Charter school officials have defrauded at least $30 million intended for Pennsylvania school children since 1997. Yet every year virtually all of the state’s charter schools are found to be financially sound. While the state has complex, multi-layered systems of oversight of the charter system, this history of financial fraud makes it clear that these systems are not effectively detecting or preventing fraud.

Indeed, the vast majority of fraud was uncovered by whistleblowers and media exposés, not by the state’s oversight agencies. In this report we identify two fundamental flaws with Pennsylvania’s oversight of charter schools:

• General auditing techniques alone do not uncover fraud. Pennsylvania oversight agencies rely on general auditing techniques, but not those specifically designed to uncover fraud. The current processes may expose inaccuracies or inefficiencies; however, without audits targeted at uncovering financial fraud, state agencies will rarely be able to detect fraud without a whistleblower.
• Adequate staffing is necessary to detect and eliminate fraud. Pennsylvania inadequately staffs its charter-school oversight agencies. In order to carry out high-quality audits of any type, auditors need enough time. With too few qualified people on staff, and too little training, agencies are unable to uncover clues that might lead to fuller investigations and the discovery of fraud.

To address these two fundamental flaws, we propose targeted reforms of the existing oversight structure:

Mandate Audits Designed to Detect and Prevent Fraud

• Charter schools should institute an internal fraud risk management program, including an annual fraud risk assessment, and audits that specifically investigate high-risk areas.
• Existing oversight bodies should perform targeted fraud audits focused on areas of risk or weakness through the annual fraud risk assessments.
• Auditing teams should include members certified in Financial Forensics trained to detect fraud.

Increase Transparency & Accountability

• All annual audits and fraud risk assessments should be posted on authorizers’ website;
• Charter authorizers should create a system to categorize and rank charter audits by the level of fraud risk they pose to facilitate public engagement.
• Charter schools should voluntarily make the findings of their internal assessments public.
• Charter school authorizers should perform comprehensive reviews once every three years rather than once every five years as is current law.
• The Attorney General’s office should conduct a review of all charter schools in Pennsylvania to identify potential fraud or inadequate school oversight by boards of directors or executives and publicize the findings.

Improve Protections against Future Fraud

• The state should enact other legal protections such as a statewide False Claims Act that encourage whistleblowers to report instances of fraud.
• The state should impose a moratorium on new charter schools until the state oversight system is adequately reformed.

Pennsylvania cannot afford to wait. Since 2000, charter school enrollment in the state has doubled three times and Pennsylvania’s students, their families, and taxpayers cannot afford to lose another $30 million misspent or misdirected within the charter school system. While the reforms proposed will require additional resources, they represent a smart investment in our communities and in our future.