Justin K. Kiddy, CPA/PFS, CFE

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

Fraud, is it possible?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……

Fraud StatisticsFraud 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%).

Fraud Headlines and Fraud Headlines and Personal EncountersPersonal 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.

Is this what you were Is this what you were thinking?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.

How do we defend How do we defend against it?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

OpportunitiesOpportunities 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.

Prevention Controls ~ Prevention Controls ~ Segregation of DutiesSegregation 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.

Is this what you were Is this what you were thinking?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.

Best PracticesBest 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.

Fraud StatisticsFraud 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

Your Scenarios and Your Scenarios and Q&AQ&A

Justin K. Kiddy, CPA/PFS, CFEMcCay, Kiddy & Associates, LLCjustin@mkaacpa.com(843) 881-4477