A fraud auditor has flagged a tax document indicating Easton Arts Academy paid $570,000 for internet services it never received.
The audit submitted July 2 by Fraud Forensic Investigations of Allentown blames a “non-working” school board for allowing administrators to spend without their permission, urges the school to hire qualified financial staff, urges the school to put procedures in place to prevent fraud and urges school officials to initiate a criminal investigation, particularly over the $570,000 expense.
“The board of trustees cannot ignore this serious matter and must act on this issue. This certified fraud examiner strongly encourages the school to contact its solicitor as well as federal law enforcement,” auditor Francis “Skip” Bedics says in his final report. You can read the full audit online or scroll to the end of this story.
The school CEO, solicitor and board president didn’t return email messages or a voicemail seeking comment for this story.
According to the audit, a 1099-MISC form from 2018 indicates the school paid independent contractor PenTeleData $570,472.19 for internet and communication services.
PenTeleData, however, said it received only $19,376.19 in payment that year, according to the audit. The company did receive the faulty 1099 form, Bedics said. The school’s accountant, Buckno Lisicky & Co., had no explanation for the discrepancy, the audit says. The director of sales at PenTeleData didn’t respond to a voicemail or email message. Buckno Lisicky & Co. didn’t respond to an email message.
It’s unclear where the remaining $550,000 wound up, according to the audit. The form 1099-MISC “is most likely fraudulent,” the audit says. It urges the matter be turned over to the Internal Revenue Service.
Board questioned on the audit
When a member of the public questioned the audit during the Thursday, July 23, school board meeting, board President Mike Lieberman said the school addressed the audit in a letter sent out by CEO Chadwick Antonio.
Antonio took over as CEO in June. He sent the letter to staff, parents, families and residents on July 16. The letter never mentions the audit but it does refer to investigations by the school board of previous practices and administrations.
“The board of trustees is acting diligently on all matters and coordinating with the Easton Arts Academy legal counsel and proper authorities, as needed, to move forward with urgency,” Antonio wrote, although he didn’t specify the matters on which the school is moving forward. You can read the full letter on the school website.
“There were comments made form the public. We have responded to those,” Lieberman said Thursday in response to the question during the board meeting. “Dr. Antonio has gone on record. We have responded proactively. We have responded to our family and all our constituents relative to how we go forward.
“Those letters stand on their own. There will be more communications from the board as needed,” Lieberman said.
Former Easton Arts Academy school board member Trish Beegle believes the school takes the audit seriously.
“If further investigation needs to be done, I believe it will be done,” she said. She kept up to date with the progress of the audit until she left the school board in June. She said If there’s $570,000 missing, the auditor should have found it.
“It’s still questionable whether there are any actual dollars missing,” she said.
‘Don’t question my report’
Bedics said his access to records was somewhat limited by COVID-19 because he wasn’t allowed in the school. He said his investigation was limited to the records that could be provided by school board member Sharon Jermany.
He said he took the investigation as far as he can as a civil auditor. Now it’s time to hand off to the Internal Revenue Service, which has subpoena power to access more records. According to Bedics, the board initially questioned his audit, saying it was full of “allegations” but not proof.
“Don’t question my report. My report is based on the records I was given and I made an informed decision on what I saw,” Bedics said. “They are allegations. I can’t prove it. The only way it can get proved is in a court of law. That’s when these things get proven outright.”
Bedics worked in the criminal investigation division of the IRS for more than 23 years. He became a self-employed certified fraud examiner after that. He conducted a fraud audit for the Allentown School District in 2016, according to an article in the Morning Call. He’s a part-time lecturer at Muhlenberg College.
So he knows how a fraud audit should be conducted, he said.
“They’re questioning my report. I’m the expert in this stuff. Not you. I’m thinking ‘Why did they even hire me then?’” Bedics said, adding, “What are they scared of? That’s what’s puzzling.”
Bedics said he received his $2,000 retainer payment and a follow-up $1,600 payment. He’s still owed $4,400 out of the $8,000 cost of the audit although that payment is being expedited, he said.
He doesn’t understand why Buckno & Lisicky or others at the school failed to report the $570,000 discrepancy to authorities.
“A $570,000 false document to the IRS is pretty significant,” he said.
Charter schools were created to encourage innovative and creative approaches to education, and they’re not subject to the same regulations and oversight as traditional public schools. They’re publicly funded but privately run. The school’s tax subsidies are calculated based on the communities in which the students live. Easton Arts Academy had an enrollment of 420 kindergarten-through-fifth grade students in the 2019-20 school year.
The school CEO, its solicitors and Lieberman declined to hand over the audit to lehighvalleylive.com. Emails sent to six of the seven school board members seeking comment on the audit weren’t returned. Jermany declined to hand over the audit but did confirm its authenticity after lehighvalleylive.com obtained a copy.
Form raised suspicions
She said she’s the one who found the suspicious 2018 1099-MISC form. Jermany was authorized to initiate the audit earlier this year. The board voted 4-0 in February to hire the auditor. Lieberman, the board president, was absent for the vote.
Jermany said pursuing the fraud audit is a job she took seriously.
“I was asked to do these investigations, to ensure the school is transparent and the community can trust us. I won’t do anything less,” Jermany said. A fraud audit differs from a conventional audit in that it’s less comprehensive but zeroes in on areas of suspected fraud.
Allentown accountant Richard Gurniak said a fraud audit takes a deeper dive into smaller discrepancies on the books. A conventional audit provides reasonable assurance to a client that financial statements are presented fairly, but a fraud audit takes a closer look specifically for fraud, he said.
Bedics said he attempted to authenticate receipts and documents rather than just pair them with canceled checks. He also looks for waste and abuse. He recommends changes to prevent future fraud and compiles evidence that can later be turned over to authorities.
Jermany said her colleagues have been slow to act on the audit’s findings.
“They’re trying to hide and bury this,” she said.
Jermany said she handed over the audit to the Northampton County District Attorney’s office. A detective in that office, Robert Watts, said the district attorney’s office didn’t plan to investigate but he believed the Easton Police Department and Internal Revenue Service were made aware of the allegations.
Lehighvalleylive.com shared the audit with the Easton Police Department.
“I received the info you sent; it will be reviewed and evaluated,” said Easton police Inspector Daniel Reagan in an email.
“Due to privacy laws, we are unable to comment on ongoing investigations,” said Internal Revenue Service spokeswoman Robyn Walker.
The school’s charter must be approved by its sending district, in this case by the Easton Area School District. Easton Area School District Superintendent David Piperato said he’d defer comment to district solicitor John E. Freund III, who was unavailable to comment the week of July 20.
The Pennsylvania Department of Education also has authority to investigate complaints about charter schools. Spokespeople with that office didn’t return messages seeking comment on the audit.
In 2018, Chief Administrative Officer Shawn Ferrara handled finances for the school. He was forced out in June 2019 as allegations swirled of a toxic work environment for teachers detailed in a special report by lehighvalleylive.com in April, 2019. Reached last Sunday, Ferrara said he was not aware of any audit or any financial problems at the school.
A lawsuit pending against the school says Ferrara and former Operations Manager Jacque Zupko rigged grades. The lawsuit filed by former principal Susan Bostian accuses Ferrara of rewriting Bostian’s employee evaluations.
“The academy’s position on the allegations brought by Ms. Bostian have not changed and it will continue to vigorously defend itself in this matter,” said Allentown attorney Ed Easterly, who represents Easton Arts Academy in the lawsuit.
Zupko’s phone number isn’t listed so she couldn’t be reached for comment. She didn’t respond to a direct message sent on Facebook. She was fired in January.
The school opened in 2017 at 30 N. Fourth St in Easton. The original CEO, Joanna Hughes, was fired in December 2019. Her number isn’t listed and a Facebook profile couldn’t be found for her, so she couldn’t be reached for comment.
Audit details other problems
In addition to the $550,000 discrepancy, the audit cites multiple financial irregularities, including the use of a debit card to rack up more than $7,000 of unaccounted-for purchases at big-box retailers and grocery stores.
“Taxpayer money should never be used for such items,” the audit says.
School policy requires permission from the board to hand out debit cards to staff, but the board never approved the cards, Jermany said.
A system of “tagging” purchases to account for them was initiated by interim CEO William Wright, but the system was “incorrectly implemented” and had to be abandoned, the audit says. Wright didn’t respond to an email seeking comment. Wright was hired to be the school principal and returned to that duty after Antonio took over as CEO.
“The school had a culture where the former administration felt they could do whatever they wanted without board input and approval,” the audit says.
Some checks from public school districts were made out to Ferrara, the audit says. These checks were properly deposited, but the practice could have enabled Ferrara to pocket funds meant for the school, it says. Ferrara denied ever receiving a check made out to him. Some checks were made to his attention, but never made out for him as the recipient, he said.
The audit says financial consultant Charter Choices shouldn’t reconcile bank accounts because it handles the finances. The school needs to hire a qualified financial staffer to check the work of Charter Choices. And when the school hires employees to handle finances, it should conduct a credit check before approving the hires. Ryan Schumm represents Charter Choices of Glenside, Pa., at school board meetings. He didn’t respond to an email seeking comment.
The audit says “established internal controls and the hiring of qualified individuals will greatly reduce the possibility of fraud and wasteful spending.”
At the time of the audit, only four members were seated on the board. The audit recommends filling all the vacant seats and recommends board members take a more active oversight of the school administration.
“If this cannot be done, it is the opinion of this fraud examiner the school will fail.”
At least seven of the nine seats are now filled on the board. The school still lacks a business manager.
At the July 23 school board meeting, the board approved a new procurement policy. It wasn’t discussed, and details were not provided on the meeting agenda, but Lieberman said it strengthens the current policy and “gives the CEO flexibility to acquire goods and services.”
The board also approved the creation of a fiscal committee, a procurement committee, an academic data and curriculum committee and a personnel committee.
“These are the start of what Dr. Antonio feels will be a transparent and effective board,” Lieberman said July 23.
Read the audit online.
Rudy Miller may be reached at firstname.lastname@example.org. If there’s anything about this story that needs attention, please email him. Follow him on Twitter @RudyMillerLV. Find Easton area news on Facebook.