Gear Up audit: State should have spotted conflicts
The Department of Education should have recognized the potential for conflicts of interest within a Platte educational cooperative it hired to handle millions of federal dollars, according to a state audit released Monday.
The report from the state's legislative auditor marks the first time the department has been found at fault for its handling of contracts with the Mid-Central Educational Cooperative, where employees allegedly embezzled nearly $1 million in public funds.
The audit says key employees at Mid-Central also held positions with organizations that received funding from a grant managed by the cooperative, and that because of those ties the department should have put in place additional policies to monitor the exchange of funds.
"Procedures implemented by the DOE did not address these risks and as a result, the DOE exposed itself to potential violation of federal regulations, and an increased risk of fraud, waste and abuse of grant funds," Auditor Martin Guindon wrote in the report.
Representatives from the Department of Education responded to the auditor's findings and said they plan to provide additional oversight to the South Dakota Board of Regents, the organization now charged with administering the federal grant.
Attorney General Marty Jackley announced criminal charges last week against three Mid-Central employees accused of helping a Platte couple funnel money from the federal Gear Up grant. The cooperative for years had administered the multi-million dollar program aimed at helping South Dakota Native American students prepare for college.
Hours after South Dakota Secretary of Education Melody Schopp notified the cooperative that it would be losing the $4.3 million contract, the group's business manager killed his wife and four children before setting fire to their home and turning the gun on himself.
The Department of Legislative Audit report provides more detail as to how Scott and Nicole Westerhuis, both Mid-Central employees, avoided federal audit by classifying a group they helped found, the American Indian Innovation Institute (AIII), in a way that exempted it from extra oversight.
Jackley last week said the couple used funds taken from AIII to pay for home improvement projects and other things.
In a November 2015 interview with Argus Leader Media, Schopp said the Department was aware of accounting problems at the cooperative but never found evidence of criminal activity.
The cooperative had been under financial scrutiny for more than three years before state officials decided to revoke its contract. Schopp said the Department of Education began tracking what she described as "incompetence" with the group's financial record-keeping in early 2012. The department offered technical support to Mid-Central managers to help bring its accounting up to standards but became frustrated with the lack of improvement, Schopp said.
"Department staff did not anticipate nor were they equipped to detect the deception and criminal activity among individuals at Mid Central," Schopp said in a statement Monday.
Tony Venhuizen, chief of staff to Gov. Dennis Daugaard, said he did not think the department was aware of the "web" of conflicts of interest that existed at Mid-Central. He said despite efforts by Mid-Central employees to deceive the department, the state decided to cut ties with the cooperative last year.
“The problems that legislative audit found really show why the department made the right decision to cancel that contract after several years of failed efforts to fix what they were doing,” Venhuizen said Monday evening.
Venhuizen also pointed to legislation brought forth by the governor's office this year that will create additional controls for groups that contract with the state.
The Department has said previous audit reports did not reveal the scope of problems at Mid-Central and that questionable or undocumented expenses billed to the state were withheld when they could not be explained.
The report also says that Mid-Central salaries, including Stacy Phelps' $65,000 paycheck in fiscal year 2014, were reimbursed by the state and Gear Up funds. Phelps, who worked as the state's Gear Up program director and CEO of AIII, also received $34,000 from AIII for contractual services. Those funds were also reimbursed by the Gear Up program but weren't reported in AIII's tax forms.
Nicole Westerhuis received $38,521 through Oceti Sakowin Education Consortium (OSEC) in fiscal year 2014 for her work as business manager there. She also received $59,740 in the same year for her work at Mid-Central.
The audit also found that Mid-Central didn't comply with federal matching requirements set forth in the terms of the Gear Up grant. Under the requirements, Mid-Central needed to find 50 percent matching funds from non-federal sources.
Gaps existed between how much the cooperative reported in match and how much they brought to the table, the audit says.
Three face charges in connection with the alleged conspiracy.
Mid-Central's Director Dan Guericke, 58, faces six felony counts of falsification of evidence and conspiracy to offer forged or fraudulent evidence. Interim business director Stephanie Hubers, 43, faces six felony counts of grand theft, grand theft by deception and receiving stolen property. And Phelps, 42, is charged with two felony counts of falsification of evidence and two of conspiracy to offer forged or fraudulent evidence.
Phelps, Guericke and Hubers are set to make their initial appearances in court Tuesday afternoon in Lake Andes.
Follow Dana Ferguson on Twitter @bydanaferguson
Read the findings by the Department of Legislative Audit: