Knowledge and Insights

In the last decade, there were numerous reports of fraudulent acts committed by school officials, many resulting in criminal indictments and jail sentences for the perpetrators, as well as significant monetary costs and adverse publicity for the victimized school districts.  More recent media headlines identifying fraud in schools again remind us that investigative audits are critical to the continued cultivation of trust and accountability in our education system.

The most prevalent types of school district fraud include theft of property, diversion of funds, personal use of credit, vendor kickback schemes, and payroll manipulation.  Since school administrators often have backgrounds in education, as opposed to accounting or finance, many do not recognize financial fraud when it occurs.  Others, however, may mistake employee incompetence or compliance issues as fraud, especially if triggered by an apparently intentional deviation from established policy.  Most fraud investigations are performed as a result of reported allegations concerning improper actions of school employees, vendors or related parties.

Funding cuts can compound the school situation, leading to workforce reductions that result in internal control deficiencies and inappropriate combinations or segregation of duties, which can create an environment susceptible to fraud.  Since fraud detection is not the main focus of a financial statement audit, even traditional school auditors may not uncover fraud unless it has a material impact on the district’s financial statements as a whole.

In the end, the school employees – from the elected board of education members, to the district superintendent, to each school’s officials and staff – have a responsibility to safeguard the funds used to educate our children.  As a result, school districts should consider engaging a forensic accountant to assist in their fight against fraud, waste and abuse.

Forensic accountants are financial professionals, and typically skilled interviewers, who can help school officials identify areas of risk and exposure and establish systems to protect against threats.  Conducting investigative audits, they often uncover issues or suspicious activity not apparent during routine audit testing procedures.  They also identify red flags that may give rise to fraud risk or the need for an in-depth forensic investigation, before the crime happens.

In the event of an investigation, containing it to include only the necessary resources and investigative steps is critical in terms of cost-efficiency.  School districts should establish purposeful objectives and develop a fluid strategy for managing any such situations.  Decisions to retain outside counsel or forensic experts, as well as the likelihood of recovery, should also be considered when developing an investigative policy and strategy.

On a proactive basis, board of education members, superintendents and school officials should assess the adequacy of internal controls placed in service to safeguard school district assets.  To accomplish this, an internal controls assessment should be performed to determine high-risk areas to routinely audit, such as cash receipts and disbursements, payroll, procurement, and financial oversight. Upon completion of the initial assessment, school administrators and boards of education should determine where weaknesses are evident, and how to best evaluate those weaknesses to prevent, detect and deter fraud in their schools.

When faced with a suspicion or definitive need for an investigation of fraud, consider speaking with a member of Mercadien’s Forensic & Litigation Support team.  Our extensive experience working closely with school officials, corporate executives, financial and technology experts, and legal counsel on a variety of internal investigations allows us to discreetly and expeditiously uncover the facts and recommend remedial actions. If you have any questions or would like further information, please do not hesitate to contact me at [email protected] or 609-689-9700.