The largest private operator in the American school system is in trouble, reports Stephen Phillips.

EDISON Schools, the United States’s largest commercial operator of schools, was rocked last week by separate revelations that it over-stated its income and is to lose a flagship contract.

An investigation by the Securities and Exchange Commission, an American financial watchdog, found that the pioneer of privately-run schools hid the fact that “a substantial portion” of its claimed income consisted of payments it never received.

New York-based Edison was ordered to stop itemising school expenses paid by client education authorities as revenue, which will lop an expected 11 per cent off what it claims to have earned in the first half of this year.

It also emerged that the firm has been dropped by Boston Renaissance School, one of America’s largest independent, publicly-funded, so-called “charter” schools, which became one of its first customers in 1994.

School president Dudley Blodget denied flagging test scores were behind the decision to scuttle the $9 million (pound;6m) a year contract on June 30; it was due to expire in 2005.

Last year, 69 per cent of pupils leaving the 1,300-strong inner-city elementary and middle school failed the Massachusetts’ maths test, compared with an average 54 per cent across Boston and 31 per cent statewide.

“The scores were not the primary reason,” said Mr Blodget, citing an unwieldy power structure under which Edison and the headteacher reported separately to the school’s governors.

“The board has wanted to run the school since it started,” said John Chubb, Edison’s chief education officer.

“Neither of us were happy with where we were but the feeling was not that Edison can’t do the job,” added Mr Chubb, who said academic improvement had still outstripped the local average.

Last week’s setbacks dealt a further blow to cash-strapped Edison, deepening concerns about the company’s ability to maintain the 133 schools and 74,000 students it controls.

The firm’s share price has plunged more than 85 per cent to below $2 since mid-April when it landed contracts for less than half the Philadelphia schools it had led investors to expect.

This is particularly critical, as Edison has relied on share sales to raise much of the $500m it has needed over the past decade to meet the steep costs of running schools.

Since it was set up in 1992, the company has recorded $250m losses. Executives announced last week that they were in talks with an unnamed benefactor to raise between $30m and $50m.

“Even if for some reason we were to leave, schools would be left in better shape than before; there is no risk on the school side,” said Mr Chubb.

But this failed to placate parents of children attending the 20 Philadelphia schools - among America’s most dilapidated - scheduled to be taken over by Edison in September.

“I don’t consider putting 15,000 students with a company that can’t guarantee operations next year reform,” said Helen Gym, mother of a five-year-old girl due to start at Greenfield elementary in September. “It’s not just a stock game, this is my child’s life.”

A spokeswoman for Philadelphia’s School Reform Commission, which called in the private sector, said it was negotiating with Edison and other school managers to include financial accountability clauses in contracts.

The date at which Edison expects to come into profit has been repeatedly pushed back, since its founding.

The company did investigate the possibility of running schools in England, but gave up on the idea, declaring that profit margins were too small and employment laws too constraining.