Fraud in your Charter School: Is it possible? How to defend against it ?

1. Fraud in your Charter School: Is it possible? How to defend against it? Justin K. Kiddy, CPA/PFS, CFE

2. Fraud, is it possible? • Before we discuss the possibility of fraud and how to defend against fraud, what is fraud? • Fraud is the intentional misrepresentation or concealment of information in order to deceive or mislead for personal gain. • Misappropriation of assets • Stealing cash receipts • Unapproved cash disbursements • Stolen inventory and fixed assets • Financial misstatement • Fraud is illegal. • Fraud is not just another “cost of doing business”. • Is it possible……

3. Fraud Statistics • Fraud affects 80% - 85% of companies (School’s are not exempt from this). • Lack of internal controls is cited as the most common reason fraud occurred (35%). • Lack of management review and override of controls tied for second at 17%. • Companies on average lose 7% of gross revenue to fraud annually. • US GDP equals $14 trillion, fraud loss each year is $994 billion • Median loss is $175,000 • More than 25% of fraud losses are > $1,000,000 • Industries most impacted (financial services - 15%; government (Charter Schools) - 12%; healthcare - 8%). • Organizations with less than 100 employees suffered the highest median loss. • Fraud most commonly is committed by accounting / finance department (29%).

4. Fraud Headlines and Personal Encounters • Enron • WorldCom • Bernie Madoff • Countrywide Financial • Is this limited to large public companies? No. • Construction company = Loss of ~$1,000,000 (AP fraud) • Church School = Loss of ~$160,000 (AP fraud) • Medical practice = Loss of ~$160,000 (AP fraud) • School = Loss of ~$136,000 (AP fraud, false bills) • Church School = Loss of ~$58,000 (skimming, revenue fraud) • Chamber of Commerce = Loss of ~$36,000 (credit card fraud) • Art museum = Loss of ~$36,000 (skimming, revenue fraud) • Fuel company = Loss of ~$85,000 (skimming, revenue) Remember, these are only a few known frauds.

5. Is this what you were thinking? • We have no fraud? or I would know if we had fraud! • Our people don’t commit fraud. • Common saying in the fraud examiner community – The number one cause of fraud is blind trust. • Profile of where I would look for fraud • I have one person handling many financial areas • I don’t have to monitor them as I trust them • There seems to be no issue as everything is done with no crisis • Implementing an effective anti-fraud program is too costly. • We have an outsourced fiscal management company, they are looking out for us and checking for fraud. • We as fiscal management company can’t do it alone, management and a board member level person must be engaged. • We as fiscal management company could be committing fraud. • How is our work being monitored? Blind trust with 3rd party provider is no different than blind trust with an employee.

6. How do we defend against it? • To defend against fraud, we first must understand the dynamics of fraud. • Opportunity • Pressures / Incentives Rationalization • The only one that a School can control is Opportunity. Fraud Triangle

7. Opportunities • Opportunities are created when one individual is responsible for several aspects of a financial transaction without monitoring. • Writes checks and reconciles bank account • Signs checks and approved bills to be paid • Receives payments and does billing for after school programs • Maintains general ledger and no one else sees • Reconciles accounts and receives bank statements • Opportunities are decreased with prevention and detection controls. • Simply having access to accounting system is not enough for management, there must be standard monthly procedures in place to ensure monitoring happens.

8. Prevention Controls ~ Segregation of Duties • What is segregation of duties? • A security principle, whose objective is to prevent fraud by implementing the appropriate level of checks and balances on the activities of individuals. • Duties must be segregated in order to prevent fraud in organizations in these common areas: • Cash receipts - skimming or lapping • Cash disbursements - fictitious student refunds or over billing schemes • Purchasing - fictitious vendors or related party transactions • Payroll - ghost employees or lagging terminations • Internal controls must be specific to your operations.

9. Is this what you were thinking? • My School’s finance staff isn’t large enough to properly segregate duties. • With two staff and minimal monitoring fraud risk can be reduced. • Check signer (Principal / Executive Director) • I (as a School leader) don’t have the skill set or time to perform accounting functions. • Accounting skill set isn’t necessary, all it takes is due diligence, skepticism, and monthly processes. • These tasks can be completed with little time requirements.

10. Best Practices • Monitoring • Monitoring is the process of going behind individuals and the tasks they have performed looking for inaccuracies and potential fraud. • Doesn’t have to be sneaky, it should be a known process. • Some examples of easy to implement monitoring steps: • Principal / Executive Director should open and review bank statements and review bank reconciliations. • Finance staff should be required to take time off and have another employee perform their duties while out. • Limit finance staff’s access to necessary areas by using IT restrictions. (e.g. Too many staff use admin login) • Establish fraud hotline.

11. Fraud Statistics • Typical fraud lasts 2 years before being detected. • 46% of frauds are detected by tips from employees, customers, and vendors. • Auditors detect only 4% of frauds. • Only 7% of fraudsters have prior convictions or terminations. • Most commonly sited “red flags” • Staff living beyond their means (39%) • Staff experiencing financial difficulties (34%) • Once a victim of fraud, 78% of companies modify their anti-fraud controls • Conduct more management review of controls • Surprise audits • Fraud training for management and employees

12. Your Scenarios and Q&A Justin K. Kiddy, CPA/PFS, CFE McCay, Kiddy & Associates, LLC justin@mkaacpa.com (843) 881-4477