Audits raised red flags long before DPS criminal charges

DETROIT — Audits raised red flags about Detroit Public Schools’ purchasing procedures long before federal prosecutors uncovered a kickback scheme last month.

In September 2014, an internal audit of DPS noted the district:

Failed to verify whether vendors had been barred or suspended for misconduct.

Closed the bidding process on some contracts before a required 14-day limit, excluding some potential bidders who may have offered better deals.

Sometimes failed to ensure that vendors were properly insured and had disclosed conflicts of interest.

Often signed contracts late, after the start date and in some cases after work had already begun.

“Overall, our audit revealed that procurement and logistics is not fully complying with its own policies and procedures,” then-auditor general Odell Bailey wrote in his report, dated Sept. 15, 2014.

Questions about DPS’s spending are hounding the financially strapped district at a crucial time.

State legislators are considering a $720-million rescue package and Gov. Rick Snyder has appointed retired bankruptcy Judge Steven Rhodes to transition the district back to local control after years of state oversight. They also come as federal prosecutors have charged Franklin businessman Norman Shy with paying more than $900,000 to school principals who approved bogus or padded invoices.

The audits show district purchasing has been a problem under both state and local control. Numerous top officials, from superintendents to emergency managers, have been unable to fix a system that spends millions each year on textbooks, computers, and services for Detroit students.

“Shy’s crimes and those committed by the Detroit Public Schools employees that he conspired with went undetected for so long because the district did not enforce the processes and controls that were in place to prevent those crimes from happening,” Rhodes said Thursday. “With the help of knowledgeable fraud prevention experts and a series of additional checks and balances, DPS is taking strong measures to protect itself in the future and to help prevent these types of outrageous abuses of the public trust.”

Previous problems

The 2014 audit wasn’t the first to raise concerns. In 2006, auditors from KPMG noted the kind of problems that foreshadowed the kickback scheme.

“There are various ways end users at the schools can override certain internal controls to expedite the procurement of goods and services,” the auditors wrote, adding “internal control procedures were not established, followed, or monitored on a consistent basis.”

District officials acknowledged the problem, replying to auditors that “this situation occurs when departments contract with vendors outside of the procurement process by discussing services with vendors directly.”

Administrators said they would reiterate the rules to employees and vendors “to ensure compliance with policy.”

The 2006 audit also noted the district:

Dissolved its internal audit department, which could increase errors in financial reports.

Lacked a process to prevent, detect and defer fraud.

Lacked a way to verify purchase orders.

Turnover in the district also complicated purchasing. Former assistant director of procurement Ann Marie Kasperowicz told the Free Press that she worked for DPS for three years, under three different heads of procurement, before leaving the district in 2013.

“They would come in and do their own policies or a new manager would come in, a new emergency manager, and he would change things,” she said.

The procurement office had strict purchasing rules that barred vendors from schools. But principals apparently found ways to circumvent them, Kasperowicz said.

“They didn’t go through procurement,” she said. “There’s just not enough people working in procurement and everything in general.”

Working the vendors

The lack of watchdogs coincided with widespread problems that were exposed in detail in November 2014. A former DPS rising star, Kenyetta (KC) Wilbourn-Snapp, told her boss how she would help vendors score school business by ghostwriting their bid responses, taking a cut of their payments and allowing them to overbill. In one case, she said she had a vendor hire her uncle to channel money to her cousin.

By that time, Wilbourn-Snapp was working for the Educational Achievement Authority, a reform district created by Snyder to turn around Detroit’s most troubled schools. But she acknowledged where she learned the scam.

“She said she was taught all of this during her DPS days by veteran principals,” EAA Chancellor Veronica Conforme wrote in a summary of the conversations.

Veteran principals are at the center of Shy’s scam as well. On Thursday, Clara Smith, former principal at Thirkell Elementary-Middle School, pleaded guilty to accepting $194,000 in kickbacks from Shy. Eight other principals have scheduled plea hearings, as has Shy.

Sometimes, Shy used middlemen in his dealings with principals.

In 2010, he sued a company called J B & Friends for $50,160 in unpaid invoices. The suit describes a business arrangement where Shy would ship educational materials to Detroit schools and then bill J B & Friends.

Shy claimed he delivered $18,097 worth of materials to various schools and “picked up the checks payable to defendant J B & Friends from the principal of the school that received the educational goods.”

Shy said he delivered the check to J B & Friends, but was never paid for the materials. Shy ended up winning a judgment in that case, but the court records are unclear whether he was paid.

Watchdogs eliminated

The 2006 KPMG audit also noted that the district had eliminated its internal audit department to save money and that it was at risk of fraud because “there is no formal process related to preventing, detecting and deterring frauds.”

District officials acknowledged that problem as well and said they planned to re-establish the internal audit department and include an inspector general position.

Robert Bobb, the district’s first state-appointed manager, created a stand-alone office of inspector general in March 2009, around the time an estimated 5,000 computers were being stolen annually from DPS buildings. The inspector general was empowered to investigate all schools, departments, personnel and vendors.

In July 2012, Shy’s name came up in an inspector general probe of a building administrator accused of violating district policy by arranging payments to vendors before they delivered any goods. Former inspector general Wilbert Van Marsh said the administrator was the target of the probe,  but Shy cooperated with investigators.

Marsh said Shy explained that, “he did what he did to circumvent the district’s payment policy because he felt it was not timely. …  He felt he was operating within a flawed system that delayed payments to vendors.”

Investigators determined that the district had paid more than $13,000 to vendors for goods that were not delivered to the school. Marsh said there were no allegations of kickbacks at that point.

Still, experts question why it took so long to bring charges against Shy and others.

“Cash off the books, that’s the most difficult crime in our jungle, but something should have stuck out over a 10-year period.” said Joe Whall, a former police officer who now runs a forensic accounting firm that hunts down fraud in businesses. “They keep losing cash. What are they buying?”

After Marsh’s investigation, the administrator was demoted to a teaching position and administrators received memos and additional training on procurement rules and policies.

The inspector general’s office conducted 720 investigations before one of Bobb’s successors as emergency manager, Darnell Earley, eliminated the position in June 2015. Earley said that he was streamlining operations but pledged the district would still review all allegations of wrongdoing.

Rhodes signed an order April 22 re-establishing the inspector general’s office, noting that the district needs the position to “deter, detect and prevent, waste, fraud, abuse and misconduct in programs and personnel.”

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Posted by Tribune News Services

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