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Arizona Association of School Business Officials. Winter Conference February 2, 2010. Dealing with the Ugly Face of Fraud Holly Frook Graham, CPA, CFE Arizona Office of the Auditor General. Objectives. In regards to potential fraud, participants will: Be able to protect their district

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Arizona association of school business officials

Arizona Association of School Business Officials

Winter Conference

February 2, 2010


Arizona association of school business officials

Dealing with the Ugly Face of Fraud

Holly Frook Graham, CPA, CFE

Arizona Office of the Auditor General


Objectives

Objectives

  • In regards to potential fraud, participants will:

    • Be able to protect their district

    • Know what actions to take when fraud is suspected

    • Understand fraud role of Auditor General


Auditor general investigations

Auditor General Investigations

  • School districts

  • Counties & elected offices

  • State agencies

  • Fire districts

  • Community college districts

  • Universities

  • Justice courts

  • Other entities


Auditor general investigations1

Auditor General Investigations

  • School district case range of losses

    • $2,322 - $11,725,425

  • School district case culprits

    • Student activities secretary

    • Department director

    • Assoc. superintendent

    • Governing board member

    • Business manager

    • Superintendent


Auditor general investigations2

Auditor General Investigations


Protect your district

Protect Your District

  • Create culture of integrity

  • Communicate expectations regularly

  • Hire quality people

  • Have strong internal controls

  • Maintain culture of integrity

  • Seek assistance

  • Support prosecution

  • Take remedial action

Proactive against fraud

Reactive after fraud


Conflict of interest

Conflict of Interest

Mother & Grandmother

Husband

Half-brother & his wife

You

Daughter & Grandson

Husband’s father. Husband’s sister & her husband

Step-son


Is it fraud

Is it fraud?

Managerial problems

Internal audit concerns

External audit issues

Other circumstances


Classic fraud conditions

Money or property missing

Money loaned or gifted

Credit cards misused

Conflicts of interest

Undisclosed information

Abuse of authority

Classic Fraud Conditions


Which situation is fraud

Which Situation is Fraud?

  • Check and cash deposits made late

  • Unauthorized payments to individuals

  • Administrators’ trips to Vegas

  • Credit card MIA


Credit card example

Credit Card Example

  • External auditors-improve controls over cards

  • District called card company

    • 12 cards with activity

    • 4 of 12 cards can’t be found

    • $2,100 gas purchases

    • July – December 2007


Credit card example1

Credit Card Example

  • December 2007

    • Performs internal investigation

  • February 2008

    • Employee placed on leave (terminated July 2008)

  • March 2008

    • District contacts police department

    • PD = several suspects, no charges

  • January 2009

    • Audit Report = alleged misuse

  • April 2009

    • Auditor General informed of misuse through audit report


Arizona association of school business officials

Stealing more than $1,700 worth of gas


Credit card example2

Credit Card Example

  • $2,100 stolen for gas

  • Six month period

  • Employee terminated

  • No legal consequences

  • Money not repaid

  • $1,700 of gas stolen

  • Two year period

  • Employee arrested

  • Employee terminated

  • Plead guilty to theft

  • Restitution ordered

School District

County


Suspected fraud

Suspected Fraud

Fraud doesn’t need a smoking gun

Sometimes, fraud is something that just doesn’t look good


Financial misconduct example

Financial Misconduct Example

  • Complaints to GB about superintendent:

    • Wife’s employment

    • Personally paid with IGA money

    • Unauthorized performance pay

  • GB contracts with investigative attorney

  • Attorney recommends:

    • Suspend superintendent

    • Review former employment file

    • Hire forensic CPA


Financial misconduct example1

Financial Misconduct Example

  • Separation agreement with prior district required superintendent to:

    • Resign

    • Repay $9,300 of personal purchases

    • Pay investigation costs of $36,000

  • No legal action

  • Two weeks later applied for AZ superintendent position


Financial misconduct example2

Financial Misconduct Example

  • District pays $15,369 for attorney investigation

  • District pays $54,977 to superintendent

  • Superintendent resigns

  • Forensic CPA not hired

  • Auditor General not contacted

  • Legal action not taken


Financial misconduct example3

Financial Misconduct Example

Office of the Auditor General:

  • Reviews external audit report

  • Sees findings of financial misconduct

  • Reviews pertinent documents

  • Conducts investigation

  • Submits report to Attorney General


Financial misconduct example4

Financial Misconduct Example

Superintendent (former):

  • Pleads guilty to felony charges

    • Theft

    • Misuse of public money

  • Agrees to pay $84,981restitution

  • Forfeits certificates:

    • K-12

    • Principal

    • Superintendent


Financial crimes

Financial Crimes

  • Theft

    13-1802

  • Fraudulent Schemes

    13-2311

  • Misuse of Public Money

    35-301

  • Conflict of Interest

    38-501et al

  • False Filing – Forgery

    39-161 & 13-2002

  • Procurement

  • 41-2616 & 15-213

  • Antitrust

  • 34-252 & 44-1402

  • Tampering

  • 41-1279.04 & .22

Criminal

Civil


Suspect fraud

Suspect Fraud?

  • Go up the ladder

  • Restrict access

  • Conduct preliminary interview

  • Document everything

  • Seek assistance

Do This First


Gathering information

Gathering Information

  • Determine Who, What, Where, When and Why

    • Review documents first

    • Ask questions later

  • Document everything

    • Analysis

    • Timelines

    • Interviews, discussions

  • Be specific

    • Names and titles

    • Dates and times

    • Amounts and locations


Role of auditor general

Role of Auditor General

Special Investigative Unit

  • Assesses potential fraud situations

  • Investigates fraud

  • Prepares confidential report for law enforcement

  • Assists in prosecution

  • Prepares summary report for entity, legislature, public

  • Conducts trainings


Resources

Resources

  • Arizona Auditor General

    azauditor.gov

  • Arizona State Legislature – statutes

    azleg.gov/ArizonaRevisedStatutes

  • Association of Certified Fraud Examiners

    acfe.com


Questions

Questions?


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