Fraud's Finer Points: Case history applications
This column is the first in a three-part series presenting many scenarios of fraud and abuse in student fundraising activities. We begin our discussion by illustrating the different schemes fraud perpetrators use to obtain funds for personal benefit from public-sector clubs and private-sector teams.
SKIMMING IS THE FRAUD OF CHOICE
Similar to our discussion in the January/February 2013 column, fraud and abuse in all types of student 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.
In my state, Washington, students in public schools conduct thousands of fundraising activities each year. Students and faculty advisors in each school district form clubs as a part of the Associated Student Body (ASB) Program Fund and then conduct a wide variety of fundraising activities to fulfill their objectives. Most school departments raise funds with the approval of school administrators. Athletic departments raise the highest amounts for football, basketball, soccer, baseball softball and other sports.
Faculty members, with the help of students interested in learning the retail trade, manage these programs in middle schools, high schools, community colleges and universities. All generated revenue is public money, which the state audits.
Faculty advisors for public-sector clubs manage all student fundraising activities, and the ASB fund treasurers maintain the clubs’ accounting records. Faculty advisors normally skim revenue from event proceeds before they give money to the treasurers for deposit. Disbursement schemes are rare.
Faculty advisors also teach students how to operate school stores and manage other retail sales activities, such as concession stands and sales of merchandise. (I’ll discuss these activities in subsequent columns.)
Most schools know they need proper internal controls over both product inventory and revenue, but there are always some that don’t properly manage them. Their negligence discredits all other schools that diligently work to achieve financial and educational successes.
The state of Washington has 294 school districts. When I managed the statewide fraud program for the state auditor’s office, there was typically an average of about eight schools per year that suffered a revenue loss of approximately USD$6,800 each (USD$54,400 annually). These losses primarily occur when one individual is responsible for all club revenue with no monitoring by managers. Investigators often can’t find those responsible because too many people have had access to product inventory and money.
When external auditors determine that a faculty advisor is responsible for a specific loss amount, he or she usually makes restitution to the school. Schools discipline some of these individuals, but others simply resign. Schools rarely refer these cases for prosecution because the schools normally have been made whole. Prosecutors also usually don’t accept small-dollar cases because they have more important crimes to pursue. However, when they do prosecute these cases, convicted fraudsters usually receive jail sentences of less than one year.
The information for the case studies for public-sector clubs cited below comes from audit reports issued by the Washington State Auditor’s Office (the external auditor for the schools).
CASE NO. 1: STICKY SOFT DRINK AND CANDY MONEY
Schools often use vending machines to raise funds. A student in charge of collecting money from machines placed it in a cloth bag without counting it and gave it to the ASB Fund cashier who stored it in an unlocked storage cabinet in the vault. The cashier and student didn’t count this money together, as they were required to, at the time of the transfer of accountability for these funds. In addition, the cashier didn’t issue a receipt to the student for the amount of money she received and didn’t include these funds in the daily bank deposit as she should have.
A faculty advisor routinely assigns one student to replenish vending machine stock and remove money, but ideally two people should do this.
The cashier later counted, receipted and deposited the money into the ASB Fund bank account. However, the external auditor determined that the amount of funds deposited was less than the expected revenue from inventory sold through the vending machines.
No one could identify the person(s) responsible for this loss because too many people had access to the inventory, and the money was stored in the unlocked cabinet in the cashier’s office vault. The external auditor issued an internal-control finding to help improve future operations.
CASE NO. 2: WANDERING CASH FROM STUDENT STORE
An external auditor detected unauthorized refunds in the cash receipting system of a school student store over four months. Cashiers didn’t use cash register passwords. The store manager didn’t monitor cash register detail tapes to identify and investigate the unsupported refunds; he only verified that the revenue amount reported on the daily cash register activity reports agreed with the amount of money actually deposited with the ASB Fund treasurer. The external auditor couldn’t identify the person(s) responsible for the US$914 loss because too many people operated the cash register and had access to the money.
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