Fortify your school against financial risk

5 best practices for fighting waste and fraud to ensure that all funds are spent properly

Mitigating financial risk means one person alone never sells tickets or collects money at a Wayzata High School football game in the Minneapolis suburbs. District rules require at least two people to manage any financial task, says James Westrum, Wayzata Public Schools’ executive director of finance and business.

“When two people are selling tickets and making the deposit at the end of the night, we’re better protected against errors and irregularities that could be fraud or just mistakes,” Westrum says.

Auditors regularly detect bookkeeping errors and financial crimes in K-12. In Arizona, investigators discovered fraud in 21 different districts over the past 20 years, with more than $26 million in taxpayer dollars stolen or misused, according to research by the Goldwater Institute.

James Sullivan, while serving as inspector general for the Chicago Board of Education, uncovered fraud that included payroll staff inflating paychecks for friends; administrators misappropriating funds; and unscrupulous contractors misrepresenting minority ownership, overbilling or having “less than an arm’s length relationship with school administrators,” he says.

Every dollar wasted or stolen from a district could have gone toward keeping students safe, raising teacher salaries or improving learning outcomes. While the appropriate system may vary for school districts of different sizes, experts recommend adhering to some of the following best practices for avoiding financial fraud and waste.

Tighten rules to mitigate financial risk

Like Wayzata and its two-person policy, every district should set specific rules for anyone handling funds or with access to financial records or accounts. Also, divvy up duties so multiple people take part in the processes of receiving cash, counting money, making deposits and reconciling accounts, Westrum says.

After Shawnee Local School District in Ohio fell victim to employee fraud, leaders implemented new checks and balances, says treasurer Chris Cross. Today, Cross conducts regular internal audits to verify the accuracy of accounts payable and accounts receivable. She also provides the school board with monthly reports and frequent financial updates.

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“Separation of duties is key, whenever possible,” Cross says. “Checks and balances need to be in place for the safety of taxpayer funds, for the integrity of the district and of the employees, and for the success of the school.”

She has an outside firm review the district’s financial data annually. The Ohio Auditor of State’s office also provides audits and suggestions for improving internal controls, Cross says.

Establish internal oversight

Sullivan, formerly of the Chicago Board of Education, recommends creating an internal audit function or an internal investigative function, such as an inspector general position. The internal auditor or inspector general can respond to complaints of malfeasance and review procedures and business practices for compliance with district policies.

“Most government-sector fraud is detected through tips or some form of internal review,” Sullivan says. “So a district must be equipped with the ability to both receive and respond to tips, usually through a fraud hotline or whistleblower system.”

Outside vendors can provide the hotline and other reporting platforms, but that’s only half the battle: “Without a plan in place to respond to the fraud complaints, you’ll be left to scramble to respond and determine if an investigation is necessary, who will conduct the investigation, how to properly secure evidence, how to respond to the media, and so forth,” Sullivan says.

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Trained business officials or school finance officers on staff should hold key roles in district administrations, says Sullivan, now a managing director and fraud investigator in the forensic and valuation services practice at Sikich, a professional services firm.

“These school leaders are usually certified business officials, and are regularly trained in the best practices of providing efficient and effective programs and services.”

Finance administrators can also take advantage of continuous learning from professional organizations such as the Association of School Business Officials International. These groups offer constant training and exposure to resources that administrators can use in the day-to-day management of dynamic school financial environments, Sullivan says.

Build a culture of efficiency

Also important is creating a culture of continual improvement, says Wayzata’s Westrum. The district’s leaders annually analyze spending in one major area—such as insurance or transportation—in an effort to reduce waste.

To ensure ample funding for student activities, Shawnee Local School District administrators regularly conduct internal and external audits.
To ensure ample funding for student activities, Shawnee Local School District administrators regularly conduct internal and external audits.

One year, they focused on transportation and realized that when temperatures dropped to 20 degrees below zero, frozen fuel kept buses off the road. So the district switched to propane fuel, and the buses now run more reliably. “We seek to continually improve, and make sure that ancillary activities are not taking resources away from our core goals of teaching and learning,” Westrum says.

Institute a community advisory council

Wayzata also created a 12-person Citizens Finance Advisory Council to oversee and recommend efficient use of resources. The group includes local taxpayers with financial expertise and an interest in maintaining accountability for spending.

The committee advises the school board on the budget, long-term strategic planning and other financial matters to ensure that the administrators’ use of funds matches community expectations.

“We present budgets and plans to them, and they ask good questions about whether those plans make the most effective use of taxpayer dollars,” Westrum says. “Their analysis and oversight of the budget process allows checks and balances between the school and the community.”

Seek independent audits

Smaller districts may not have the funds to keep an internal auditor or inspector general on staff. In that case, Sikich’s Sullivan recommends bringing in outside resources, consultants or contractors who are trained to respond to complaints or to review financial controls. For optimal results, the district should give contracted auditors free reign to search any and all areas susceptible to fraud, he says.

“District staff may identify some areas of risk, but seasoned professionals have usually seen it all, and know the inherent risks districts encounter and how to control or mitigate the risks,” he says.

If your district is the recipient of grant funding, the funding source may also audit the district’s expenditures and controls related to the grant, Sullivan says. “Mishandling grant funding could cause the district to lose the grant, and hamper its ability to apply for and receive future grant funding.”

Nancy Mann Jackson is an Alabama-based writer.

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