Audit Finds Irregularities at Academy : Finance: Lynwood’s entrepreneur program maintained inadequate control of $2 million from the city to help aid new businesses, study concludes.
A Lynwood business academy kept shoddy records and maintained inadequate control of nearly $2 million in public funds that it received from the city, a private auditing firm has concluded.
Simpson and Simpson, hired early last year to audit the Entrepreneur Development Academy of California during its first 18 months of operation, found duplicate payments of a $31,000 bill for computer equipment, insufficient documentation to support thousands of dollars in expenses and payments to academy officials that may constitute conflicts of interest.
Auditors also found two contracts detailing vastly different obligations for the city to fund the academy. Under one contract, the city’s redevelopment agency would provide $4 million to the academy over a five-year period. Under the other contract, the city would provide about $14.5 million in funding over 40 years. Auditors suggested the city seek legal advice to determine which contract is valid.
The academy was set up in 1991 to provide free training to fledgling local entrepreneurs. The academy offered owners of new businesses free courses, training, office space and clerical support until the businesses were strong enough to operate on their own, preferably in Lynwood.
The city’s redevelopment agency in July, 1991, approved $2 million in funding, including a $1.5-million interest-free loan to be repaid over 40 years. Most of the city money was earmarked to renovate two buildings in the city to house these “incubator businesses.”
But the auditors found that nearly half of the $1.5 million was paid to the executive director, the board of advisers or small-business owners who set up shop at the academy. Executive Director Jess Arnold was paid $97,500 from July, 1991, until he retired in August, 1992. Other board members or business owners were paid amounts ranging from $33,306 to $174,781 during an 18-month period. The audit did not describe the nature of the payments.
The auditors questioned some of these expenditures, but City Manager Faustin Gonzales said some of the spending was encouraged. “These business people were supposed to be funded by the academy,” he said. Arnold could not be reached for comment.
Some city officials expressed dissatisfaction with the audit, claiming it did not determine how thousands of dollars were spent by the now-defunct Lynwood Manufacturing Co., which received $694,800 for machinery but never opened. The machine shop was to have been one of the academy’s anchor businesses and its profits were to have been used to help make the academy self-supporting.
An investigation by The Times found the company’s owner, Richard Calhoun, apparently used much of the city’s money to pay personal debts, including an Internal Revenue Service bill. The investigation also found that Calhoun spent only $300,000 of the $694,800 on the equipment.
Calhoun has denied any wrongdoing but has declined to discuss with The Times the payments to the IRS or other expenditures. Calhoun halted his manufacturing effort after 10 months and turned over the machinery to the academy in July, 1992.
The audit, released last week, was criticized by Councilman Robert Henning. “There are still too many unanswered questions about this thing,” he said.
The auditors said they could not review the operations of the defunct manufacturing company because they were not provided any of its financial records.
Henning and Councilman Armando Rea said they may take legal action to block additional city funding to the academy. Last February, the council decided to give the academy another $225,000 for rent, tuition and training of incubator businesses.
The academy has been renamed and restructured. Now the Lynwood Entrepreneur Development Academy, it has a new board of directors and a new business plan that city officials said will have tighter controls on how the money is spent.
“We haven’t got all the assurances that we need yet, but we are working on them,” Gonzales said. “We realize that precious little tracking has been done for the institute. That will change.”
Mayor Paul H. Richards II has consistently defended the academy, which he said has launched dozens of businesses in the community and surrounding areas. He has vowed to continue its funding.
“It is probably one of the greatest things that has ever happened to this community,” Richards said previously in response to reports of questionable spending at the academy. “The benefits have far exceeded all anticipated results. That’s a good feeling.”
