In response to its first financial audit, Halau Lokahi Public Charter School in Kalihi is working to fix accounting problems and repay its debts, and has removed family members from the local school board that oversees it.

"Halau Lokahi has made changes and taken immediate corrective actions as recommended by the auditor," said June Nagasawa, chairwoman of the local board for the 10-year-old, Hawaiian-focused school, which employs several members of the director’s family and touts its atmosphere of ohana. "Overall the school has learned a lot during this audit, and we look forward to strengthening and progressing."

The independent auditor that reviewed Lokahi’s books cited problems with internal financial controls, unrecorded liabilities, payments to related parties and a lack of verification of employee advances. The school ended the 2010 fiscal year $425,000 in debt. Halau Lokahi’s director, Laara Allbrett, said it has erased most of that liability this fiscal year, thanks to an infusion of federal stimulus money that went toward teacher salaries.

The charter school has 244 students in kindergarten through 12th grade. Half are enrolled in its Hawaiian project-based curriculum, and the rest take classes online with Elite Element Academy, a local private school.

Halau Lokahi’s 22-member staff includes Allbrett, two daughters, a son, a son-in-law and the son’s girlfriend. Allbrett’s son is a project manager, her son-in-law is a teacher and the others handle mostly administrative and clerical tasks. One daughter was also the treasurer of the local school board until stepping down from that volunteer position at the advice of the auditor, along with her brother, who was the board’s secretary. Another treasurer was recently chosen, and the school has adopted new fiscal procedures and will hire an outside certified public accounting firm to monitor the financial system.

The school said it followed "fair and consistent hiring practices" in hiring and setting salaries, and that the family’s involvement is characteristic of a traditional Hawaiian approach to education. Allbrett said her daughter took on the treasurer’s role only after the school had to lay off 15 staff members in August 2009 after a big drop in state funding. Lokahi faculty members said family members on staff do more than their jobs require and provide a nurturing atmosphere for students.

"The families come to us because they are sending their children to be educated by a family," said Leo Akana, a cultural and performing arts specialist at the school. "That’s the way our families look at us, and that’s how we look at them. We consider it an honor, a privilege and a huge responsibility to be their makua, their parents during the day. The Western notion of family comes first, favoritism — that is not the case here at all."

This year all of Hawaii’s 31 charter schools were required for the first time to submit independent financial audits for the 2010 fiscal year to the state Charter School Review Panel. Halau Lokahi missed the deadline early this year and submitted its audit last month. It was one of five schools that had negative or marginal net assets and the only charter whose auditor declined to render an opinion, also known as a "disclaimed" audit, according to Bob Roberts, chief financial officer of the Charter School Administrative Office. Carbonaro CPA & Associates of Hilo, which audited most of the state’s charters, said it was unable to form an opinion of Halau Lokahi’s finances because it could not rely on internal controls at the school and was reviewing only one year’s accounts.

"One audit was disclaimed, and that’s not a good audit opinion, and the panel feels that it should look into that," said Ruth Tschumy, chairwoman of the state Charter School Review Panel. "It was discussed in the Finance Committee meeting, and the panel has put it on the agenda for its June 23 meeting."

Halau Lokahi is in restructuring for failing to meet academic targets, but its test scores have risen steadily in the last three years to 68 percent proficient in reading and 29 percent proficient in math, up from 42 percent and 11 percent, respectively, in 2007. The scores combine the performance of its day students with its "cyber" students who are studying with Elite Element Academy. That nonprofit online school was opened in 2007 by Heather Kanoe Ahuna and Reydan "Tita" Ahuna, and charges its private students $7,200 per year in tuition. The Charter School Review Panel has asked that the test scores be separated for review.

"The panel has had a hard time determining whether the students are students of Halau Lokahi or Elite Academy," Tschumy said.

Asked about the arrangement, Allbrett said, "They are our kids; we just buy the educational services from Elite."

Halau Lokahi is the latest Hawaii charter to undergo scrutiny of its oversight, accounting and hiring practices. Earlier this year the panel conducted an evaluation of Myron B. Thompson Academy after an auditor cited deficiencies in board oversight and some former staff members complained publicly that family members on staff were not qualified or were not doing their jobs. The matter was referred to the state Ethics Commission and the attorney general for investigation. Another charter school, Hakipuu Learning Center in Kaneohe, also has several relatives on staff, and the son of its administrator heads its local school board, but the campus received a clean audit by a different financial auditor.

Unlike most Hawaii public schools, which are overseen by the Board of Education, charter schools are managed by their own local school boards, made up of volunteers who hire the principal and provide independent oversight of the campus. Charter school staff members are state employees, and the schools are open to the public, free of charge.

Federal law prohibits hiring relatives for federal government jobs, except in special instances. A bill to extend such restrictions to state employees failed during this year’s legislative session. While Hawaii state law does not directly address nepotism, its fair-treatment law prohibits state employees from giving anyone preferential treatment, and the conflict-of-interest law prohibits them from taking discretionary state action that affects their financial interest or that of their spouse or dependent child.

Halau Lokahi doesn’t have a traditional campus, instead operating at various sites in Kalihi. A quarter of its students are economically disadvantaged. Hands-on projects range from carving and launching a traditional Hawaiian canoe to participating in the Hawaii Stock Market Simulation and producing news video for Hawaii Public Television’s "Hiki No" program.

"We have kids with some of the roughest pasts, we have incarcerated parents, all kinds of issues, single-parent homes," said teacher Milton Coleman. "This school has been, in their own words, a ‘lifesaver’ for them."

The bulk of Halau Lokahi’s debt at the end of the 2010 fiscal year was in back rent for its facilities and money owed to Elite Element, and both should be paid off by the end of this fiscal year, Allbrett said. The school also owed $50,000 to First Hawaiian Bank, with Allbrett as guarantor on the line of credit, and about $26,000 to the Department of Education’s Food Services branch. It expects to reduce those balances substantially by the end of this month, according to its accountant.

Allbrett said inadequate funding from the state has hampered the school since its founding.