FCMAT team lacks any such legal authority to declare an occurrence of fraud, with its role being one of independent operational review.

The goal of the audit was to present the requested information to Delgado. Delgado has authority to make recommendations to the District Attorney’s Office if he suspects illegal activity occurred.

Before the report’s publication, Acton Agua Dulce Superintendent Brent Woodard said based on conversations he’d had with officials, he didn’t believe the issues with Einstein Academy reached a “red flag” level of concern.

Woodard said he planned to address the concerns at the school’s charter petition hearing, however, Los Angeles County Office of Education officials had not yet finalized the report with FCMAT as of that hearing date.

Woodard did not immediately return calls seeking a comment Tuesday.


An overview of the FCMAT audit report for Einstein Academy

The report is broken down into three sections: an explanation of what FCMAT is and the study conducted into the operations for Einstein Academy’s various schools; an explanation of Albert Einstein Academy for the Letters, Arts and Sciences operations they reviewed; and a review of the team’s findings.

The audit was requested in December 2013, and then amended in March 2014, and the audit was underway by April.

During interviews, “FCMAT study team members asked questions pertaining to levels of authority to enter into contracts, governing board oversight, financial management policies and procedures, job duties and responsibilities, the business practices processing of transactions through the various back office service providers, and management’s process for preserving documents and the overall internal control structure and line of authority,” according to the report.

The audit also sampled transactions between three organizations identified in the audit, the schools’ management organization (CMO), the nonprofit AEALAS Foundation and the schools’ operating entity, AEALAS Inc.


Below are findings in the report, taken directly from the report.  


Internal controls for Einstein Academy

* The 2011-12 independent auditor’s report findings and questioned costs identified two internal control findings:

* Finding 2011-1 identified that AEALAS, Inc. lacks formal purchasing policies because invoices that were tested did not have an audit trail of who initiates, authorizes, and approves the purchases, and a check was issued to a staff member rather than the actual vendor.

* Finding 2011-2 identified the lack of a formal cash receipt process or policy because there was no formal documentation of cash and checks collected and deposited.

* The 2012-13 independent auditor’s report findings and questioned costs identified six findings:

* Finding 2013-1 identified that AEALAS, Inc. had established a CMO without setting aside funding for the CMO’s operations and failed to budget for its activities. Referenced in finding 2013-1 are audit notes one, four, and 14. Audit note four documents that an intercompany payable of $354,260 owed by the CMO to AEALAS-Hart was corrected by the auditor as an audit adjustment at page 21 in the 2012-13 audit report’s Schedule to Reconcile the Unaudited Actuals Report with Audited Financial Statements, as shown above in Table III.

* Finding 2013-1 and audit note 14 describe that AEALAS, Inc. also loaned $457,481 to the Foundation for the purpose of starting new school locations.

Because of the funds loaned to the CMO and Foundation, the AEALAS-Hart charter school had to sell a portion of its receivables and place some of its cash as collateral to fund the CMO activities.

* Finding 2013-1 response of AEALAS, Inc. states that AEALAS, Inc. has hired a new experienced chief financial officer (CFO) who will be addressing the budget and control issues. FCMAT believes the new CFO should provide stability and improve AEALAS’s internal controls and management monitoring, accountability, and communication and the overall control environment of all AEALAS organizations.

* Finding 2013-2 identified that the CMO does not follow the same cash disbursement controls as AEALAS-Hart.

* Finding 2013-3 identified that AEALAS, Inc. authorized a payment on one of its loans resulting in an overpayment of $4,000.

* Finding 2013-4 identified that loan documents were unsigned and minutes of board meetings were missing. In addition, the CMO did not have any budgets readily available for the other charter schools except for AEALAS-Hart.

* Finding 2013-5 identified that the AEALAS, Inc. founder and former executive director were continuing to sign checks and loan documents on behalf of AEALAS, Inc. without express authorization of the governing board. Auditors were unable to obtain board meeting minutes or other documents indicating any authority to perform those functions.

* Finding 2013-6 identified that $142,500 of loans payable to related parties were delinquent and not in compliance with Bond Series 2012A and Bond Taxable Series 2012B loan agreement covenants in the following sections:

* 5.07, failure to file annual report for the fiscal year ending June 30, 2013 on time.

* 5.09, to maintain an arm’s-length relationship with its affiliates such as the Foundation; not to pledge its assets for the benefit of any other entity or make any loans or advances to any other entity such as was done with the Foundation; to hold itself out as a separate entity when the Foundation processed a loan with Mission Valley Bank while the loan was issued to AEALAS, Inc. using AEALAS, Inc.’s tax identification number; to correct any known misunderstanding regarding separate identity, which AEALAS, Inc. did not correct and left the loan in the name of AEALAS, Inc.; to maintain adequate capital whereby the CMO did not have a budget or operating capital for its activities.

* 5.12, AEALAS, Inc. failed to have the required 30 days cash on hand.

* 5.13, AEALAS, Inc. failed to maintain its short-term borrowing to less than 10 percent of its gross revenue, which at June 30, 2013 was 14 percent.


Transaction Sampling for the Foundation, CMO, AEALAS-AlpineEA, AEALAS-Acton, and AEALAS-Hart

FCMAT found that consistent and complete audit trail documentation continues to be unavailable. In several instances, the only documentation of the transaction to support the item sampled was a photocopy of a commercial warrant. The team did observe that the most current transactions selected as part of the sample testing were supported by more complete documentation, including vendor invoices, contracts and photocopies of the commercial warrant.

Many loan agreements are unsigned by one or both parties to the loan. In addition, minutes of the governing board approval authorizing the loan were not available.

A deficiency exists with formal written cash receipt processes or policies. For several cash receipt transactions, including donations, AEALAS failed to formally document cash and checks collected and deposited, and failed to present or have available donation acceptance letter copies acknowledging acceptance of any donations. In many instances, only a deposit slip was available and was missing photocopies of checks that support the total amount deposited.

Conversely, stacks of check copies and remittent advice copies were available but did not indicate the date of deposit.

The Foundation accounting records identified six transactions totaling $22,258.12 between March 2014 and May 2014 noted as cash and located in the general ledger account titled “Ask My Accountant–Cash Transactions.” AEALAS was unable to provide any documentation that would explain these cash transactions.

The Foundation accounting records identified a vendor as “Pizza Place” with four transactions in October 2013 totaling $13,847.65; however, the supporting documents indicated that the transactions were for legal services, consulting and reimbursements.

* $10,000 for legal services regarding the Ventura project-AEALAS-TO.

* $2,000 to Mark Blazer for reimbursement; however, no documentation was available to provide the details of the reimbursement.


Other findings in the FCMAT report

During FCMAT’s examination of AEALAS books and records, other notable findings involved pledged commitments as part of the charter petitions. AEALAS charter petitions relied on significant and material dollar amount donations from the Foundation to support several charter petitions included in the proposed startup financial budgets. The Foundation’s accounting records show that at no time did its cash accounts have available funding levels to honor the commitments made in the charter petitions to the authorizing entities.

Specific examples include:

* The AEALAS-TO charter petition submitted to the Ventura County Office of Education in November 2012 states on page 8 of the financial plan: “The plan includes a starting balance of $275,000 based on an existing commitment of funds to the school.” The funds are committed by the Foundation and scheduled in the AEALAS-TO charter petition financial plan on Table X cash flow to be received in July 2013.

* The Saugus Union School District August 2012 charter petition that was denied by the district included in the proposed charter petition a commitment letter from the Foundation of $150,000 to be received February 1, 2013 and $150,000 to be received August 1, 2013.

* The AEALAS San Fernando Valley charter petition that was denied by the charter authorizer included in the proposed AEALAS San Fernando Valley charter petitions’ multiyear budget, that in July 2012, the Foundation would donate $275,000 “if needed.”

* FCMAT’s review of the Foundation’s QuickBooks software accounting records from the date of the Foundation’s first transaction recorded on April 30, 2012 through June 4, 2014 revealed that the daily balance never had combined or individual cash of $150,000.

In other words, the Foundation records indicate that the Foundation did not have the ability to pledge or pay the stated donations in the proposed charter school petitions of $150,000 (Saugus petition) or $275,000 (San Fernando Valley).

* The largest cash balance that the Foundation possessed in any of its cash accounts was in its primary checking account, with a balance of $148,379.51 on July 5, 2013. The temporary large cash balance is attributable to an influx of funds lent to the Foundation by the CMO on the same day, July 5, 2013, totaling $150,700. Two days earlier on July 3, 2013, the primary checking account balance was negative by $2,320.49.

* The Foundation account titled Outside Contract Services contains 40 checks dated December 17, 2013, of $599.99 each and totaling $23,999.60 that were paid to employees of AEALAS-Hart. The checks do not describe the purpose of the payment, or type of contract service each of the AEALAS-Hart employees performed to receive $599.99 in compensation.

AEALAS was unable to provide any Internal Revenue Service (IRS) form W-9s signed by the 40 independent contractors. A signed IRS form W-9 – Request for Taxpayer Identification Number and Certification should be required for all independent contractors regardless of the amount the contractor or consultant earns from the organization as a practice of a good system of internal controls.

According to IRS publications specific to issuing IRS Form 1099, if the cumulative earnings of an independent contractor are $600 or more, the Foundation would have been required to issue a 1099-Misc to each contractor. Because a signed W-9 was not provided to FCMAT, each contractor who received the $599.99 may have been subject to the IRS’s 28% backup withholding requirement. In any event, the payment to each employee/contractor is reportable income and should have been included on the individual tax return.

The Foundation is designated to serve the AEALAS charter schools, issue consolidated charter school and CMO financial reports. The AEALAS organizations transfer and lend money among themselves, pay expenses for each other, and operate under common management and control.

Therefore, the Foundation and other AEALAS organizations may be considered one group entity.

For these and other reasons described, transactions such as paying employees as independent contractors may also be considered as circumventing payroll tax withholding and an attempt to avoid paying the employer’s portion of payroll taxes.

Finally, paying for unsubstantiated work by AEALAS-Hart charter school employees with Foundation funds may be considered a gift of public funds and allowed management to override internal controls. This is a critical internal control point because management should be the final check and balance that prevents such transactions.



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  1. I can say they don’t pay homeschool vendors on time or all. Horrible…
    One of the “places” we go for extra classes has considered not accepting Einstein Academy funding. :(

  2. Allen Yang says:

    It’s a good thing the county is making sure the AEA school has $150,000 in its checking account instead of only $148,379.51. And its a good thing the paid an independent auditor over two years to find out they did not withhold taxes on a W-9 for $599. This is really important. Things like test scores, graduation rates and entry to prestigious colleges is not a priority for our education system…

    Will the board stop going after a successful charter school because you see it as a threat to your resources! Please you were educators once…the mission should be to educate kids. Not secure resources for your tenure and pensions.

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