Cleaning our Own House: De-frauding the halls of academe

As Certified Fraud Examiners, we learn that three factors, collectively referred to as the Fraud Triangle, may portend fraudulent behavior. According to the late Donald Cressey, when pressures/incentives, opportunity, and rationalization converge, the environment is ripe for fraud. Although many may presuppose that academe is above such behavior, history has shown otherwise. All types of organizations are susceptible to fraud - even colleges and universities.

According to articles in the Chronicle of Higher Education and other print media, universities are sometimes quite far from the bastions of ethics they preach in their volumes of policies and procedures. In fact, because of concerns about the effect of "bad press" on public relations and fundraising, higher education has frequently sought to negotiate "back-room deals" as opposed to rooting out the problem. Therefore, the cases that do reach the public eye could be just the tip of the iceberg.

Regrettably, it has become rather commonplace to hear about administrators being asked to step down from their positions as a result of "accounting problems." This phrase has sometimes become synonymous in academe with fraud. Some of the recent fraudulent schemes in academe include:

• The resignation of the University of Tennessee's former president, John W. Shumaker, in August 2003. The state comptroller's office released a report stating that Shumaker had misused university credit cards and misled internal auditors. The report also accuses Shumaker of "his repeated failure to provide credit-card receipts; alterations to his calendar; and the existence of personal trips, which were purported to be business trips." Shumaker stepped down from his position after it was revealed that he had bought extravagant items for his home, including a $30,100 phone system, and made personal use of the university's airplane. Questions were also raised about a $300,000 no-bid consulting contract that the university awarded to a friend of Shumaker.
• A state audit in November 2004 at the University of North Carolina School of the Arts exposed that nearly $1 million had been diverted for nonacademic purposes. The questionable payments cited include unauthorized overtime pay and travel expenses for several employees, a $25,000 down payment for a new residence for the school's chancellor, and lease payments of $15,000 for a Cadillac Escalade for a former vice chancellor of finance and administration, Joseph L. Dickson. Dickson also received more than $90,000 for consulting and expenses in violation of University of North Carolina policies.
• Central Connecticut State University's chief financial officer, Frank Resnick, was fired in November 2004 after a state audit revealed that he had used fraudulent means to circumvent the competitive-bidding process. Resnick is accused of pushing through a $40 million, 10-year contract with a food-service company, Chartwells USA, that had paid his way into several charity golf tournaments. Resnick has stated that nothing he did "rises to the level of termination."
• A former president and former student-aid director of Morris Brown College, in Atlanta, Ga., were indicted in December 2004 for allegedly obtaining $5 million in federal funds through fraudulent activity while at the college. Dolores Cross, who served as Morris Brown's president from November 1998 until February 2002, increased spending by $8.5 million during her first year on the job. To help pay for the spending spree, which included 50 business and personal trips for herself and her family and friends, she and Parvesh Singh, the student-aid director, fraudulently secured $5 million worth of federal grants and federal and private student loans. Hundreds of students were victims of the alleged fraud, which they perpetrated by obtaining more than 1,800 loans and Pell Grants for ineligible students. Many of the illegal loans later hurt students' ability to secure financial aid at other colleges.
• In January 2005, Alabama A&M University gave the institution's president, John T. Gibson, 30 days to negotiate his departure. Although no official reasons were given for seeking Gibson's resignation, his presidency at the institution was plagued by accounting problems and other controversies, including accusations that his wife, Mayme Voncile Gibson, falsified payroll documents to collect $33,500 from the university. Mrs. Gibson directed the Enhanced Skills Center of the Reserve Officers Training Corps on the campus for 11 years.

In my 20 years of experience in academe, I've seen deals that were occasionally struck between the perpetrator and upper-level administrators or board of trustees. Such deals generally provide for the fraudster to either leave quietly or be offered another position within the institution for the same compensation but little or no responsibilities. The benefit to the institution is to avoid continued bad publicity, but this alternative obviously does nothing to address the problem of deterring future fraud within the organization. In fact, if anything, it exacerbates the problem. Others in the organization observe the manner in which this activity is handled and may perceive that the school condones this type of behavior because of the lack of appropriate consequences for the fraudulent act. Some may use this to justify or rationalize future fraudulent behavior within the organization. The motivators of fraud in academic institutions are essentially the same as we would expect to find anywhere fraud occurs.

PRESSURES/INCENTIVES
The public domain seems to provide greater pressures/incentives to commit fraud than the private sector. Lower salaries and the frustration associated with bureaucracies might contribute to this issue. Poor accountability compounds the problem and sets the stage for fraud.

OPPORTUNITY
In recent years, budget cuts in state appropriations for education have resulted in the consolidation of many responsibilities. Because the segregation of duties is crucial to any good internal control system, the opportunity for fraud increases when an organization reduces the number of employees and consolidates their responsibilities among fewer employees. The existence of various college-related entities can make it even more difficult to identify fraudulent activity. Each entity has its own accounts, sometimes with little oversight. Typical college-related entities might include the following:

Auxiliary enterprises refer to types of operations that are financed and operated in a manner similar to private business enterprises, where the intent of the institution is that the cost (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges (as defined by the Governmental Accounting Standards Board). All auxiliary enterprises must be integral to the fulfillment of the college or university's instructional, research or public service missions, such as food services, bookstore sales, and campus parking.

College associations are formed to administer fees generally associated with student clubs and other activities.

College foundations are tax-exempt entities formed to solicit and administer funds through various fundraising activities to benefit the educational mission of the institution. Many of the accounts associated with these college-related entities have discretionary funds for administrative efficiency. Unfortunately, along with the advantage of efficiency comes the potential for abuse.

RATIONALIZATION The "tone at the top" concept in any organization plays a significant role in the attitude of other employees within the organization concerning fraud. When the president or other high-level administrators display a significant disregard for ethical values and "following the rules," it makes it easier for other employees to rationalize a fraudulent act. By now you're asking yourself, "So what can I do?" Depending upon your emotional constitution, there are a few things you might consider, in descending order of risk to your professional career.

• If there's reason to believe (predication) that fraud is taking place at your public college or university, you may avail yourself of the freedom of information laws to obtain financial data that relates to the suspected fraudulent activity. (One note of caution - don't try this unless you have a very strong stomach!) Remember, the protection of faculty tenure will only take you so far, and - Sarbanes-Oxley notwithstanding - whistleblower protection is only applicable under limited circumstances, such as for reporting safety or health violations or the misuse of federal funds.
• If your fortitude is not quite up to the former, you might assist in augmenting the common body of knowledge by conducting much-needed research in the area of fraud in academe.
• And, of course, never underestimate the importance of educating our future business leaders, researchers, and teachers about fraud detection and deterrence, and the importance of ethical decision-making. As always, I welcome your comments and suggestions on these and other issues.

Mary-Jo Kranacher, MBA, CFE, CPA, is an ACFE Regent and an assistant professor of accounting at York College of The City University of New York. She's also the chair of the ACFE's Higher Education Committee.