State Auditor releases report on Epic Charter Schools

Team Radio - October 1, 2020 3:29 pm

The Oklahoma State Auditor and Inspector is charged with one primary duty:  To provide oversight and accountability for every tax dollar in Oklahoma.

In 2019, Governor Stitt issued an order directing my office to conduct a special investigative audit of Epic Charter Schools and all related entities.  We followed the Governor’s directive and what we found was very disappointing.

Let me be perfectly clear:  This is not an indictment of charter schools or the charter school model.  My findings are specific to the management and administration of this specific charter school.

This is part 1 of the audit report and will only focus on the funds held by the school.

The infrastructure of Epic Charter Schools is remarkably complex –

I have seen a lot of fraud in my 23 years and this situation concerns me

I am going to present three key issues today:

  1. How the Owners of Epic Charter Schools built this structure
  2. The findings of our investigative audit.  And…
  3. Why every taxpayer in Oklahoma should likewise be concerned

State statute defines Epic Charter Schools as a public school district  – just like the OKC or Tulsa school districts.

Therefore, Epic is subject, by law, to the same oversight and accountability we demand from every school district across the state.

Epic Charter Schools designed an administrative system that is not consistent with the Oklahoma Charter School Act and their charter agreements.

Epic Uses Three Pots of Money

Epic Charter Schools Investigative Audit Slide 1

School Fund –

  • These are the normal expenditures you would expect to see for a school

Epic Youth Services -for profit –

  • This is a private company owned by Ben Harris and David Chaney.
  • EYS for profit was hired by Epic Schools which is also founded by Harris & Chaney.
  • They take 10% of every tax dollar that comes through the school’s door.

Learning Fund –

  • The school currently allows for each child to be designated $1,000 each per school year.
  • This is given to EYS-for profit and is supposed to be used for technology, curriculum, and X-curricular activities,

Epic Charter Schools was given almost a half -Billion dollars during the audit period:

  • FY2015 through FY2020, Epic schools received a total of $325.3 million
  • EYS for-profit received management fees of $45.9 million
  • EYS for-profit also took $79.3 million to manage the Student Learning Fund
    • This nearly $80 million has never been audited by an outside entity
  • EYS-for-profit controls more than 30% of the entire Epic Charter School budget

Epic Charter Schools Investigative Audit Slide 2

That is more than $125 million of student educational funds – transferred into a for-profit management company– with no transparency and no accountability.

Who controls these hundreds of millions of dollars?

It appears three people make the financial decisions at Epic and its related entities.

They are…Ben Harris and David Chaney – they are the founders of Epic and owners of EYS -for profit– and a Chief Financial Officer, Josh Brock, who answers to Harris & Chaney both as the founders of the School, and as the CFO of the for-profit entity, EYS.

This arrangement presents an inherent conflict of interest.

Findings:

            Our audit is around 120 pages long –  so it would take hours to explain all the violations we discovered.  Here are just seven findings we found particularly notable.

1.

  • Epic’s structure is set up to provide their for-profit entity a financial incentive to recruit more students
  • Epic spent almost $3 Million on advertising in three months to recruit new students.
  • To put that in perspective, the three-million dollars Epic spent on advertising in just three months was enough money to buy 1.2 million school lunches for low-income students, buy 15,000 new Chromebooks, or buy a half-million new textbooks.
  • While many school districts are struggling, Epic spent millions from the school fund on advertising which benefited EYS for profit

2.

  • Epic Schools use the Learning Fund as a marketing tool to drive enrollment
  • Parents expect $1000 for their child for school curriculum and activities
  • The School has paid almost $80 million into this fund which is managed by Ben Harris and David Chaney
  • The method Epic used to calculate its student enrollment is still a mystery – so we cannot confirm- that EYS was entitled to the nearly 80M they received
  • It has never been independently audited – our ability to audit these funds – is currently in litigation

3.

  • EYS-for profit wanted to expand their brand to California.
  • We received documents from the State of California confirming EYS-for profit used $203,000 from the Learning Funds – to help with expenses for Epic-CA. That money was dedicated for Oklahoma children.
  • Worse yet, Epic founders used Oklahoma school employees to run the California school. They used $210K of Oklahoma resources to develop their project in California.  And they only paid the money back after our office discovered what had happened.
  • Harris and Chaney started the CA school by using the pledged credit of OK Epic Charter school. What that means is… they used School Bank Accounts as collateral to obtain a half-million dollar loan to run their for-profit venture in California.
  • The school board did not authorize this
  • Harris & Chaney used state resources and state employees to further their business interests

4.

  • EYS-for profit has a Chief Financial Officer, or CFO, who serves not only Epic Charter Schools and Epic-California schools, but also serves as CFO for EYS-for profit.
  • A CFO is a position of trust. That person should watch over and safeguard the assets of the school district.
  • How can the CFO of the school also be the CFO of the for-profit??
  • On one hand the CFO writes the check from the school funds and then on the other hand signs the back of the check as he deposits it on behalf of EYS for profit.
  • This violates the most basic principles of accounting.
  • You can’t have a CFO whose priority is profit on one side, and taxpayer protection on the other.
  • Taxpayers must ask…are the students REALLY the ones being served?

5.

  • The legislature puts a 5% cap on administration costs for school districts to make sure as much money as possible goes to the children.
  • Epic exceeded that 5% cap on administrative overhead year after year –
  • Last year, Epic was forced to repay the state a half-million dollars for underreporting administrative costs above and beyond the 5%. However, that half-million dollars was just a slap on the wrist.
  • By our calculations, Epic owes the state of Oklahoma $8.9M.
  • My responsibility is to ensure the accurate amount gets to each student – this is further illustrated –  – –

6.

  • Looking at this chart – you can see that $46M was paid to the Epic founders during the audit period. What did taxpayers get for this?
  • It appears that the arrangement between Epic Charter Schools and EYS for profit will provide everything needed for the administration school district.
  • However, we reviewed OESC reports and found that from July 2014 through October 2018, this for profit company, which was in charge of managing two entire school districts, had ZERO employees.
  • From November 2018 to present, EYS-for profit has hired just 3 employees
  • At the same time, Epic’s School Fund pays for 75 administrative employees.
  • When we asked about the number of employees – EYS-for profit provided for school administration, Ben Harris told us, “What the Legislature will do if we make our employee count public record, they will bludgeon us about our fees.” (pg. 57)

7.

  • Major financial transactions are conducted without Board approval
  • We found $6m in transfers back and forth between Epic’s school entities – without board approval
  • We found a $3.3m loan from one Epic entity to another – without board approval
  • This would be like the Superintendent of Oklahoma City schools, with no board approval whatsoever, just lending $3 million dollars to the Superintendent of Tulsa public schools – public schools cannot do that

From this thorough and exhaustive investigative audit, I remain concerned that the money is NOT getting to the students. The lack of cooperation and the roadblocks encountered was unprecedented in the experience of the State Auditor’s office. This is your money and you deserve accountability.

It appears – Epic did not comply with laws and regulations for reporting requirements.

Certified documents were submitted in a haphazard manner with estimates rather than actual numbers.

Oklahoma has limited resources –  and in the past few years – our legislators have taken big steps and taxpayers have made great sacrifices to increase funding for education.

*It doesn’t seem like our education dollars are balanced – when I see Epic spent almost $3 million for a three month media blitz and used our tax dollars for their CA school….YET our classroom teachers are taking money away from their own families to buy school supplies –

We are sharing our findings with:

o The Office of the Attorney General

o The Oklahoma State Bureau of Investigation

o The Oklahoma Tax Commission

We will also share our findings with several federal agencies including:

o The Office of Inspector General

o The Internal Revenue Service

o The Federal Bureau of Investigation

I want to thank Governor Stitt for his commitment to initiate this audit of Epic Charter Schools.  We have met with the Governor’s office throughout the audit to ensure we were following the scope and the spirit of the Governor’s directive.

I am determined to carry out my constitutional duties to safeguard the expenditure of public funds – your money.

I am honored and proud to serve as your State Auditor.  You are always my priority and I will always report my findings directly to you … and I am not done.

 

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