PIERRE, S.D. (CN) – A South Dakota legislative audit of an education cooperative has confirmed that at least $1.3 million in federal funds meant for Native American students has gone missing, with millions more poorly accounted for.
South Dakota’s Department of Legislative Audit (DLA) first began investigating the Mid Central Education Cooperative, which ran the state’s GEAR UP program, in 2014 due to “deficiencies in internal controls and noncompliance.”
GEAR UP, which stands for Gaining Early Awareness and Readiness for Undergraduate Programs, is a federally funded program to help low-income students complete high school and pursue higher education. In South Dakota, GEAR UP funding was approved for the benefit of students on the state’s impoverished American Indian reservations.
But much of that money was redirected toward the bank accounts of program administrators Scott and Nicole Westerhuis, who according to a criminal investigation were living beyond their means.
The program attracted national attention when Scott Westerhuis shot himself in September 2015 after killing Nicole and their four children and starting their house on fire.
The state’s Department of Criminal Investigation interrupted the almost-complete audit when it subpoenaed the DLA’s documentation as part of a criminal investigation that led to the indictments of three of Westerhuis’ colleagues – MCEC’s assistant business manager Stephanie Hubers, its director Daniel Guericke, and Stacy Phelps, the chief executive officer of the American Indian Institute for Innovation (AIII) – on embezzlement-related charges.
MCEC contracted with AIII and other nonprofits to carry out its programs, often using them to redirect funds for “under-the-table” bonuses and personal expenses, according to the indictment documents.
Hubers, Guericke and Phelps have all pleaded not guilty to the charges and face trial in Charles Mix County this summer.
On Friday, the DLA finally released its report, which examined the usage of funds going back as far as 2007.
“Our review did not involve determining whether crimes were committed as that is the responsibility of law enforcement agencies,” the report opens. “Additionally, our review did not involve evaluating whether State and federal programs administered by MCEC were effective in achieving expected results and outcomes. The objective of our review was to determine whether funds received by MCEC had been adequately accounted for and expenditures of those funds were properly supported by documentation.”
The audit revealed that numerous MCEC employees also worked for or served on boards for nonprofit organizations doing business with MCEC, and that there was no oversight of potential conflicts of interest; that the MCEC did not properly identify its relationship with partner nonprofits or make sure the nonprofits complied with requirements to receive federal grants; and that MCEC withdrew more than $7 million in unauthorized funds from its bank account to funnel toward associated nonprofits.
Although most of the money was returned, $1.3 million remained unaccounted for at the close of the audit, according to the report.
The audit also found no support for the organization’s claims that it had received $2 million in software from Microsoft to be used in educational programs, along with another $2 million in matching funds. Based on the licensed software’s retail price, the DLA calculated it should have cost the cooperative only about $250,000.
Expenditures for a teacher quality program and an educational grant program run by the cooperative lacked documentation as well, racking up another $1.5 million that was not accounted for, the audit found.
“Governing boards and management must provide oversight of and require effective performance and financial reporting for all of an organization’s programs and activities,” the report said in its recommendations section. “Such accountability does not indicate a lack of trust, but rather protects governing boards, management and employees from the consequences of those who violate the trust that has been placed in them.”
The MCEC Board denies responsibility for the deficiencies identified in the audit, claiming that it was in the dark about the illegal activities happening in the organization.
“DLA’s Special Report has not identified any facts that would have put MCEC or its Board on notice of the fraudulent and illegal activities of Scott and Nicole Westerhuis,” it said in its 10-page response to the audit. “There is nothing that MCEC or its Board could have reasonably done to prevent this complex scheme of fraudulent and illegal activities.”
The board added that it had no reason to suspect Westerhuis and his wife of embezzling funds, as they were “well respected members of the [local] community, and trusted overseers of MCEC’s financial activities.”
Moreover, Westerhuis did not submit monetary transactions to the board for approval as he was required to do, it said. And he and his wife would “blatantly lie” when questioned about certain discrepancies in the budget, according to the board.
The board also blamed the South Dakota Department of Education for failing to properly oversee GEAR UP. However, the audit found the fewest accounting issues in programs in which the DOE was directly involved, ostensibly because it was one rare area where the organization had outside accountability.
The MCEC will cease providing programs to its member schools in June, making the DLA’s recommendations for better internal controls and oversight “moot,” according to the board.
The GEAR UP program will continue in the state under the oversight of the South Dakota Board of Regents.