Economic Instability Exposes Schools to Fraud

Recent studies show that budget cuts and decreased staff make schools vulnerable to fraud schemes.

Cash larceny and payroll fraud are more common in education organizations than in all other industries examined by the Association of Certified Fraud Examiners (ACFE) in its 2008 Report to the Nation on Occupational Fraud and Abuse. The report also shows that billing schemes and expense reimbursement frauds were two of the most common fraud schemes in the education industry, and both categories exceeded the overall rate of occurrence by approximately 10 percent.

Education fraud is certainly not a new problem, but there is evidence that it is getting worse. According to ACFE, the public domain seems to provide greater pressures and incentives to commit fraud than the private sector. Lower salaries and the frustration associated with bureaucracies, for example, contribute to this issue. Also, poor accountability compounds the problem and sets the stage for fraud. Unfortunately, budget cuts in state appropriations for education as a result of the global financial crisis have increased the potential for — and likelihood of — fraud by consolidating many responsibilities. Because segregation of duties is essential for effective internal control, the opportunity for fraud increases when schools reduce the number of employees and consolidate their duties among fewer employees.

Considering the current economic downturn, employees pose the greatest threat to organizational resources, according to ACFE’s Occupational Fraud: A Study of the Impact of an Economic Recession. The report shows that employee embezzlement has been on the rise, making this the most commonly cited category of fraud. The report also shows that 88 percent of chief financial executives (CFEs) polled for the study indicated that they anticipate an increase in fraudulent activity. Furthermore, 70 percent of CFEs believe the incidence of employee theft will rise during the coming year.

“Elementary Fraud,” featured in the Feb. 2009 issue of Internal Auditor magazine, describes how a surprise cash count exposes a trusted school employee’s US $15,000 embezzlement scheme.

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