Friday, April 28, 2017

Is charter school fraud the next Enron?

Is charter school fraud the next Enron?:

Is charter school fraud the next Enron?

In 2001, Texas-based energy giant Enron shocked the world by declaring bankruptcy. Thousands of employees lost their jobs, and investors lost billions.
As a scholar who studies the legal and policy issues pertaining to school choice, I’ve observed that the same type of fraud that occurred at Enron has been cropping up in the charter school sector. A handful of school officials have been caught using the Enron playbook to divert funding slated for these schools into their own pockets.
As school choice champions like Secretary of Education Betsy DeVos push to make charter schools a larger part of the educational landscape, it’s important to understand the Enron scandal and how charter schools are vulnerable to similar schemes.
Secretary of Education Betsy DeVos, a longtime charter school supporter, successfully fought several attempts to increase charter regulation in her home state of Michigan. Reuters/Joshua Roberts

What is a related-party transaction?

Enron’s downfall was caused largely by something called “related-party transactions.” Understanding this concept is crucial for grasping how charter schools may also be in danger.
Related-party transactions are business arrangements between companies with close associations: It could be between two companies owned or managed by the same group or it could be between one large company and a smaller company that it owns. Although related-party transactions are legal, they can create severe conflicts of interest, allowing those in power to profit from employees, investors and even taxpayers.
This is what happened at Enron. Because Enron wanted to look good to investors, the company created thousands of “special purpose entities” to hide its debt. Because of these off-the-books partnerships, Enron was able to artificially boost its profits, thus tricking investors.
Enron’s Chief Financial Officer Andrew Fastow managed several of these special purpose entities, benefiting from his position of power at the expense of the company’s shareholders. For instance, these companies paid him US$30 million in management fees – far more than his Enron salary.
Fastow also conspired with other Enron employees to pocket another $30 million from one of these entities, and he moved $4.5 million from this scheme into his family foundation.
Enron’s collapse revealed the weaknesses of the gatekeepers – including boards of directors and the Securities and Exchange Commission – that are responsible for protecting the markets. Because of lax accountability and federal deregulation, these watchdogs failed to detect the dangers posed by Fastow’s conflict of interest until it was too late. Congress responded by passing the Sarbanes-Oxley Act, which tightened the requirements for oversight.
Enron employees lost their jobs and billions of dollars in pension benefits. AP Photo/Pat Sullivan

How do related-party transactions occur in charter schools?

Forty-four states and the District of Columbia have legislation that allows for charter schools. Just like public schools, charter schools receive public funding. However, unlike public schools, charter schools are exempt from many laws governing financial transparency.
Without strict regulation, some bad actors have been able to take advantage of charter schools as an opportunity for private investment. In the worst cases, individuals have been able to use related-party Is charter school fraud the next Enron?:

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