Fraud detection and prevention should be an ongoing process. LEAs of all sizes, large to small, are all vulnerable to fraud despite built-in safeguards; such as the County Office warrant processing and State funding deposits directly to the County Treasury. The types of fraud LEAs need to be aware of typically fall into four categories:
- Misappropriation of assets: makes up the majority of fraudulent activity according to the Association of Certified Fraud Examiners. Examples of the misappropriation of assets can be either by directly stealing cash in areas such as ASB, Adult Education, fingerprinting fees, childcare fees, Cafeteria, claiming bogus expenses, misusing credit cards or taking District property.
- Financial statement fraud: would involve financial statement reporting, such as deliberately manipulating the fund balance with bogus entries, or creating fictitious entries to cover up fraud.
- Asset misuse: would include converting LEA assets to personal assets or use.
- Conflicts of interest and abuse of powers: general corruption, such as bribes and kickbacks typically involving large construction projects or other schemes in which the employees, management, or board members benefit personally.
Here are five steps to assist you in your fraud health:
Step 1: Maintain Segregation of Duties and Internal Controls
Just like a doctor would ask you to maintain a healthy diet and exercise regimen, your auditor would ask Districts to have at least have two people handling separate functions such as processing payroll, entering new employees in HR systems, requisitions and payment of invoices and the collection of cash. As a rule of thumb, don’t leave an employee in a position to correct and verify their work.
Step 2: Assign Process and Controls to the Job Position, not the Employee
Nobody is immune to every illness. Although it may seem counterintuitive, I find that employees committing fraud are often found to be the most loved by their coworkers, because the person will go out of their way to help and gain trust, often working longer hours, always available and rarely taking time off. The carefully crafted trust factor typically results in the fraudster handling several duties, and with less oversight, thereby enabling their criminal activity. Requiring staff to take their vacations can help expose fraud if it is occurring, but only if someone else is assigned to perform the staff’s job in their absence.
Step 3: Set the Tone at the Top
Just like getting enough sleep, exercising, and eating healthy help prevent illness, you would want to take critical steps mentioned below to prevent fraud.
- Train staff on how to do their jobs properly
- Have a written policy on fraud prevention and reporting
- Create a code of ethics that makes it clear that unethical behavior is intolerable and severe HR and/or prosecution actions would result from violations
- Create an environment where they can report suspected fraud anonymously, such as tip-line.
Step 4: Follow up on Tips and Establish a No Tolerance Policy
If something does not feel right, you should not ignore it. More often than not, suspicious behavior or odd variances in the accounting are reported to management, but too often nobody follows up or looks into it. For example, we will find a healthy cafeteria program all of a sudden, experiencing a significant loss or an ASB club account with a negative balance and nobody following up. If you’ve set up fraud prevention steps and reporting procedures, but you don’t follow through by looking into significant variances, tips or reported suspicions, then you’re defeating your security. The opportunity to commit fraud is easier to rationalize when employees believe their wrongful acts will go undetected and unprosecuted.
Step 5. Get Outside Help
If your Lea has implemented fraud prevention steps and the numbers still aren’t adding up, or when there are more significant legal implications, it may be best to hire an outside professional to come in and perform a more extensive review and audit of the numbers and control processes. Christy White has a team of fraud examiners that can assist you in an investigation.