Fraud's Finer Points

Raising frauds, not funds

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Written by: Joseph R. Dervaes, CFE, CIA

Date: July 1, 2013

Read Time: 10 mins

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.

PUBLIC-SECTOR CLUBS

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.

CASE NO. 3: NO CONCESSION FOR THIS FRAUD

A faculty advisor left an undetermined amount of revenue and the change fund in an unsecured cabinet at the gymnasium’s concession stand rather than storing the money in the school’s office safe. The school then rented the gymnasium to a private organization for a basketball tournament. After the event, the school discovered that almost all of the money left in the concession stand was missing. The basketball tournament officials reimbursed the school for the known loss from the change fund — US$172. However, there were no school records proving the amount of concession-stand revenue that had been left in the unsecured facility. The school couldn’t determine who stole the revenue because too many people had access to the concession-stand inventory and money.

CASE NO. 4: SHOP WASN'T SHIP-SHAPE

In an unannounced cash count, an external auditor found that the amount of money on hand at a school’s floral, candy and balloon shop didn’t agree with the amount of the revenue recorded on the shop’s cash register. Employees cashed personal checks from cash receipts (a poor internal control practice), didn’t make intact daily deposits with the ASB Fund treasurer and had unlimited access to inventory and funds stored in an unlocked cabinet at the shop. The school didn’t use a change fund at the shop and didn’t maintain any merchandise inventory records. The auditor couldn’t find the culprit(s) who stole US$216 because too many people had access to the inventory and money in the unsecured facility.

PRIVATE-SECTOR TEAMS

Children also conduct fundraising activities in the private sector — primarily in athletics. Parents form governing bodies for teams and manage fundraising activities that almost nobody audits, including state offices. In fact, no agency in the state of Washington guides these private groups. Of course, this can spell disaster. The teams’ treasurers or managers often misappropriate funds by skimming for personal benefit — often writing checks to themselves — because they handle all revenue and maintain the teams’ accounting records. Parents are rudely awakened when they find the teams’ bank accounts have dried up and their children’s fundraising work has been wasted. Coaches, treasurers and managers can go to jail, and their professional lives ruined.

CASE NO. 1: GAMBLING AWAY SOCCER CLUB FUNDS

A private-sector youth soccer club began a new season in debt and almost bankrupt because its former treasurer stole more than USD$72,000 — its entire savings — in 14 months. The club’s board of directors detected this misappropriation of player and tournament registration fees when it investigated the reasons the club wasn’t able to pay its bills. A generous benefactor and the local soccer association loaned cash so the club could get back on its feet.

Because of its financial woes, the club had to eliminate player award programs and cancel adult volunteer coaching classes. The current treasurer said, “We have been on a very tight budget and unable to serve our kids the way we would like to, but we have been able to make ends meet.”

The former treasurer, 43, transferred USD$40,000 from the club’s bank account to her personal bank account without authority. She also made unauthorized ATM withdrawals from the club’s bank account at a local casino and wrote 129 unauthorized checks to local casinos totaling more than USD$8,000, according to charges filed by the county prosecuting attorney’s office.

The governing body didn’t monitor club financial activity closely before the loss, but you can be sure it does now. At least two members review bank statements at meetings, and at least two or three members review the club’s bank activity online. The current treasurer, a CPA, also presents monthly cash flow statements and balance sheets to the governing body.

The former treasurer pleaded guilty to 10 counts of first-degree theft in a plea bargaining agreement with the county prosecutor. The judge ordered her to be treated for her addictive gambling habit and sentenced her to 90 days in jail. After meeting all of these obligations, she was subject to deportation to her native country — South Africa. (Source: The News Tribune, Tacoma, Wash., “Ex-treasurer’s trial set for March 31,” by Steve Maynard, Feb. 19, 2009, and “Pierce County, woman admits stealing from soccer club,” by Adam Lynn, June 29, 2009.)

CASE NO. 2: GOING ONCE, GOING TWICE... FRAUD AT THE AUCTION

A volunteer bookkeeper at a private-sector school was charged with one count of first-degree theft for allegedly stealing USD$30,981 in 22 months from a bank account that contained money from annual fundraising auctions. The bookkeeper, 37, was one of two people authorized to sign checks for the auction bank account. Normally, there wouldn’t be any reason for the bookkeeper to issue any checks on the account because she was simply supposed to transfer all the funds directly to another school bank account from which disbursements transpired.

Two citizens complained that their credit cards were charged twice for their purchases at the auction. This prompted an investigation that uncovered the losses from the auction bank account. Investigators found that the bookkeeper didn’t transfer any auction funds to the school’s disbursement account during this period. Instead, she made numerous unauthorized cash withdrawals and issued many checks to herself and her personal creditors from the auction bank account. She returned about USD$8,000 of her own funds to the auction bank account to try to make partial restitution.

The school apparently didn’t perform a thorough background investigation of the volunteer bookkeeper. If they had, they would have discovered that she was in a court diversion program for a prior theft. Sentencing information was not available on this case. However, perpetrators of similar crimes usually receive sentences of less than a year in jail and restitution of the loss amount. (Source: “Bookkeeper charged with stealing from school,” by Herald staff, The Herald, Everett, Wash., March 12, 2005.)

LESSONS LEARNED

Let’s review some of the finer points of fraud and abuse in student fundraising activities.

Private sector governing bodies and public sector entities should:

Establish formal written policies, procedures and internal controls for all student fundraising activities.
Monitor the profitability of all fundraising events to ensure their financial expectations have been met.
Fraud examiners must understand the differences between public-sector clubs and private-sector teams and the fraud scheme of choice for each when assessing the risk of fraud.

PLANNING FOR SUCCESS

Managers must plan for success when conducting student fundraising activities. Part 2 in this series discusses a successful plan for successful fundraising, which comes from my life experiences dealing with fraud and abuse in all types of student fundraising activities in my state. We will also discuss “gross profits testing” — the most common internal control weakness associated with retail sales events. There’s much more to come.
Get ready.

Regent Emeritus Joseph R. Dervaes, CFE, CIA, ACFE Fellow, is retired after more than 42 years of government service. He’s president emeritus of the ACFE’s Pacific Northwest Chapter.

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