Amid the outcry over a new state investigation detailing an alleged $85 million self-dealing scheme at two Indiana virtual charter schools, state leaders are asking why it took years to catch large-scale enrollment inflation and widespread financial conflicts of interest.

State leaders, education officials, and charter school advocates have pointed to several players who they believe share the blame for the apparent misdeeds at Indiana Virtual School and Indiana Virtual Pathways Academy. And, as Chalkbeat has reported, some officials were made aware of red flags years ago, but didn’t step in.

“We can’t just be giving this money away without accountability,” said Democratic state Rep. Ed DeLaney, of Indianapolis. “The scope of this is stunning. … There appears to have been every kind of misfeasance or malfeasance you can imagine.”

The alleged wrongdoing at the two online schools prompted Indiana officials to ask state and federal law enforcement agencies to look into the case. No criminal charges have been filed.

So how did this happen? And who could have intervened along the way?

School officials apparently flouted their responsibilities.

The report released this week on state auditors’ investigation into Indiana Virtual School and Indiana Virtual Pathways Academy lists the names of school officials and vendors whom they believe are responsible for the over-reporting of enrollment numbers and inappropriate spending.

The ledger included virtual school administrators who signed off on inflated reports or bore responsibility because it was their job to verify enrollment, the report said, including the number of students who qualify for extra funding because they come from low-income families or have special needs.

Virtual school officials appeared to ignore many state requirements for charter schools, the state report said, including rules about vendor contracts and annual audits. The first line of defense should have been school board members, but state auditors found they “had no meaningful oversight” of the schools and didn’t appear to have approved expenses. 

The authorizing school district didn’t keep a close watch.

As the virtual schools’ authorizer, Daleville Community Schools permitted the programs to open and were responsible for overseeing them.

A Chalkbeat investigation in 2017 highlighted potential conflicts of interest, with Indiana Virtual School contracting with companies tied to the school’s founder, Thomas Stoughton.

But documents show that the Daleville district discounted the story and didn’t press the school on the reported conflicts of interest.

Later, Daleville told state auditors they were unaware of the schools’ contracts with a tangled web of vendors associated with school officials.

Daleville officials have defended themselves by saying they didn’t have access until recently to data showing the extent of the enrollment issues at Indiana Virtual School and Indiana Virtual Pathways Academy — and, as soon as they received the data, they brought their concerns to the state. 

But critics say Daleville did a poor job keeping a tight rein on the virtual schools, in part because the district agreed to a weak contract from the start. 

It took six months for Daleville to close the two troubled virtual schools last year after it discovered the enrollment inflation.

State policymakers were quick to pin Daleville for allowing the problems to persist. But it’s unclear whether state lawmakers ever really intended to give districts like Daleville the power to oversee fast-growing statewide virtual charter schools — that was “a big loophole in Indiana law, unfortunately,” one charter advocate once told Chalkbeat

Neither state lawmakers nor state education board members intervened, until lawmakers amended state law last year to stop Indiana school districts from overseeing virtual charters.

Indiana Virtual School blurred academic results by opening a new school.

Daleville approved the opening of a second school, Indiana Virtual Pathways Academy, in 2017 — even though virtual school officials had been unable to improve dismal academic performance at their first virtual school.

The new school opened as Indiana Virtual School was on the brink of receiving its second straight F grade from the state. The state steps in after schools have received four failing grades.

Daleville officials have said the new school was meant to provide special support for struggling students. But they later discovered that huge numbers of students had transferred from the failing Indiana Virtual School to the new Indiana Virtual Pathways Academy, which allowed Indiana Virtual School to sidestep accountability.

Enrollment inflation didn’t sound state alarms.

Indiana Virtual School and Indiana Virtual Pathways Academy enrolled students who didn’t want to attend the schools — keeping students on the rolls after they had moved away, were withdrawn, and, in one case, had died, Chalkbeat has reported. The schools also enrolled students who had merely requested more information through their websites, the state audit revealed. In addition, they counted many students who were 22 or older, which might be unusual but is not prohibited, state officials have said.

It’s unclear whether those patterns would have triggered alarms in the state’s data system. It’s possible that inactive students who remained on the virtual schools’ rolls never enrolled at other schools in Indiana, which would allow them to go undetected more easily. But it also raises questions about whether the state should have noticed some of those reported to have been enrolled likely weren’t students.

House Speaker Brian Bosma, an Indianapolis Republican, said Thursday that the Indiana Department of Education bears some responsibility for not auditing the virtual schools’ enrollment counts: “I think there will be a lot of questions asked about that as well.”

An education department spokesman said the blame was “unwarranted,” but didn’t respond to Chalkbeat’s questions about how the state reviews student counts. 

The state could see most students never showed up for tests.

So few Indiana Virtual Pathways Academy students showed up for state tests in 2018 — just 65 out of nearly 350 10th-graders — that the school couldn’t receive an A-F grade. (It would have been an F, based on the single-digit passing rate for students who did take the tests and the school’s 2% graduation rate.)

The 19% test participation rate, paired with the dismal graduation rate — both far lower than at other virtual charter schools in the state — could have been a sign that many students were inactive. 

Federal requirements call for schools to test at least 95% of students, or schools’ state letter grades can be affected. But Indiana Virtual Pathways Academy simply didn’t receive a grade and didn’t face other consequences for its low test participation rates.

The schools didn’t face immediate consequences for not filing annual audits.

Indiana Virtual School didn’t file its required annual audits with the state for several years, starting with the one that was supposed to have been completed for 2015-16. Those audits could have shown some of the spending patterns that state officials deemed inappropriate.

Even if the school had filed audits in a timely matter, charter schools can choose their own third-party auditors. The state investigation shows Indiana Virtual School had hired an accountant, Greg Bright, who was connected to the web of related companies. Bright is named as one of the dozens of parties responsible for the $85 million due back to the state.

State lawmakers have been slow — and loathe — to regulate virtual schools.

While Indiana is widely lauded for its charter-friendly environment, even charter school supporters have pointed to the state’s lax regulations on virtual charter schools as an area of weakness.

As virtual charter schools showed continued low performance, lawmakers took some steps to improve the quality of education. But some say they haven’t gone far enough to ensure state money is well-spent on online learning, and it’s not yet clear what effect new regulations passed last year have had on the state’s remaining virtual schools.

“The legislature bears responsibility,” said DeLaney, the Democratic state representative, who is a frequent charter school critic. “We allowed this program to explode, and we didn’t monitor them effectively.”

Lawmakers did not put caps on growth at virtual charter schools, which allowed Indiana Virtual School and Indiana Virtual Pathways Academy to collect significantly more state funding over the years. Some advocates recommend performance-based funding, where schools are paid only for the courses students complete, or prohibiting virtual charter schools from contracting with for-profit management companies.

But regulating online education has been a tenuous balancing act in Indiana, as school choice supporters seek to protect what they see as a critical option for students who aren’t succeeding in traditional environments.

Some argue that it might have been difficult to stop the problems at Indiana Virtual School and Indiana Virtual Pathways Academy, if officials manipulated the rules as the state report shows.

Even after the state began requiring virtual charter schools to have a policy about withdrawing truant students, those virtual charter school officials kept inactive students on the books, the state report found.

“It’s difficult to legislate against conduct that’s criminal, and this appears to be criminal in nature,” Bosma said.