Edkey, the major Arizona charter school operator serving roughly 6,000 students across the state, including at Maricopa’s Sequoia Pathway, is grappling with serious financial instability and compliance issues, according to a series of newly released audit reports. 

The audit, conducted by Baker Tilly US, is dated April 22, but released publicly this week. The key findings are that auditors are raising “substantial doubt” about Edkey’s ability to survive, citing recurring losses, declining enrollment and noncompliance with debt covenants. 

The Mesa-based nonprofit charter school system reported a $15.9 million decrease in net assets for the fiscal year, driven by total expenses of $90.4 million outpacing revenues of $75.2 million. 

Notably, Edkey ended the year with a “net asset deficit” of more than $10.1 million. Put simply, the charter school system is $10 million in the hole. 

Despite holding more than $11 million in “cash and equivalents,” Edkey had liabilities exceeding $156 million, including more than $145 million in bonds payable. 

Auditors determined that Edkey is out of compliance with its “debt covenants,” a factor contributing to the “substantial doubt” regarding its financial future. In the audit, Edkey management acknowledged as much in financial statement disclosures, and auditors emphasized that the financials do not reflect any potential adjustments that might be required if Edkey is unable to continue operations. 

Here are a few of the key issues flagged in the audit:  

• Edkey recorded almost $2.3 million in expected grant reimbursements as income, even though it hadn’t actually billed for them. This made its financial statements look better than they really were, overstating how much money it was owed and how much revenue it generated. 

• For six to eight months, Edkey’s board of directors didn’t review monthly financial statements nor ensure that bank accounts were being properly reconciled. The board members weren’t informed when the organization took on new debt, which is not only a serious oversight but also goes against Edkey’s financial responsibilities and loan agreements, according to the audit. 

• Edkey didn’t keep records showing it had checked whether vendors receiving large payments of more than $25,000 were allowed to do business with federally funded organizations. This puts it at risk of violating federal grant rules. Edkey also initially reported about $400,000 more in federal ESSER funds than it was actually eligible for, due to a reporting error. 

Despite the financial distress, Edkey was found to be compliant with several state-level operational requirements. A separate agreed-upon procedures report confirmed the charter system was adhering to fingerprint clearance for employees, special education certifications, student attendance reporting, open meeting laws and tax filing standards. 

In a written response to the findings, Yovhane L. Metcalfe, Ph.D., on behalf of Edkey, told InMaricopa today: 

“Like all Arizona charter holders, the Edkey board submitted its audit to the Arizona State Board for Charter Schools after reviewing the findings with our independent audit firm. Since then, Edkey has been working with the Arizona State Board for Charter Schools to develop and implement its corrective action plan, which directly addresses the findings and reflects the continued work Edkey has been doing over the past year to ensure its financial sustainability.” 

Metcalfe emphasized the organization’s commitment to keeping its schools open and maintaining academic progress despite the financial challenges. 

“Our focus on recovery and sustainability ensures Pathway teachers can continue to make academic gains with students like the 50% improvement the school saw in third grade reading just this year,” she added. “No further schools are planned for closure.” 

The Arizona State Board for Charter Schools did not respond to questions about Edkey’s audit or ongoing oversight before publication time. 

The audit was submitted to Edkey, the Arizona State Board for Charter Schools and the Arizona Office of the Auditor General.