Fraud in School Districts: A Difficult Issue to Detect

September 9, 2020 | Article

With the reduction of state funds, fallout from COVID-19, furloughs, layoffs, personnel turnover and a general lack of education in government accounting, the opportunities for others to take advantage of school resources are growing every day.  Fraud in K-12 school districts can occur easily and be difficult to detect.

Sources of School District Income Prone to Fraud

The three primary sources of educational funding and income for school districts are:

  1. Federal government or state grant programs
  2. Property taxes paid by families living in the area
  3. Donations

For parents and educators, these funds are to be used for one purpose: to educate and provide support for their students. To a fraudster, these funds can be an unlimited cash account. This results in a deficit for the tools, resources and programs that teachers rely on to do their job, which worsens the issues that they already face with a general lack of funding.

These facts create a desire for parents, teachers and office personnel to ask the question:Is fraud happening at my school district during the COVID-19 pandemic? Unfortunately, this is a question that many school districts struggle to provide a definitive answer for.

Set your students up for success and let us help protect your schools from fraud.

Common Types of Fraud that can Occur in School Districts

Most individuals do not know the types of fraud that can occur specifically within school districts or how to determine if fraud is occurring. As COVID-19 has reduced the amount of in-person trainings provided, we have summarized key points below in order to assist school districts during these challenging times.

Corruption

Classified as the number one type of fraud scheme in governmental entities according to the ACFE 2020 Report to the Nations, corruption is the hardest type of fraud to prove. Corruption typically exists when two individuals are involved in the crime, either voluntarily or involuntarily. Examples of corruption related to school districts include:

  • Conflict of Interest: Occurs when a person who holds a position of implicit trust and has a competing professional or personal interest that motivates their decisions.
  • Bribery: The offering, promising, giving, accepting or soliciting of an advantage as an inducement for an action which is illegal, unethical or a breach of trust.
  • Illegal Gratuities: When someone gives something of value to a public official because that public official does or fails to do some act.
  • Economic Extortion (“Blackmail”): Occurs when a member demands payment from a donor to influence or make a decision.

Having a partner in crime makes it easier for fraudsters to cover up evidence, making this issue very difficult to reveal. However, due to the current work-from-home environment, this fraud might be easier to capture than before. With organizations conducting video calls using Microsoft Teams and Zoom, in addition to communicating with emails, phone calls and text messages, the chance for a private, unrecorded conversation to happen in person has lessened dramatically.

Embezzlement of School Site or ASB Funds

When people think of fraud, it’s typically the sort of fraud they hear about on the news. That publicized and reported fraud is usually embezzlement of funds. Unfortunately, there are many embezzlements that do not hit the newspapers due to the smaller dollar amount stolen.

The good news is this fraud can be prevented or detected by parents and teachers. However, due to the current pandemic, many individuals are not physically in the office, which can lead to more opportunities for this to occur. For example, any cash that hasn’t been deposited yet is most likely sitting in the safe. If the individuals working in the office have access to the safe, they now have an unlimited amount of time to take what they want.

To help keep this from happening, school districts should:

  • Have the school principal or a trusted advisor deposit all the funds from the safe in a timely manner. Due to uncertainty for the coming year, there is no reason for cash to be left in the safe. If a site has startup cash that is kept for school events, these funds should be deposited as well and reissued if necessary through the school district. This generates a paper trail that is easier to follow and understand.
  • Look into a software program that parents can use to donate online. If funds are processed electronically, the chances of the funds being taken illegally are less likely than when cash is in the safe. This is helpful whether the COVID-19 pandemic is still going on or not.
  • If these two options can’t be followed and the organization must keep the cash in the safe, it is recommended that the principal change the combination without notification to the other staff who know it. This will prevent unauthorized users from taking any cash that is left in the safe and narrow down the individuals responsible for possible theft.

Credit Card Fraud

As stay-at-home activities have become the new normal, so has an increase in online shopping and credit card transactions. Unfortunately, as more and more people experience financial strain, they may be tempted to use their school district credit card instead of their own for personal purchases.  

Here are a few ways to prevent and detect credit card fraud:

  1. Monitor and ask. The best way to prevent or detect this type of fraud is to monitor charges and ask questions about any suspicious charges. The more questions asked, the more information that can be obtained. Check all credit card accounts regularly to catch fraudulent activity quickly.
  2. Keep receipts. This has always been important, but it’s especially important now during the COVID-19 pandemic. Check receipts and online transactions if a purchase appears questionable.
  3. Compare it to the big picture. Before COVID-19, if a teacher purchased a video camera, the school district might have debated the purpose for it. Now, due to COVID-19 and the prevalence of distance learning, it makes more sense for a teacher to purchase a video camera to record lectures. However, it might make less sense for a teacher to purchase art supplies when students aren’t in the classroom creating art.

Credit card fraud that occurs in school districts usually happens because districts trust their employees’ decisions or because the districts do not fully understand the purchase. If the district employee is unable to explain the purchase to a parent and have the parent agree with it, then both the purchase and the employee should be questioned.

Ghost Employees

A ghost employee scheme typically occurs in two ways. The first is when an employee for the district has been terminated. Instead of deactivating the employee, the fraudster changes the employee’s address to their own or a different one and continues processing their payments. The second way includes the fraudster creating a fake person in the system. Both can go undetected due to the reviewer’s trust in the district’s personnel and their inability to remember all the teachers or personnel in a pay period. However, due to the COVID-19 pandemic, districts have an opportunity to verify that trust.

Districts can perform the following tasks to help determine if a payroll scheme is occurring:

  • Request an update on personnel records. Due to the pandemic, a lot of employees are staying at different houses, changing phone plans to cut costs or working through other necessary changes. This provides the district a logical reason to request an update for all employee records through email. If there is no email address listed or no changes provided, this could be a red flag there is an issue.  
  • Have the Director of Fiscal Services review the computer system authorizations in order to verify that the HR Director/Manager does not have access to change payroll information. This usually just takes a phone call to the District’s HR System or to the District’s IT Department. If the HR Director/Manager doesn’t have access to change payroll information, it makes this scheme a more difficult to pull off.
  • Run a report from the district’s HR system showing all the employee addresses registered at the district. Look for addresses with PO box numbers, duplicates, employees with no addresses listed and addresses that appear to be spelled incorrectly. These are all red flags that employees need to be investigated further. You never know what you might find.

Personal Use of Government Funds, Assets or Facilities

Fraud does not solely mean stealing money. Fraud can also occur through use of school district possessions or resources for personal gain in different ways. For example, a cooking teacher could inappropriately use the school’s food supply to make food for their own business. Another example would be an employee using a district vehicle to make Uber pickups for extra cash. The opportunities for fraud to occur are endless.

It is more cost effective to prevent fraud than it is to detect it after the fact. School districts should lock up all assets, allowing only few individuals access. This should include laptops that are not being used by the students or staff, keys to the district buses and vehicles and common school supplies. Due to the extended period many are spending out of the office, anyone could be using school supplies or the district vehicles without being detected. Locking up these essentials would help prevent these schemes from occurring.

Prevent Fraud in Your School District

There are a lot of questions that can’t easily be answered during this pandemic, but hopefully these tips help you feel more comfortable addressing fraud risks within school districts. Could your district have fraud going undetected right now? The answer may be yes; however, there are ways to prevent and detect these common fraud schemes so your district can continue to succeed.

In a time when peace of mind is difficult to find and budgets are tight, you can still use forensic accountants.

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