Fraud's Finer Points: Case history applications
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Hundreds of taxpayer-supported public high schools and colleges offer trade-skill programs that enable many to pursue lifelong technical careers. However, fraud examiners often are faced with a common roadblock when they investigate these programs: a lack of documentation of financial transactions. Program directors and employees often don't create records when students pay their school bills or they immediately destroy them after student projects are completed. Therefore, entities and fraud examiners can't properly analyze these programs because it's impossible to determine the total number and value of all transactions that have occurred over a period of time. We'll focus on this challenge and others as we discuss some of the special situations of examining trade-skill education programs in this column followed by a two-part complex fraud case study on the topic.SKIMMING IS THE FRAUD OF CHOICEEmployee fraud in trade-skill education programs is usually simple asset misappropriation. In the ACFE's Fraud Tree, cash larceny by stealing an entity's funds falls into two major categories: fraudulent disbursement schemes and theft schemes. Theft schemes fall into two categories: skimming and cash larceny schemes. Skimming is the theft of off-book funds; cash larceny schemes involve the theft of funds recorded in the entity's accounting records. This discussion will focus on skimming. INCOMPLETE ACCOUNTING RECORDSYou might have detected possible fraud or abuse, but you can't find many supporting financial documents. You can't gather evidence to prove beyond a reasonable doubt that an employee you've had your eye on has misappropriated program revenue.This is a tragedy because it most often results in a finding that only encourages the school to improve internal controls rather than solid evidence that an employee committed fraud or abuse. Of course, there are exceptions when you're able to obtain a confession from an employee during an interview or when you find stolen revenue checks in an employee's bank account after a subpoenaed personal bank account search. INTERNAL CONTROL PROCEDURESNow if an auditor does find some supporting documents and management reports, the best thing he or she can do is analyze the profitability of student educational programs and review the internal control system by performing a walk-through of transactions and the program's policies and procedures. These primary steps will tell you how much additional audit work is needed and where to focus your efforts.Unfortunately, auditors often are under time and budget constraints and don't document the internal control systems for each aspect of these small operations. Big mistake. A simple walk-through of revenue generation procedures often uncovers weaknesses of high-risk areas that then require a detailed audit to determine if fraud can or has already occurred — even if the amount of the loss isn't material to the entity's financial statements.THE PERPETRATORSIn the private sector, you must concentrate on owners and key employees when determining those most likely to succeed in perpetrating fraud and abuse in trade-skill education programs. However, in the government sector, you can usually eliminate the owners — governing bodies, councils, mayors, etc. In my experience, key entity managers often are the perpetrators of these crimes for personal benefit. In fact, it's the very people responsible for educating students who are likely to be those that kill the goose that lays the golden egg. I often wonder what kind of education they think they're providing to the students in such poorly managed operations.
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