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What is fraud?
What is fraud?
When fraud is exposed within schools, it makes for eye-catching headlines because it
just seems blatantly wrong and dishonest for anyone to financially exploit the education
system. However, fraud within K-12 schools happens more often than anyone wants to
admit due to inadequate systems, processes and technology, as well as a lack of financial
controls.
This is a problem because schools across North America collect billions of dollars in
tuition, lunch, textbook and student activity fees. Far too often, schools and school
districts are exposed to fraud and waste when these fees are collected using cash.
Fraud does not have to be a major problem. With government cracking down on fraud
and educators looking for efficiencies, schools are being asked to increase transparency
and meet rigorous fund management reporting requirements with significantly fewer
resources.
Before getting into ways to battle fraud, let’s be clear about what’s involved. Fraud is
defined as “the deliberate deception of an individual with the promise of goods,
services or other financial benefits that are actually nonexistent, were never intended to
be provided, or were grossly misrepresented”.*
Fraud falls into three basic categories:
Individual Fraud
Corporate Fraud
Online Fraud
Targets a person directly –
this can differ from frauds
affecting businesses and
other organizations.
Fraud committed against a
business – fraud impacting
businesses can be both
general frauds that target
any business, to sector
specific frauds.
Using the Web to
defraud victims or take
advantage of them.
This includes fraudulent
transactions or schemes.
*Deffinition sourced from Titus, Richard M., F. Heinzelmann, and J. Boyle (1995) Victimization of persons by fraud.
Crime & Delinquency Vol. 41, No. 1, 54-72.
March 2014 - What is fraud?
KEVGROUP
$64,000
of student funds taken by a Toronto
area principal and office administrator
The sad reality is school level fraud occurs every day. It’s the PTA member who takes a
couple dollars out of a collection to grab a coffee with a mental note to replace it
tomorrow. It’s the football coach who buys pizzas for the team using uniform funds, but
forgets to replace it. It’s the school bookkeeper who takes $200 from a field trip
collection, to pay for another school cost and does not create a journal entry to record te
transfer of funds.
You get the point, it happens all the time. Here are some noteworthy examples;. In 2011,
a Toronto area principal and office administrator were charged in a fraud case with
student funds totalling $64,000. They used these funds to purchase un-approved items
and cover expenses for themselves.1 Another instance totalling $3 million over a
three-year period happened in Oakland, California where a school administrator and
her husband, (the school’s chief executive), embezzled funds through several of their
privately owned companies.2
This kind of fraud happens far too frequently. It not only causes financial loss to the
schools and their districts, but has a negative impact on human and public relations,
as well as the perception of safety in the schools.
While student activity funds make up a relatively small portion of a district’s total funds
because these transactions are mostly comprised of highly liquid cash, it’s the
easiest area for fraud and fund mismanagement to occur within schools and their
districts.3&4
1
Source:http://www.theglobeandmail.com/news/toronto/toronto-school-officials-charged-in-alleged-64000-fraud-scheme/
article4247696/.
2
Source: https://www.wsws.org/en/articles/2012/04/char-a24.html
3
Key Legal Issues for Schools 2nd.ed. Kevin P. Brady et.al. (Mark I need to brush up on my resource quoting skills)
4
Cash Management: A Financial Overview for School Administrators
5
http://www.fraud-magazine.com/article.aspx?id=4294978524&terms=schools
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In many cases, people who commit student activity fund fraud do not have criminal
records and they have not committed fraud in the past. When colleagues and friends
are questioned about the individual, they will say they never would have imagined this
person would have done it. So why do these otherwise seemingly good people made
these poor decisions?
There are several aspects to the human process of committing fraud. Usually fraud and
fund-mismanagement occur as a result of pressure, rationalization and opportunity.
Pressure can come from compulsive behaviours like gambling, alcohol and drug use. It
can also come from financial debt and family problems.
Rationalization is a form of denial and is how the fraud is justified. Fraud perpetrators
may believe they earned it, need it more than another person, feel they are owed, or
that they would be forgiven if caught.
Opportunity comes from individuals believing they can commit fraud without getting
caught. This can be influenced by the tone set by management. The level of managerial
leadership, expectations, transparency, etc. all have an effect on the environment.
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Fraud can be prevented
The good news is; fraud and student activity fund mismanagement can be prevented.
There are five key concepts for fraud prevention. Management leadership, expectations,
well established and clearly defined roles, internal control structures and audits, and a
transparent accounting system.
By keeping a watchful eye for the following accounting anomalies and behavioural
triggers, you can prevent your district from experiencing the havoc that comes with
a fraudulent situation.
Here are some questions you can ask to help identify fraudulent accounting anomalies:
• Does your bookkeeper frequently make telephone transfers from your bank accounts
or credit lines?
• Does your bookkeeper’s lifestyle seem inconsistent with their earnings?
• Does your bookkeeper frequently take records home to work on, or work in the office
when no one is around?
• Are your accounting records a mess?
• Has your bookkeeper suggested replacing or getting rid of the outside accounting
firm, saying they can handle the duties of the independent accountant to save on
expenses?
Once you have a plan to identify the signs of fraudulent activity, what are the tools to
make sure it is prevented?
From a structural standpoint, it is important to have well-defined structures and
processes that drive financial transparency and visibility. This puts accountability and
financial accuracy into the spotlight by tracking every transaction in terms of cash
coming into and out of schools.
Technology can play a crucial role by giving schools and their districts real-time
information at their fingertips. This makes it easy to tracking income and expenses,
complete audit trails and establish well-defined reporting processes.
By having the right approach and tools, schools and school districts can be pro-active in
preventing fraud from becoming a problem. In many ways, this requires changes in how
schools and school district operate financially, but it is an excellent investment in driving
better school cash fund management and keeping your district out of the headlines.
March 2014 - What is fraud?
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