Johnson County school board member Melvin VanHoose knows exactly what it’s like to be surprised by a case of internal theft.
His district was the victim of fraud perpetrated by its former finance officer and payroll clerk, to the tune of close to a half-million dollars. Both were convicted in 2007 and have served their sentences, while the district’s bonding company insured against the loss, VanHoose said.
“We’re in good shape right now,” he added.
VanHoose, a 31-year member of the Johnson County board, said the board now gets more detailed financial reports, and receives them more frequently.
“We have asked our internal auditor to oversee things a lot more closely than he was allowed to do during the previous administration,” he said. “We require more up-to-date reports on finances.”
Debbie Frazier (left), chief financial officer for Madison County Schools, and Nancy S. Grubb, finance director/treasurer for Pike County Schools, talk to Bill Robertson, a member of the Fulton Independent school board and the KSBA board of directors, following a training session on fraud at KSBA’s annual conference Feb. 26.
The issue of fraud is one of the hotter topics in school finance training for board members. A new course on the subject was featured prominently at KSBA’s annual conference earlier this year, developed by the Kentucky Association of School Business Officials.
Nancy Grubb, finance director/treasurer for Pike County Schools, said there is a knowledge gap on this subject that school boards are trying to close.
“I think that board members are realizing they’re more culpable for what goes on in their districts and they’re not trained as much, or haven’t been in the past, on really, do we really have a policy for fraud and here is what you can do if you’re uncomfortable with your regular audit or you’re uncomfortable maybe with your superintendent or your finance officer,” she said.
Grubb and Madison County Schools Chief Financial Officer Debbie Frazier are among those presenting the fraud training for board members. The training heavily cites information in a 2014 study by the As-sociation of Certified Fraud Examiners, Inc. (see charts at bottom of page).
There are several major myths about fraud, Frazier said, including perhaps the most misunderstood aspect: An annual school district audit is not designed to detect fraud.
“When auditors come in they aren’t doing forensic work; they are not specifically looking for fraud. If fraud happens to rear its ugly head while they’re in there, yes, they will be talking to you about that. But the auditors are primarily looking at your internal controls … and whether or not you’re following them. They’re looking at your financial statements to make sure they fairly represent the position of your district,” she said.
Most people who commit fraud are basically honest and have never been involved in fraud before, Frazier said, dispelling another myth. “Fraudsters look like all of us. There’s really no specific psychological profiles,” she said.
It also is not true, Frazier said, that fraud happens only in large organizations. “In fact, it may be easier for fraud to happen in smaller organizations,” she said.
Fraud cases at the district level tend to be more high profile and can be for higher sums, but significant fraud can occur at the school level because of the amounts of cash handled, Grubb said. And internal control weaknesses can happen at any level, she added.
“If you speak to some of the experts on school-level fraud, they’ll tell you some of the frauds they’ve had are pretty good-sized and have gone on for years at the school level,” Grubb said. “Some of those big school districts are running huge numbers through their high school in cash.”
If followed, the state education department’s guidelines for school activity funds, called the Redbook, “make it very difficult for people to commit fraud,” Frazier said.
Boards can minimize risk
Boards can control opportunities for fraud by setting the tone at the top: hire a superintendent with zero tolerance for fraud and address and prosecute any cases discovered, Frazier said. This includes timely discipline and no management overrides of controls. Boards further can ensure they have a fraud prevention policy, that it is being followed and that employees receive anti-fraud training.
Boards also can develop a relationship with the district’s finance officer and be able to comfortably communicate with him or her.
When the annual audit is delivered, boards should pay attention to what it says about internal controls – whether they are adequate and whether they are being followed. “Be sure that no one’s working in a silo and you’ve got segregation of duties,” Frazier said. “You cannot have one person doing multiple things.”
This can be difficult in small districts. Frazier suggested that in those cases, a high school bookkeeper be recruited to help in the central office to provide better controls, and vice versa.
School board members should be alert to the types of fraud that can occur, from reimbursements for trips that were never taken to failure to make cash deposits to theft of district goods and services, Fra-zier said.
“Trust is not an internal control,” she said. “I would go out on a limb and say The No. 1 internal control weakness is blind trust.”
If the board suspects shenanigans, Grubb said it has the authority to request additional audits. A management audit may be in order if there is a pervasive internal control problem. In suspected fraud, the board can pursue a forensic audit, designed specifically to identify illegalities.
There’s a policy for that
All but eight school boards have approved KSBA’s model fraud prevention policy or a variant. A key provision from that model policy:
“Employees who suspect that financial fraud, impropriety or irregularity has occurred shall immediately report their suspicions to their immediate supervisor and/or the superintendent/designee who shall have the primary responsibility for initiating necessary investigations. If the superintendent is an al-leged party in the fraud complaint, provision shall be made for addressing the complaint to the board chairperson.”