Home » Santa Clarita News » Education » FCMAT Releases Einstein Academy Audit Final Report
From left, Larry Layton, Ed Porter, Mark Distaso, Michael Fox (foreground), and Matt Ridenour discuss Einstein Academy's charter petition at a hearing in December.
From left, Larry Layton, Ed Porter, Mark Distaso, Michael Fox (foreground), and Matt Ridenour discuss Einstein Academy's charter petition at a hearing in December.

FCMAT Releases Einstein Academy Audit Final Report

Click here for a link to the report.

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.


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 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.

Related: Einstein Academy Re-applies For AADUSD Charter

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.

Related: Auditors Continue Probe Of Einstein Academy Charter School Finances

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

  1. 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.
  1. 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.

Do you have a news tip? Call us at (661) 298-1220, or drop us a line at community@hometownstation.com.

KHTS AM 1220 - Santa Clarita Radio

FCMAT Releases Einstein Academy Audit Final Report

8 comments

  1. KHTS makes it sound like someone should return their calls. Why should anyone comment on this? Please stop the unfounded attacks on one of the top school systems in the state. Just like the L.A. County Board of education stated, the report stands on its own.

    The summary says it all:

    “AB 139 Extraordinary Audit Report Summary
    Based on the findings in this report, there is not sufficient evidence to demonstrate that fraud,
    mismanagement and misappropriation of funds and assets or other illegal activities may have
    occurred.”

    Thank you to everyone who supports freedom of choice. It is American Democracy in action.

    Dear Saugus and Newhall School Districts,
    Please stop the slander, lies and deceit. Please spend our tax dollars on our children and not lawyers. We need leaders in this community, not bullies.

  2. So the report “speaks for itself”…and the FCMAT calls it “fraud” although they are not authorized to call it fraud? Mr. Smith why not have some fair reporting and ask a simple question how much did the county and Mr. Kalaitzides spend on this report to done? They are upset because the receipts for some pizza restaurants are missing???? Let’s be honest here. AEA as a school is successful. It is shown by test scores of the students attending the school and the wait lists to get into the school. As a charter school they have had the ability to recruit top teachers and fire (not invite back) the ones that do not perform. The county and educators in Santa Clarita are afraid as charter schools divert funds away from the public schools. they don’t want competition. Shame on you. As your educators you must have once felt a duty to teach children and provide them the best education possible. Now all you are interested in is blocking a successful charter school from jeopardizing your way of life and easy money….be honest about the witch hunt you are implementing on AEA.

    two simple questions:
    1) What was the cost of the audit?…I bet it is was much more than the money spent on pizza without a receipt
    2) Why aren’t the other schools audited independently?

    Perhaps the flaw is that the leaders of Education system are more concerned with Pizza receipts then test scores, graduation rates, and kids going to college. SHAME ON OUR POLITICAL LEADERS….and one sided reporting….

  3. Comments clearly show that one can’t run a grift without a willing mark. This would be fine if AEA were a private school, but the taxpayers of California are not the willing marks.

  4. Mr. Smith and KHTS, Thanks for giving us access to the audit report before it is made publicly available. Also thanks for staying on top of this issue that affects our community.

  5. The local districts like Saugus and Newhall twists the truth.
    Lies, slander, and defamation, and intimidation are their tools against those they view as their enemy.
    The public (who are taxpayers) should demand a detailed examination of the local districts, including Saugus and Newhall, especially regarding how much they spend on fighting parents in special education disagreements and fighting AEA.
    So terrible that they use the public’s tax money to use against those they view as their enemies in court and not on funding appropriate services for the students (reducing the overcrowding in classrooms, lack of funding for arts, sports, extra curriculars, class supplies, and other support services)
    Is spending money on attorneys to fight parents and charters the way that the taxpayers wanted its local schools to spend their tax? I think not.
    There should be no taxation without representation
    Tyranny should not occur in our Democratic Society.
    The people should vote with their feet from these Districts.

  6. The Signal reports stories on Albert Einstein Academy in the paper and is not clear to which school it is writing about. The Albert Einstein Academy Junior/Senior High School is a different school with different staff-teachers, principals, students, etc. than the Albert Einstein Academy Elementary. The Junior/Senior High School was established in 2010 and has operated quietly and successfully since the the opening process in William S. Hart School District.
    It would be appropriate for the paper to state which school it is writing about to prevent the confusion of what is happening at each school whether negative or positive. Most families and from the Junior/Senior High have no connection to the the elementary and just as Rio Norte families, West Creek Academy families, Valencia High School, and SCVI are/can be independent of each other.
    Please note that most people in SCV are readers of the Signal and look to the newspaper for accurate reporting and information on what is going on in the area. The Signal should make readers aware these are two separate schools and function independently of each other.

  7. As I read this, it appears AEA has used funds from the Newhall campus to fund the start up of other schools, eight schools in the last wo years and some of those are out of state. In other instances, the school admin cannot explain where hundreds of thousands of dollars went. The most there has been in the school checking at any one time was $150k, and the next day that same account was overdrawn. Vendors, such as the bus services and homestudy providers were not being paid, directly causing hardship to students, yet AEA was writing checks in the tens of thousands to open new campuses and to cover other outside expenses. Is this co-mingling of funds legal? Why could no W-9s be found for many “independent contractors” to whom thousands of checks were written? Is it legal to take funds from the taxpayers of California to fund the start-up of schools in another state? It sounds a lot like a ponzi scheme to me, yet “no wringdoing” was found? How is that possible? It’s sad that AEA parents are constantly pressured to hold fundraisers “for the school” yet it seems like that money is really lining the pockets of administration. I’m shocked AEA parents are not demanding answers.

  8. Invaluable comments . I learned a lot from the info , Does someone know where my business could possibly find a sample IRS W-9 copy to use ?

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About Perry Smith

Perry Smith is a print and broadcast journalist who has won several awards for his focused, hyperlocal community coverage in several different regions of the country. In addition to five years of experience covering the Santa Clarita Valley, Smith, a San Fernando Valley native, has worked in newspapers and news websites in Los Angeles, the Northwest, the Central Valley and the South, before coming to KHTS in 2012. To contact Smith, email him at Perry@hometownstation.com.