Raising frauds, not funds

In my state, Washington, students in public schools conduct thousands of fundraising activities each year. Fraud examiners must understand the rules governing the entities conducting these activities to properly evaluate and investigate them. Managers can easily fail without proper direction and guidance. And only informed faculty advisors will succeed in collecting the proper amount of revenue from each type of fundraising activity their students conduct.

Skimming is the fraud of choice

Similar to our discussion in the January/February 2013 column, fraud and abuse in all types of fundraising activities is usually a case of simple asset misappropriation. In the ACFE’s Fraud Tree, cash schemes (part of asset misappropriations), which involve stealing an entity’s funds, fall into three categories: larceny, fraudulent disbursements and skimming. Cash larceny schemes involve the theft of funds recorded in the entity’s accounting records. In fraudulent disbursement schemes, an individual makes a distribution of entity funds for a dishonest purpose. Skimming, the theft of off-book funds, is usually at the heart of student fundraising losses.

Red flags in student fundraising activities

The following presentation summarizes many of the internal control weaknesses (red flags) that have occurred at schools in my state during public-sector student fundraising activities. Poor school policies and procedures allowed individuals to misappropriate funds or operate fundraising activities for personal benefit. Critical deficiencies included a lack of accounting records (records were often missing or had been destroyed), a lack of accountability for revenue and inventory (too many people were involved or had access to funds), and poor oversight of events by faculty advisors (because of a lack of formal training).