The State Auditor's Office released an audit (.pdf) today which slams Seattle Public Schools for spending $1.5 million on services with a questionable public purpose and another $280,005 for services it did not receive and which benefited a private company. Spendings that set off a criminal investigation for alleged financial fraud, and has resulted in an independent investigation by the Seattle School Board.

The Seattle Times, which received a copy of the audit report yesterday, ran it as their top story today.

SPS Superintendent Maria Goodloe-Johnson said in a statement (.pdf) that the district had requested an investigation by the state auditor "as soon as we were alerted that fraudulent financial activity may have occurred." The district also reported the loss to the Seattle Police Department which is still investigating the alleged fraudulent activity.

Singled out in the audit investigation (.pdf) is a program manager, Silas Potter, who blatantly abused his power to issue contracts, and his director supervisor, the district's Executive Director of Facilities Fred Stephens, who is currently working at the U.S. Department of Commerce. Although Potter didn't have any prior experience in awarding and managing construction contracts, the district promoted him to a position that allowed him to do that.

According to the audit, the problems started when Potter, who was managing a school district program that helped small businesses, awarded contracts to vendors for services such as outreach, instruction, consulting services, marketing, and lobbying. During its investigation, the state auditor reviewed payment vouchers and other documents and found that the district paid for services that were never provided.

The district decreased funding for the program in the 2009-2010 school year. The program manager formed a private company on Feb. 22, 2010 which he called the Regional Small Business Development Program, but which was not associated with the district in any way. Between October 2009 and June 2010, the district's program manager was transitioning the district program to the private company—something Stephens was aware of—hiring consultants to provide services that would benefit the private company and billing those services to the district. The program manager kept signing off on these invoices and the district kept paying them.

Additionally, the program manager misrepresented contracts between the City of Bellevue and the school district, leasing office space for the private company. The City of Bellevue incurred a loss of $39,873 from this.

The audit found that Stephens did not adequately supervise the program manager. During an interview with the auditor's office, Stephens said that the “the program manager . . . should have been providing the oversight” of the program. He also stated he “managed the program manager just like everybody else” who reported to him.

After the program manager resigned on June 7, 2010, the district retained him as a consultant to the program the next day, finally terminating his contract on June 23. He is currently missing. The program manager's direct supervisor, Stephens, left the district in July 2010. The district ended the program in September 2010, and according to Goodloe-Johnson, has put additional financial controls, policies, and procedures in place ""to ensure that the public’s investment in our schools is protected."

On June 28, 2010, the district's Chief Financial and Operations Officer asked the district's internal auditor to report a possible misappropriation of funds to the State Auditor's Office. The internal auditor reported that the district had received a $35,000 check from the Tacoma Public Schools that had been deposited into the private company's bank account "by a person associated with the company." The district asked the former program manager to return the funds and he gave the district a $35,000 cashier's check after the district filed a police report.

According to The Seattle Times, the district's internal auditor, Kariuki Nderu, resigned in December as the district was getting ready to fire him in connection with a special state audit. The audit found that Nderu might have had a role to play in siphoning off the $35,000 to Potter's private account. According to the audit, Potter's private company was planning to hire Nderu as its certified public accountant. He was also attending meetings on behalf of the private company during normal district business hours, the audit found.

"I am very angry that any school district employee would consider using this or any other program fraudulently and for their own personal gain," Goodloe-Johnson said. "Such a use would be an abuse of taxpayer funds and an appalling violation of our community’s trust."

The district is also working with its legal team to seek repayment of these funds where possible. "The Regional Small Business Development Program was established to encourage local small businesses to bid on school district projects," Goodloe-Johnson said. "The intent was to support local jobs and spend taxpayer dollars in the local community. It is truly unfortunate that it now appears to have been abused."

The auditor's office found that although district staff suspected that something was not right with the program, they did not bring it up due to fear of reprisal. The audit also found that many employees were not aware of the district's whistleblower policies or anti-retaliation policies or did not trust them.

"We agree that district management failed on several fronts, including lack of employee oversight, failure of internal controls, failure of the internal audit function, and lack of an adequate means for employees to raise their
concerns," Board President Steven Sundquist and the district's General Counsel Noel Treat said in a response to the audit report. The board initiated an independent investigation in December led by a former prosecutor to figure out who should be held responsible for this fiasco. I am waiting to get the latest on the investigation from Sundquist, who is handling all interviews on this.