Preston Green, Bruce Baker and Joseph Oluwole have a new publication forthcoming in the Indiana Law Journal:
Are Charter Schools the Second Coming of Enron?: An Examination of the Gatekeepers That Protect against Dangerous Related-Party Transactions in the Charter School Sector.
The authors map the roles that gatekeepers played in the failure of Enron with parallel processes that are occurring within the charter sector. The following segment summarizes concerns outlined in the piece and underscores the need for greater attention to oversight procedures as current policy trends push toward unchecked charter growth:
“Enron’s collapse was significant because it exposed the deficiencies of gatekeepers that had the responsibility of protecting the integrity of the markets. These gatekeepers included Enron’s auditor Arthur Andersen, independent analysts, credit rating agencies, corporate boards,and the Securities and Exchange Commission (SEC). In the case of the Enron debacle, all of these watchdogs failed to detect the dangers caused by Fastow’s conflict of interest.
Related-party transactions are now posing a threat to the charter school sector. Charter schools are a deregulated departure from traditional public schools because they are exempted from laws governing budgets and financial transparency. Similar to Fastow, unscrupulous individuals and corporations are using their control over charter schools and their affiliates to obtain unreasonable management fees for their services and funnel money intended for charter schools into other business ventures.
In spite of this evidence, the federal government has consistently attempted to increase the number of charter schools without pushing for oversight. This policy approach is alarming because it will create more opportunities for illegal related-party transactions. Also, this approach runs the risk of harming students in low-income and minority communities – the very children whom charter schools are supposed to serve. Therefore, charter school gatekeepers must learn from the Enron debacle by becoming more prepared to guard against the dangers posed by related-party transactions. These gatekeepers include auditors, governing boards, authorizers, state education agencies (SEAs), and the U.S. Department of Education.”
The remainder of the article reveals processes by which weak oversight structures resulted in the Enron fallout and documents how various levels of charter school gatekeepers mirror those practices. The authors identify several measures that can be taken to strengthen the ability of charter school gatekeepers to protect against the dangers described. They cite from the Office of the Inspector General’s Audit Assessment of Charter and Education Management Organizations and add the following specific recommendations in their conclusion:
“We have found that independent auditors must make detecting illegitimate related-party transactions a priority. States should also increase the capacity of regulatory bodies to conduct audits of charter schools. For instance, states could either:
(1) have regulatory agencies conduct periodic audits of all charter schools; or
(2) conduct risk assessments of charter schools and audit those schools most vulnerable to fraud. Finally, states should authorize regulatory bodies to conduct discretionary audits if they suspect that a charter school operator is engaging in fraud.
With respect to charter school governing boards, we recommend that states should do the following:
(1) forbid persons from serving on charter school boards if they or their immediate family members have a significant financial stake in a contractor or vendor;
(2) require governing boards to be structurally independent from their EMOs;
(3) require board members to receive training regarding their supervisory responsibilities; and
(4) require governing boards to receive specific training regarding leases.
With respect to charter school authorizers, we advise that states require them to review all vending and lease contracts and reject those that would be harmful to the charter schools’ interests. Furthermore, states should:
(1) require SEAs to monitor the relationships between charter schools and their contractors; and
(2) coordinate with authorizers with respect to conducting investigations of suspected illegal activities.
Finally, we advise the U.S. Department of Education to do the following:
(1) develop risk assessments that account for risks posed by charter school-EMO relationships;
(2) develop strategies that would enable state gatekeepers to reduce the risks posed by related-party transactions; and
(3) require states to implement fraud prevention programs as a prerequisite for the receipt of charter school funding.” [Emphasis added]
Green, P. C., Baker, B.D. and Oluwole, J. (2017). Are Charter Schools the Second Coming of Enron?: An Examination of the Gatekeepers That Protect against Dangerous Related-Party Transactions in the Charter School Sector. Indiana Law Journal, 93. (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2924886
For additional work by the authors, see also:
Green, P. C., Baker, B.D., and Oluwole, J, (2013). Having It Both Ways: How Charter Schools Try to Obtain Funding of Public Schools and the Autonomy of Private Schools. Emory Law Journal, 63, 303-337. Available at: http://law.emory.edu/elj/_documents/volumes/63/2/articles/green-baker-oluwole.pdf
Oluwole, J., and Green, P. (2016). School Vouchers and Tax Benefits in Federal and State Judicial Constitutional Analysis. American University Law Review, 65,1335-1435. Available for download at http://www.aulawreview.org/images/pdfs/65.6/oluwolegreen.pdf.
Green, P. C., Baker, B.D., Oluwole, J., & Mead, J.F. (2015). Are We Heading Toward a Charter School ‘Bubble’?: Lessons from the Subprime Mortgage Crisis. University of Richmond Law Review, 50, 783. Available at SSRN: https://ssrn.com/abstract=2704305.
For more on concerns related to privatization, see Charter Schools & “Choice”: A Closer Look.