State audit finds wrongdoing was widespread in GEAR UP

PIERRE--South Dakota's auditor general released findings of widespread problems covering multiple years regarding GEAR UP and the four agencies responsible for managing the federally-funded program Monday evening.

PIERRE-South Dakota's auditor general released findings of widespread problems covering multiple years regarding GEAR UP and the four agencies responsible for managing the federally-funded program Monday evening.

The state Department of Education should have been keeping better watch of the more than $3 million that flowed annually to Mid-Central Educational Cooperative, the report said.

Mid-Central in turn sent large amounts of money to two nonprofit organizations, American Indian Institute for Innovation and Oceti Sakowin Education Consortium.

"The audited financial statements of MEC and the accompanying notes to the financial statements did not disclose any of these relationships or the related transactions," the audit report says.

Several Mid-Central employees were also paid by the nonprofits, a situation the auditor general said created "significant risks."


One of the people receiving multiple salaries was Stacy Phelps, who ran GEAR UP for Mid-Central and also was chief executive officer for AIII.

Scott Westerhuis and Nicole Westerhuis also had multiple sources for their salaries.

He was the business manager for Mid-Central and was chief financial officer for AIII. She was an assistant business manager for Mid-Central and performed financial services for Oceta Sakowin.

The Westerhuis couple and their four children died in a series of murders in the early hours of Sept. 17, 2015. Investigators believe Scott Westerhuis killed the children and his wife, lit their house on fire and shot himself to death.

The state Department of Education's response to the state audit said independent audits performed for Mid-Central didn't show any irregularities.

Because of problems that were discovered, the department terminated its GEAR UP contract on Sept. 16, 2015. The killings happened in the hours after Scott Westerhuis returned home late that night.

The state Board of Regents now manages GEAR UP, which helps high school students from low-income families understand what they need for higher education after graduation.

The department in the report Monday outlined its plans for future grants.
More in-depth risk analysis of the financial management capacity of potential subawardees of discretionary or competitive grant programs, including their ability to identify and appropriately document match;
More in-depth review of key staff;
Require grantees to submit a conflict of interest policy and to submit documentation disclosing any related parties;
Require any entities providing subawards to “affirmatively notify” the department of any subawards;
Those entities must submit a signed written acknowledgment by both the entity and the subrecipient acknowledging they are aware of federal requirements regarding subawards; and
Any entity receiving a subaward must acknowledge it is required to meet audit requirements under uniform guidance if their total federal awards exceed the threshold. The threshold has been $500,000.
The state audit identified several problems regarding the matching amount that Mid-Central was supposed to provide for GEAR UP.
Two of the situations caused hundreds of thousands of dollars too much to be matched on software while there wasn’t sufficient match for salaries and benefits, supplies and equipment, and other costs.
The department told the auditor general’s office there were difficulties in obtaining adequate documents from Mid-Central regarding the match amounts and concerns about the situation “was a factor” in the determination to terminate the contract with Mid-Central.
“The department has not received timely and sufficient responses from MEC. As a result, the department has engaged a specialist to help in acquiring adequate supporting documentation for match for the Gear Up grant,” the department said in its response.
The state audit also faulted Mid-Central and the state department for failing to see that AIII received a single audit as required by the federal government for grant recipients.
The state audit found proof on AIII’s federal 990 reports to the Internal Revenue Services that AIII received more than $500,000 annually for 2012, 2013 and 2014. The $500,000 should have triggered the required single audit.
The state audit said the single audits also should have been required “because of the nature of employment and contractual relationships that existed between employees and officers of MEC and AIII.”
The state audit then specifically named Stacy Phelps, Scott Westerhuis and Nicole Westerhuis.
Phelps turned himself in for arrest last week on charges involving altered contracts between AIII and Mid-Central in an attempt to avoid a government audit of AIII.
Also charged regarding altered contracts involving AIII and involving two employees was Dan Guericke, who has been Mid-Central’s director.
Those two employees, former state Department of Education secretary Rick Melmer and former state Indian education director Keith Moore, haven’t been charged.
A third person, Stephanie Hubers, was charged with theft for receiving payments from AIII for work she generally didn’t perform. She was an assistant business manager at Mid-Central.
Guericke, Hubers, Melmer and Moore aren’t mentioned in the latest state audit results. Melmer and Moore were referred to in the state audit report one year ago regarding Mid-Central.
South Dakota’s involvement in the GEAR UP program began a decade ago when Melmer and Moore were at the state department.
The state department sent GEAR UP money to Mid-Central totaling nearly $3.4 million in federal budget year 2013; nearly $4.8 million for federal year 2014; and nearly $4.3 million for federal year 2015.

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