Fraud Prevention
What you will learn:
 Definition of fraud
 Steps to prevent fraud by employees, vendors, and others
 How fraud relates to school district audits
Key points:
 Be aware of the danger of fraud.
 Create a culture of honesty, starting at the top of organization.
 Have policies that prohibit fraud.
 Expect the administration to have systems to monitor for fraud.
 Periodically evaluate the administrative systems.
About the Author:
Joy Baskin, Director, TASB Legal Services
Joy became the Director of Legal Services for the Texas Association of School
Boards in 2005, after working as a law clerk and attorney in Legal Services for
almost ten years. Joy is the current chair of the school law section of the State
Bar of Texas, and is also a member of the Texas Council of School Attorneys and
the National Council of School Attorneys.
Joy received her bachelor of arts degree with honors from Stetson University in DeLand, Florida,
in 1992 and her law degree with honors from The University of Texas School of Law in 1995.
Financial Responsibility Guide
Copyright 2011 Texas Association of School Boards. All rights reserved.
1
Fraud Prevention
Introduction
You may be thinking, “Fraud would never happen in our district,” and hopefully you are right.
But fraud comes in many forms, from elaborate embezzlement schemes to little white lies on
employee time cards. By its nature, fraud is difficult to detect. School districts are wise to guard
against the various forms of financial wrongdoing.
What can a school district do to prevent these abuses? Fraud experts consistently answer that
fraud prevention starts at the top of any organization, as high ranking officials create a culture of
honest and ethical financial dealings. In a school district, that means starting with the board of
trustees, which is charged with overseeing the management of the district.1
What is Fraud?
What types of fraud happen in a school district setting? Examples of school district fraud include:

Forgery or unauthorized alteration of any document, including a check, or account
belonging to the district—for example, a club sponsor writes a check for supplies, buys
the supplies, then returns them for cash.

Misappropriation of funds, securities, supplies, or other district assets, including
employee time—for example, a maintenance crew uses school equipment to provide yard
services to private homes for profit on the weekend.

Impropriety in the handling of money or reporting of district financial transactions—for
example, a school board member turns in padded expense reimbursement reports and
pockets the money.

Unauthorized disclosure of confidential or proprietary information or profiteering as a
result of insider knowledge of district information or activities—for example, knowing
the district was contemplating buying a certain tract of land as a school site, an
administrator tips off his brother to buy the property.

Destroying, removing, or inappropriately using records, furniture, fixtures, or
equipment—for example, a teacher reports a laptop stolen from her classroom that she
has actually taken home for personal use.

Failure to disclose conflicts of interest as required by policy—for example, a
superintendent accepts and fails to report the gift of a golf weekend with his wife paid for
by a potential vendor.
Financial Responsibility Guide
Copyright 2011 Texas Association of School Boards. All rights reserved.
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Steps to Prevent Fraud
Create and maintain a culture of honesty and high ethics: Each board member, the
superintendent, and administrators should take the lead in modeling behavior that avoids even
the appearance of financial impropriety.
Evaluate the risks of fraud and implement good systems: A school board should adopt policies
and expect the administration to adopt procedures, often called systems, to detect, prevent, and
deter fraud by anyone who deals with district assets. These systems may include, for example,
closer supervision of employees, disclosure of conflicts of interest, establishing checks and
balances in the business office, and requiring fraud to be reported and investigated promptly.
Develop an appropriate oversight process: Once these preventative systems are in place, the
board should actively oversee the implementation of the systems. Such a process may include,
for example, an audit committee on the board, internal auditors, independent auditors, certified
fraud examiners, and regular reports from the administration to the board.
Many board members worry that they will be accused of micromanagement if they monitor the
administration too closely. Don’t let this fear prevent you from providing appropriate oversight
as a board member. Generally speaking, asking questions to confirm the presence and
effectiveness of management systems like the ones described above are an appropriate form of
oversight. On the other hand, asking questions about the actions or performance of an individual
staff member (other than the superintendent) or the handling of an isolated and specific incident
may overreach the board’s appropriate oversight role.
How Fraud Affects Your Audit
After the ENRON and other financial scandals of the early 2000s, the federal government and
private industry took steps toward reform. Congress passed the Sarbanes-Oxley Act of 2002,
which primarily addressed publicly-held companies regulated by the Securities and Exchange
Commission (SEC). That same year, the American Institute of Certified Public Accountants,
Inc. adopted the “Statement of Auditing Standards No. 99, Consideration of Fraud in a
Financial Statement Audit,” (SAS 99). SAS 99 established strict new fraud prevention standards
to prompt audited entities to take proactive steps to diminish the risk of fraud. SAS 99 imposes
affirmative duties on auditors to assess the risk of material fraud in the audits of entities.
As a result, school officials—including board members and selected staff—should be prepared to
answer a few very direct questions from your auditor. These questions are not accusatory; they
are designed to give people with knowledge of the district’s operations a chance to voice any
concerns they might have about fraud within the organization. Questions may include:

What specific risks of fraud do you see in the district? What areas have you identified as
being susceptible to fraud?

Do you think employees in the district are essentially honest?

Has anyone you work with ever asked you to do something illegal or unethical?
Financial Responsibility Guide
Copyright 2011 Texas Association of School Boards. All rights reserved.
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
If someone in the district wanted to commit fraud against the district, what would be the
easiest way to do it?

If you become aware of any fraudulent activities in the district, will you contact us?
In addition, in November 2004 the Texas Education Agency (TEA) issued specific fraud
prevention recommendations to school districts in Update 12 to TEA’s Financial Accountability
Systems Resource Guide (FASRG).2 As part of this change, TEA recommended that Texas school
districts adopt certain procedures, policies, and administrative systems to provide evidence of a
proactive environment to diminish the risk of fraud. TEA also recommended that school districts
with an enrollment of 5,000 and larger perform a periodic self-assessment of the risk for fraud. If
a school district does not have an internal audit department, the self-assessment may be obtained
through an engagement with a public accounting firm. A self-assessment may provide a school
district an opportunity to implement appropriate changes prior to the independent auditors’
procedures under SAS 99.
Polish Your Policies
School district policy should broadly prohibit fraud and financial impropriety. Many
organizations choose to impose a special fraud code of ethics to officers, employees, vendors,
contractors, consultants, volunteers, and others seeking or maintaining a business relationship
with the organization. Recommended TASB Policy CAA(LOCAL) provides in part that each
employee who supervises or prepares district financial reports or transactions must set an
example of honest and ethical behavior and actively monitor his or her area of responsibility for
fraud and financial impropriety.
Through a combination of board policies, Texas school districts have the policy pieces in place
to navigate an audit under SAS 99 standards and to comply with other fraud prevention
requirements. For more detail on fraud prevention, review the following policies:

Financial ethics: CAA

Code of ethics for board members: BBF

Code of ethics for employees: DH

Financial conflicts of interest for public officials: BBFA

Financial conflicts of interest for all employees: DBD

Financial conflicts involving federal funds: CBB

Compliance with accounting regulations: CFC

Activity fund management: CFD
Financial Responsibility Guide
Copyright 2011 Texas Association of School Boards. All rights reserved.
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Responding to Suspected Fraud
All allegations of fraud should be investigated promptly and thoroughly by the administration, in
coordination with law enforcement when necessary. Investigations should be concluded as soon
as possible to preserve evidence. Everyone involved as a potential perpetrator or witness should
be warned not to destroy or alter e-mails, computer files, notes, or other documents that may be
relevant to an ongoing investigation of fraud. Doing so could violate both federal and state law,
as well as district policy.3 Be aware that retaliation against informants, witnesses, or others
involved in an investigation may also violate law and policy.4
If fraud is uncovered, the perpetrators may be subject to criminal prosecution. They may also be
subject to an employment action by the school district, up to and including discharge, in
accordance with district policy.
If a certified educator resigns or is fired in the face of fraud allegations, a superintendent may
have to report the allegations to the State Board for Educator Certification. A superintendent
must make a report if the superintendent has reasonable cause to believe that the educator
illegally transferred, appropriated, or expended funds or other property of the district; attempted
by fraudulent or unauthorized means to obtain or alter a professional certificate or license for the
purpose of promotion or additional compensation; or committed a criminal offense or any part of
a criminal offense on school property or at a school-sponsored event.5
Conclusion
Board members often express concern about fraud, but say they feel helpless in their role to take
preventative action. The good news is that there are steps every board can take to help school
districts avoid financial impropriety. Setting a tone of honesty and high ethics, having the right
policies, and following through with appropriate oversight and responses to investigations can all
help school districts avoid fraud.
This document is provided for educational purposes only and contains information to facilitate a general understanding of the
law. It is neither an exhaustive treatment of the law on this subject nor is it intended to substitute for the advice of an attorney. It
is important for the recipient to consult with the district's own attorney in order to apply these legal principles to specific fact
situations.
Copyright © 2011 Texas Association of School Boards, Inc. All rights reserved.
This document is copyrighted by TASB but may be reproduced in order to share the information within your own school district.
Further use or copying is prohibited without the consent of TASB Legal Services. Requests to duplicate or distribute this
document should be made in writing to Director, Legal Services, Texas Association of School Boards, P.O. Box 400, Austin,
Texas 78767-0400 or by e-mailing [email protected].
Published February 2011
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Tex. Educ. Code § 11.151(b).
www.tea.state.tx.us/index2.aspx?id=1222&menu_id=645. FASRG has the same legal effect as a board-adopted
rule. 19 Tex. Admin. Code § 109.41.
Sarbanes-Oxley Act, 18 U.S.C. § 1519; Tex. Penal Code § 37.10; TASB Policy CPC(LEGAL).
Sarbanes-Oxley Act, 18 U.S.C. § 1513(e); Tex. Gov’t Code § 554.002; TASB Policy DG(LEGAL).
Tex. Educ. Code § 21.006(b)(2)(C)-(E); 19 Tex. Admin. Code § 249.14(d)(2)(C)-(E).
Financial Responsibility Guide
Copyright 2011 Texas Association of School Boards. All rights reserved.
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