Fraud's Finer Points: Case history applications
Every school in my state, Washington, has a cafeteria, which provides healthy and nutritious breakfast and lunch meals for students. The policies and procedures for managing food service operations vary from state to state. Thus, fraud examiners in other U.S. states and in other countries should research the rules and regulations that apply to these activities for the guidance needed to investigate them. Food service managers often commit fraud when schools fail to establish proper policies and procedures governing the critical aspects of operating a cafeteria.ASSET MISAPPROPRIATION IS THE FRAUD OF CHOICEIn the ACFE’s Fraud Tree, fraud schemes applicable in the food service department include asset misappropriation (i.e., theft of inventory) and cash schemes. These involve stealing an entity’s funds and 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. Fraudulent disbursement schemes in public-sector schools are rare because staff disburse funds outside the food service department. However, fraudulent disbursement schemes in private-sector restaurants occur frequently because one person, usually the bookkeeper, is responsible for all banking functions (e.g., deposits of cash receipts and disbursement of funds by check). Skimming is the theft of off-book funds, a common scheme in the cafeteria.SUGGESTED PLAN FOR MANAGING A CAFETERIAThe following discussion presents a plan I’ve recommended schools use to manage their food service departments and reduce entities’ risk of fraud, waste and abuse.
Policies and procedures
All public entities should approve policies and procedures governing food service at all schools under their jurisdictions. Policies should clearly define management’s financial expectations, including establishing an annual budget, using gross-profits testing and monitoring revenue in relationship to the number of meals served, such as by using tray counts and the number of free and reduced-priced meals provided to eligible children under the U.S. Department of Agriculture’s child nutrition programs. Schools also should conduct training classes for staff working in the food service department.
Accountability and fixed responsibility
Each school board should establish a food service change fund, assign responsibility for the money to the manager and require him or her to store the funds in a secure facility, such as a safe or vault. Each school should change combinations to the safe or vault periodically and not write them down and also fix responsibility at all times for funds to a specific individual.
Managers should assign a separate cash drawer to each cashier. Cashiers and supervisors should sign all documents transferring funds from one person to another at the beginning and end of each shift. Multiple cashiers shouldn’t operate from one cash drawer or commingle cash receipts. Cashiers should record all transactions, by type of meal provided, on a cash register and document Z-tape numbers (e.g., total fund accountability) on daily activity reports.
Schools should require and monitor the use of prenumbered documents used throughout food service departments, such as cash receipt forms, transmittal forms for change funds and/or cash receipts from the manager to cashiers (and return), cash register Z-tape numbers, meal tickets or meal cards issued and daily activity reports.
Free and reduced-priced meals
Schools must adhere to strict federal requirements for eligible children that aren’t further described here. In general, schools must collect parent financial information to verify that children are eligible for programs and retain all forms on file for review and audit.
Once schools approve children, parents usually make any required payments to school administrative staff who then transmit these funds to the food service departments. Schools use a variety of control procedures, such as meal tickets or meal cards, to ensure that others aren’t discriminating against children participating in these programs when they eat meals at the cafeterias.
Fraud examiners should research the rules and regulations that apply to each of the various systems used in other U.S. states and in other countries for guidance in investigating the free and reduced-priced meal programs.
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Schools should periodically monitor the implementation of food service policies and procedures to ensure their financial expectations will be met. This includes unannounced cash counts, review of cash register tapes and comparison to daily bank deposits, review of monthly bank statement reconciliations and bank-validated deposit slips, verification of sequential use of all prenumbered forms, periodic visual inspections to observe actual cafeteria and cash receipting practices, computation of gross-profits testing (which compares inventory used and revenue received for reasonableness) and installation of security cameras for both food inventory storage facilities and cashiering areas.