Together, Reducing Fraud Worldwide


Raising frauds, not funds


Red flags in student fundraising activities, part 3 of 3

 





joseph-dervaes-80x80.jpg   Fraud's Finer Points: Case history applications

NovDec-cash-register    
  
In my state, Washington, students in public schools conduct thousands of fundraising activities each year. Fraud examiners must understand the rules governing the entities conducting these activities to properly evaluate and investigate them. Managers can easily fail without proper direction and guidance. And only informed faculty advisors will succeed in collecting the proper amount of revenue from each type of fundraising activity their students conduct.

SKIMMING IS THE FRAUD OF CHOICE

Similar to our discussion in the January/February 2013 column, fraud and abuse in all types of fundraising activities is usually a case of simple asset misappropriation. In the ACFE’s Fraud Tree, cash schemes (part of asset misappropriations), which involve stealing an entity’s funds, fall into three categories: larceny, fraudulent disbursements and skimming. Cash larceny schemes involve the theft of funds recorded in the entity’s accounting records. In fraudulent disbursement schemes, an individual makes a distribution of entity funds for a dishonest purpose. Skimming, the theft of off-book funds, is usually at the heart of student fundraising losses.

RED FLAGS IN STUDENT FUNDRAISING ACTIVITIES

The following presentation summarizes many of the internal control weaknesses (red flags) that have occurred at schools in my state during public-sector student fundraising activities. Poor school policies and procedures allowed individuals to misappropriate funds or operate fundraising activities for personal benefit. Critical deficiencies included a lack of accounting records (records were often missing or had been destroyed), a lack of accountability for revenue and inventory (too many people were involved or had access to funds), and poor oversight of events by faculty advisors (because of a lack of formal training).

Athletic departments
Schools often didn’t establish policies and procedures, which required faculty advisors to attend training classes before conducting fundraising events, or faculty advisors managed fundraising events without attending school-sponsored training. 

Schools had lost profit opportunities from retail sales events (see part two of this series in the September/October 2013 issue), and they didn’t make gross profits determinations.

Supporting documents for fundraising events were inadequate, or records didn’t exist to establish accountability for funds. When clubs conducted retail sales events, they didn’t have inventory records available for the sold products. 

Schools didn’t have records of transfers of accountability for products and money from faculty advisors to students and vice versa. A faculty advisor would either open an unauthorized bank account in a school’s name or deposit collected funds collected in his or her personal bank account. In some cases, advisors wouldn’t deposit funds in any bank.
When clubs held off-book fundraising activities outside the control of schools, faculty members often spent money unwisely. And they netted revenues and expenditures only after they eventually remitted collected funds to the schools.

Faculty advisors didn’t require customers to sign prenumbered cash collection forms for car washes or similar fundraising events. And schools didn’t account for parents’ donations to faculty advisors for student trips. 

Faculty advisors opened charge accounts directly with vendors to conduct business outside the control of the schools’ purchasing systems. They even gave gifts to staff members, students and others associated with the events in violation of Washington state’s constitution.

Schools didn’t establish policies and procedures covering faculty advisors’ participation in extracurricular activities sponsored by booster clubs and other private non-profit entities engaged in activities similar to faculty advisors’ school positions (such as a school’s basketball coach who managed a basketball booster club).

Schools didn’t always know the number of parent-teacher associations or booster clubs that participated in community activities with them and hadn’t entered into formal agreements with these entities to ensure that all parties understood the rules of conducting activities in the name of the school.

Before faculty advisors entered into agreements with them, schools didn’t confirm that booster clubs were legitimate organizations rather than loosely knit groups of parents who had good intentions. Schools didn’t establish files for authorized booster clubs, including the entities’ constitutions and by-laws, lists of officers and directors, federal tax identification numbers and letters of determination of tax-exempt status from the Internal Revenue Service [i.e.; a Section 501(c)(3) private non-profit entity].

One school actually operated a booster club and had custody of all accounting records for the entity, including the checking account. Faculty advisors, on work time, blended school and booster club activities by conducting fundraising activities on school property. They used the school’s copy machine and also the email system for advertising, promotion and sponsor solicitations. 

One coach didn’t obtain bid quotes from three vendors for purchases as Washington state’s bid law required. Instead, he allowed a representative from the coach’s favored vendor to provide quotes from three separate vendors — one for the rep’s firm and two for false vendors. The vendor rep used letterhead stationery from bankrupt firms where he once worked to simulate the two bogus firms.

Another coach asked the school’s information technology department to post his private non-profit entity’s sporting events and camps on the school’s website.

 


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