Best Practices to Protect Public Dollars & Prevent Financial Mismanagement

Executive Summary

In 2010, fourteen years after Illinois passed its charter school law, the U.S. Department of Education raised a red flag about the state’s oversight of fiscal controls at its charter schools,  finding that the state “has no system in place for monitoring [charter schools].” Four years later, this problem continues. To date, $13.1 million in fraud by charter school officials has been uncovered in Illinois. Because of the lack of transparency and necessary oversight, total fraud is estimated at $27.7 million in 2014 alone. Our research uncovered three fundamental flaws with the state’s oversight of charter schools:

• Oversight depends heavily on self-reporting by charter schools, or by whistleblowers. Illinois oversight agencies rely almost entirely on complaints from whistleblowers and audits paid for by charter operators. Both methods are important to uncover fraud; however, neither is a systematic approach to fraud detection, nor are they effective in fraud prevention.
• General auditing techniques alone do not uncover fraud. The audits commissioned by the charters and provided to Illinois oversight agencies use general auditing techniques, not those specifically designed to uncover fraud. The current processes may expose inaccuracies or inefficiencies; however, without audits targeted at uncovering financial fraud, state and local agencies will rarely be able to detect fraud without a whistleblower.
• Adequate staffing is necessary to detect and eliminate fraud. We found evidence that the government agencies tasked with investigating fraud are severely understaffed, which is prohibitive to conducting high quality, time-intensive audits of any type.

We propose the following targeted reforms of the existing oversight structure to remedy these flaws:

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;
• Charter schools should commission audits of internal controls over financial reporting that are integrated with an audit of financial statements;
• Existing oversight bodies should perform targeted fraud audits focused on areas of risk or weakness through the annual fraud risk assessments; and
• 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 the websites of charter school authorizers, typically the local school system;
• Charter authorizers should create a system to categorize and rank charter audits by fraud risk levels to facilitate transparency and 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;
• The Attorney General’s office should conduct a review of all charter schools in Illinois to identify inadequate school oversight by boards of directors or executives and publicize the findings; and
• The state should impose a moratorium on new charter schools until the state oversight system is adequately reformed.

Despite the possibility of almost $30 million lost to fraud in the last year alone, charter schools continue to experience unprecedented growth. Since 2003, charter school enrollment in Illinois has grown by 680 percent. Illinois students, their families, and taxpayers cannot afford to lose a dollar more in public funds as a result of fraud, misspending, or misdirection within the charter school system. The reforms proposed herein require a smart investment and a commitment to the future of Illinois’ youth and all its communities.