School districts are as vulnerable to fraud as organizations in the private sector. The types of fraud most often perpetrated in the education industry include procurement schemes, corruption (conflicts of interest, bribery, illegal gratuities and economic extortion) and skimming. The Association of Certified Fraud Examiners’ most recent report on occupational fraud and abuse proves that the education industry is far from exempt from fraud concerns.
The study also states that across all industries, the most prominent organizational weakness that contributed to the fraud in their study was a lack of internal controls, which was cited in 29.3 percent of cases. The next most prominent weakness was an override of existing internal controls, which contributed to just over 20 percent of cases.
Over the past few months, I have been asked to present at multiple conferences regarding fraud prevention within school districts. This topic is at the forefront of many conversations between business offices, auditors, and governmental regulators. With limited resources, school districts feel the impact of even immaterial fraud losses much more heavily than larger corporations do. In addition to the monetary losses, districts face the subsequent media storm of bad publicity.
Unfortunately, even with this knowledge, many districts take a reactive approach to unethical behavior. Instead of waiting for something bad to happen and responding reactively, consider the following five tips to prevent fraud, and encourage your district to adopt a more proactive approach.
1. Establish strong internal controls. The Association of Certified Fraud Examiners (ACFE) fraud study reported that 94.5 percent of perpetrators took some efforts to conceal the fraud. This means that in all but about 5 percent of fraud cases, if the opportunity for a fraudster to commit fraud had been removed, the crime would not have occurred. The best way to remove the opportunity for concealment is to implement and enforce a strong internal control structure. An ideal structure would include the following imperative controls:
- segregation of duties
- consistent examination of supporting documentation
- timely reconciliation of bank statements
- safeguarding assets
2. Implement hotlines. The ACFE fraud study reported that 39.1 percent of fraud cases were detected through tips. Also, organizations with hotlines were nearly twice as likely to receive tips as those without hotlines. A confidential service for reporting fraud through email, telephone, or a website will allow both internal and external sources to be pursued immediately. A hotline provides employees the peace of mind that they can report suspicious activity without pressure or threat.
3. Perform surprise audits. There are many ways to wear an auditor’s hat for a day; here are a few that have yielded results at school districts:
- Observe cash collections at a sporting event or lunch service
- Perform an unplanned audit of technology inventory or petty cash
- Review cleared checks online for a break in sequences
- Verify new vendor names with a legitimate website, or their addresses to a Google Maps search
4. Utilize data analysis. This is a fancy way of saying, review accounting information for trends that make sense. If a district’s football team had a winning season, but ticket sales revenue did not increase, this may be a reason to dig deeper. If there was a decrease in student meals sold, but food costs have increased, there may be a need to gather more supporting data.
5. Train employees. Ensure that employees understand where to seek advice when they are faced with uncertain ethical situations. Instruct employees on how they can recognize red flags or early warning signs. Communicate the impact that fraud or abuse can have on the district, whether it’s negative publicity, job loss, or lower morale. Enforce a zero-tolerance policy through words and actions.
The ACFE fraud study also reported that there are typically no distinguishing factors of the “average” fraud perpetrator. Unfortunately, fraudsters look like honest people and are often first-time offenders. However, some of the behavioral red flags to be aware of include an employee living beyond his or her means, financial difficulties, unusually close association with a vendor/customer, wheeler-dealer attitude, control issues and an unwillingness to share duties, divorce/family problems, and irritability, suspiciousness or defensiveness.
By establishing a strong internal control system, providing employees with training and a confidential reporting outlet, performing surprise audits, and analyzing financial trends at your district, the likelihood that your district will be a victim of fraud will decrease substantially.
For more information about protecting your school district’s assets through effective internal controls, contact Yeo & Yeo’s Education Services Group.