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Federal, provincial and state governments, as well as donors, have recently increased the pressure on universities to implement better governance practices and on their boards of governors to exercise their fiduciaries responsibilities more efficiently. (See “Reputations at Risk.”)

Institutions of higher learning, of course, aren’t immune to fraud. The risks they face are similar to those in other industries. However, the probability of occurrence of fraud risks may be higher for universities because of their promoted environment of collegiality, which may lead to more decentralization and lack of basic internal controls. (See “Canadian Universities are Victims of Fraud,” by M. Britt & al., in University Manager, Winter 2011.)

According to the ACFE’s 2012 Report to the Nations on Occupational Fraud and Abuse, 6.4 percent of worldwide fraud cases occur in the education sector, which represents the fifth most-targeted industry by fraudsters out of 23 industries. (See Report to the Nations, page 28.) Furthermore, the three most frequent fraud schemes perpetrated in the education sector are billing schemes, fraudulent expense reimbursements and corruption schemes. (See Report to the Nations, page 30.)

Appropriate governance and financial accountability calls for senior university administrators to exercise their professional duties with loyalty and reasonable care. They should be implementing internal controls and investigating all credible allegations of fraud, regardless of their size, to prevent financial and reputational damage to their organizations.

IMPORTANCE OF FRAUD RISK ASSESSMENTS

Universities around the world must perform regular fraud risk assessments and implement targeted internal controls, such as proper segregation of duties and surprise audits. Of course, as with all organizations, universities can prevent fraud by segregating a task of requesting a financial transaction from those of approving it, processing the payment, reconciling the transaction to the accounts and safeguarding the involved asset. Surprise audits must be just that: unannounced supervisory reviews. This creates not just an atmosphere of collegiality and support but one in which the perceived opportunity to commit fraud is low.

GHOST INVIGILATORS' CASE

This case involved invigilators (test monitors) who were hired to proctor final exams in a large undergraduate department at the pay rate of $50 for a three-hour exam. This department didn’t have proper controls to verify who showed up for work and who didn’t on exam days. Therefore, as long as the correct number of invigilators showed up, those who had registered and accepted the jobs in advance with the department administrator were all paid using time sheets, which that administrator had prepared. The department chair would then approve the time sheets. The administrator didn’t verify attendance of the invigilators with the professors who’d supervised the exams.

The invigilators began to exploit the lack of proper controls. Believe it or not, parents of some younger invigilators would show up on exam days to do the work of their offspring, but the university would still pay their kids because the students’ names appeared on time sheets. The children then gave their gross salaries to their parents because these students’ annual taxable incomes were too low to pay any income taxes.

In this fraud scheme, the university paid the “ghost invigilators” for services they never rendered. Even though the university didn’t lose any money, it made individual payments to the wrong people. The governmental revenue agency was the actual victim of this fraud, which is a clear case of tax evasion. However, the fraud really occurred because the university hadn’t identified invigilation activities as high risk, and some invigilators took advantage of internal control deficiencies. The university has the ethical and legal responsibility to pay the right people and implement proper controls to prevent and detect fraud whether the victim is itself or an outside entity.

The department chair detected the fraud by chance when a parent of an invigilator let slip that he’d worked an exam the previous weekend, while the chair didn’t have his time sheet to approve. Investigators from the security department discovered that this was far from volunteer work because the parent’s son was the one getting paid for the work. They later found that four more parents were also using the same scheme to avoid paying income taxes. The university warned the parents and invigilators that any further misconduct would lead to formal legal and disciplinary actions and potential dismissal, but it didn’t take any formal action.

Lessons learned
Following this case, I recommended a thorough fraud risk assessment and establishment of targeted internal controls. The undergraduate department implemented a simple and effective control; it required professors who supervise exams to maintain signature sheets that all invigilators must sign at the beginning and the end of their work shifts. Any new or unknown invigilator must show identification to the supervising professor. Afterwards, the chair’s assistant must validate each signature sheet with the registration sheet prepared by the department administrator. A proper segregation of duties requires that someone independent from the department administrator must validate and prepare time sheets.

BENEFITS OF ANTI-FRAUD TRAINING

Educating faculty, staff members and students about the university’s ethics (or anti-fraud) policies is important, of course, to prevent fraud and preserve the institution’s reputation. It’s also important to develop ethics policies carefully and implement them in accordance with the culture of the institution.

Culturally, universities, like most nonprofit educational institutions, don’t like heavy-handed policies, or controls, because faculty members perceive them as impediments to their research and teaching activities. (See “Reputations at Risk.”)

After going through an appropriate anti-fraud training program, every employee and faculty member (many higher-education institutions actually view faculty above the instructor level as quasi-independent contractors) should understand the nature and role of internal controls as well as the negative consequences associated with fraud.

University administrators, faculty and staff members should be motivated to prevent fraud because its occurrence might affect their chances of promotions and salary increases and tarnish the external reputation of the university, which could then affect its financial situation.

FRAUDULENT EXPENSE REIMBURSEMENTS' CASE

This case implicated two executives of a university’s student association. Student associations at this university were legally independent, but they received financial subsidies from the institution and special student contributions from an automatic levy on tuition fees.

The university allowed student association executives to seek reimbursement for expenses for the many extracurricular activities they organized throughout the academic year. Each association would reimburse executives after they submitted receipts or paid invoices.

The two association executives committed fraud by submitting fictitious, altered and mischaracterized expense receipts and invoices. For example, one submitted a fictitious receipt for $600 that she drew and signed on a paper place mat. She claimed the expenses were for “marketing activities.” Her association actually reimbursed her.

Another student exec submitted a scanned valid hotel invoice on which he had added with Photoshop two fictitious nights plus additional food and mini-bar items. He also submitted another hotel invoice for a meeting room that he claimed was for a student recruitment event, but it actually was for the wedding reception of a family member. Both the recruitment event and the wedding reception had been on the same day at the same hotel.

The student association is obviously the victim of these frauds because it lost most of its funds. However, the university is ethically and legally responsible to ensure it doesn’t invest taxpayers’ money in ventures that it should know are fraudulent.

The newly elected executives of the same student association discovered the fraud, which had grown to more than $100,000. One of the new executives was concerned because the association didn’t have any money left in its bank account at the start of the new academic year. He had also heard some students bragging about “how easy it is to forge invoices on Photoshop.” The executive asked for the university’s help in investigating.

The university expelled the two crooked student executives from their programs of study, and the university referred the case to the local police department. All parties reached an out-of-court settlement.

Lessons learned
I recommended that the university require student associations to undergo annual financial audits as a condition to receiving financial support. Universities should also educate student associations’ executives about ethics and basic internal controls to prevent and detect such frauds.

The absence of an independent party’s verifications and the lack of training fostered students’ perceptions that they could easily commit fraud and get away with it. Independent and thorough reviews of expense reimbursement claims could have easily detected most expense reimbursement frauds.

Managers and auditors normally can detect fictitious receipts and invoices by observing missing vendor information and relevant registration numbers. Management can usually discover electronically altered expense receipts and invoices by inspecting for slight differences in font size, style and page format, and calculation mistakes in fictitious items and their sales taxes. If an invoice is addressed to the student association itself or the university, contacting the vendor can be an effective method for confirming amounts while not infringing on the claimant’s privacy rights.

NECESSITY FOR ANONYMOUS REPORTING MECHANISMS AND OPEN COMMUNICATIONS

Leaders who don’t get honest feedback and don’t hear fraud tips quickly get in trouble politically, legally and strategically. All universities should implement user-friendly reporting mechanisms that allow anyone to anonymously report fraud and irregular activities plus give healthy feedback on leadership’s strengths and weaknesses. This will keep direct lines of communication open among all employees and senior university administrators. (See “Bad Advice,” by Patrick Sanaghan, in Inside Higher Ed, April 27, 2011.) These tools will not only hasten the fight against fraud but also advance the university’s strategic mission and refine senior administrators’ leadership styles.

Independent parties, such as internal audit departments or audit committees, should oversee reporting mechanisms. Many universities outside the U.S. are still resisting pressure from their external stakeholders to implement hotlines because they’re concerned they might create climates of mistrust among faculty members. (See “Making it Safe to Report Wrongdoing,” by Rosanna Tamburri, in University Affairs, Dec. 6, 2010.) 

Faculty members’ tendency to resist any effort to have their work examined and questioned may explain this resistance. (See “Why Does the Faculty Resist Change?” by John Tagg, in Change: The Magazine of Higher Learning, January-February 2012.)  Necessary cultural changes take some time, but universities can achieve them with anti-fraud training and a good dose of ethical leadership.

TEACHING ASSISTANT'S BRIBERY CASE 

Let’s get back to the opening case. That test grader, a graduate student who solicited bribes from undergraduate students, was able to get away with his crimes for a while because he knew those professors who wouldn’t verify his work and those who would. He, obviously, offered his illicit marking services mostly to professors who were negligent supervisors.

Universities, whose stated mission is to educate tomorrow’s leaders, can’t afford to allow cases of corruption to tarnish their reputations and compromise grades, which employers rely on most when making hiring decisions.

Eventually, some honest students — who discovered the scheme — dropped anonymous letters into two department chairs’ mailboxes. An investigation revealed that the corrupt grad student had successfully solicited at least 10 students he knew in three different undergraduate courses.

The university didn’t press legal charges against the grader or the implicated students, but it filed internal complaints of academic misconduct against all of them. The university gave the corrupt students fail grades in the courses for which they bought grades and expelled the grader from graduate school.

Lessons learned
The university found it more difficult to prevent this corruption than other frauds because both an employee (the grader) and customers (the bribe-paying students) attacked it.

Collusion also has the perverse effect of frightening those who might have noticed what was occurring and who otherwise would have reported it. Most honest students are afraid to become victims of intimidation if they snitch on their friends, and faculty members may not feel comfortable openly complaining about their colleagues. Open lines of communication and accessible anonymous reporting mechanisms would clearly facilitate the detection of such insidious activities.

I would highly recommend that professors who hire graders begin regular controls, such as surprise audits (spot checks). For example, re-grading a sample of every question on the exam is effective at preventing bribery and also provides detailed feedback to professors who are interested in their students’ learning outcomes.

A policy that forbids hiring teaching assistants (graders and tutors) enrolled in the academic program for which they will work also limits fraud opportunities because it reduces chances they might know the students that they’ll be responsible for grading. Also, department chairs and deans, instead of faculty, should hire teaching assistants.

NEED FOR ETHICAL LEADERSHIP AND FACULTY INCENTIVES

University administrators, such as presidents, vice presidents, deans and department chairs should lead by example and adopt an ethical tone in all their communications and actions. Senior administrators must be proactive in facilitating an atmosphere of honesty, openness and trust. (See “Bad Advice.”)

Most employees watch management’s behavior closely. When managers fracture an institution’s ethics policy, employees begin to rationalize that fraud is acceptable. (See “Found: Proof the Good Guys Finish First,” by Sheila Keefe, in ACFE Insights, May 25, 2011.) 

University administrators should also ensure that faculty members’ incentives are aligned with the university’s strategic mission and goals. According to Keefe, improper incentives can elicit dysfunctional behaviors and fraud.

Universities should strive to adopt appropriate incentives that align ethical behavior with the attainment of institutional goals. Otherwise, faculty members may adopt behaviors that would only serve their own self-interests to the detriment of the university’s goals and reputation.

CONFLICTING PRIVATE TUTORIALS' CASE

Part-time faculty members created a side business to offer private tutorials to students for specific undergraduate courses for a fee (for example, $200 per student for a four-hour session), normally before mid-term and final exams. These faculty members also taught the same undergraduate courses. Sometimes, they taught the course in the same university classrooms in which they taught the tutorials.

The faculty members who taught these private tutorials were in direct competition with their university because they had divided loyalties. These are the ethical questions they could have grappled with: Can I teach these courses with the greatest professionalism and accessibility knowing that could minimize my students’ needs for private tutorials and hurt my side business? Or should I just provide the minimum efforts in class and refer students to my private tutorial business for assistance?

This profit-making business was a clear case of a conflict of interest because the faculty members didn’t disclose it in advance to the university, it tarnished the university’s reputation and financial position, and diluted the quality of education.

Also, the offending faculty reserved university classrooms for some of the tutorials under false pretenses (for example, saying they would use them for conferences).

The facilities administrator detected the fraud by chance when she noticed that a faculty member had booked many university classrooms for several weekends. Investigators discovered that the faculty member had said that these rooms would be used for conferences, but they quickly verified that he actually conducted his private tutorials during the reserved times. This faculty member and others who had reserved rooms had deprived the university of rental revenues that it normally charged to outside businesses.

The university gave the part-time faculty members with divided loyalties official warning letters telling them to stop using university premises to run their side business. However, the university didn’t lodge a formal complaint about their undisclosed conflicting interests, and the faculty members unfortunately continued offering their conflicting tutorials off campus.

Lessons learned
This delicate but crucial situation for universities could have drastic consequences for their reputations and financial stabilities. These conflicts of interest create inequities not only among students (because not every student can afford private tutorials to compete on a level playing field with their classmates) but also for other faculty members who devote all of their energies to their universities.

The first and most important control is requiring all full- and part-time faculty members to complete annual disclosure forms to report their competing interests to the university. This preventive control sends a message that a university is serious about eliminating divided loyalties and provides ammunition for potential lawsuits when faculty make false statements.

A training and communication program about a university’s ethics policy would reinforce the message. Aligning faculty members’ incentives with the university’s goals and mission may also prevent dysfunctional behaviors. For example, a financial or non-financial reward program for excellent teaching performance may encourage faculty members to spend more energy on their regular teaching duties.

Also, an accessible and anonymous reporting mechanism would help detect conflicts of interest because students and faculty probably are secretly talking about them.

Finally, the ethical behavior of senior university administrators plays an important deterring role and generates an honest and open atmosphere.

IMPORTANCE OF FRAUD EXAMINATIONS 

Universities, of course, are far from immune to fraud. Legally, they, like other nonprofit organizations, must adopt measures to prevent fraud and damage to their reputations. They’re also financially and ethically indebted to governments and donors to educate tomorrow’s leaders by showing that their internal policies and practices are sound.

 

Senior university administrators must investigate all credible allegations of fraud. Independent, professional and confidential investigations allow a victim university and its senior administrators to:

Dominic Peltier-Rivest, Ph.D., CFE, is professor of fraud prevention and detection at Concordia University in Montréal, Canada. 

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