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Audit finds Magnolia charter school operator in red after questionable purchases

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Los Angeles Unified auditors allege charter operator Magnolia Public Schools made questionable purchases then borrowed millions from classroom funds to stay afloat, according to a report released Wednesday.

Auditors found the charter organization was $2.9 million in the red at the end of June 2013.

Kim Onisko, accountant with Onisko and Scholz LLP representing Magnolia, said all improper accounting issues were addressed months ago and revenues now exceed expenditures.

"A lot of this is not fact, but opinion," said Onisko. "The opinion would have been modified if they would have interviewed staff to ask them about these issues."

In  June, L.A. Unified's charter school division auditors found questionable financial practices at Magnolia, prompting the school board to order the closure of two of the charter operator's campuses, Magnolia 6 and 7. 

Magnolia is fighting the closures in court. While the case is litigated, Judge Luis Lavin allowed the schools to stay open. The parties are due back in court later this month.

"To imply that there was financial wrong-doing and even criminal offenses is an outrage," Mike MeCey, spokesman for Magnolia, said in a statement.

Los Angeles Unified officials declined to comment for this story.

Although the auditors' report was completed in June, it was not made public until Wednesday.

Auditors traced charter operator's financial troubles to an outside nonprofit school management organization, the ACCORD Institute for Education Research that shares a building with Magnolia.

In 2011, about 30 percent of  expenditures by Magnolia's parent organization were for services from ACCORD.  

“[Magnolia Public Schools] experienced deficit spending in these years, which causes doubt about whether this service is actually affordable,” according to the report. 

Onisko said the auditors' report is misleading. He said expenditures for ACCORD represent roughly 4 percent of the consolidated revenue of all 11 schools. 

The report said services performed by ACCORD appear to overlap responsibilities assigned to Magnolia Public Schools staff.

Auditors zeroed in on several transactions: a $47,000 class trip to Europe that didn't appear to be funded through fundraisers alone and a $200,000 payout for immigration fees benefiting prospective staff members and their families, according to the audit. 

Onisko said "no public money was spent on a field trip to Europe." McCey said the immigration payments were guided by federal law.

Auditors investigated school cash and debt card usage, including purchases of electronics and meals. School officials bought goods from the online retailer Amazon, but didn’t indicate what items were purchased, making it difficult for auditors to ascertain whether they were legitimate.

According to the report, expenditures soon outpaced revenues and the charter organization began to rely on school cash drawn in the form of poorly documented loans that were made before Magnolia's board gave approval. 

“It is commonly necessary for schools to temporarily borrow monies from other sources,” the report noted. “However, it is unusual for the supporting foundation to be borrowing money from schools.”

By June 2013, the schools too were borrowing money to stay afloat.  Magnolia 6 and 7 looked to be in healthier financial shape after June 2013, but the audit concluded before the June 2014 close of the fiscal year.