A Santa Rosa, Calif., charter school finance and business manager is facing charges of embezzling nearly US $400,000 to support a prescription narcotics habit, according to an article published in the Press Democrat. Police officials suspect the woman wrote checks for large sums — as much as US $20,000 and $30,000 — to herself, and hid the money through accounting techniques. The investigation was prompted by a tip suggesting that officials look into the manager’s “financial lifestyle.”

During an emergency board meeting, the school’s executive director expressed shock about the alleged embezzlement and said yearly audits always have been “clean.” The sergeant in charge of the investigation confirmed that annual reports never showed any discrepancies, and he said that’s consistent with embezzlement cases.

As a charter, the school not only receives state funds but also receives other grants and donations. Because the suspected loss would represent a significant portion of the annual revenue received by the charter school’s parent organization, a Santa Rosa district official suggested that a key question will be identifying the source of the missing money.

Lessons Learned

Three factors are constant in most fraud cases, even if the details of the scheme differ: The fraud is a result of poor controls over segregation of duties; it continues until the person is caught; and there are red flags, even when the accounting evidence is cleverly concealed. In the charter school case, the only reason the manager was investigated is because someone reported her “financial lifestyle.”

The manager allegedly exploited poor controls over the receipt of checks to write checks to herself and hid money through “accounting techniques.” One way organizations can protect themselves is requiring a separate party (e.g., management or internal audit) to review the check register. Large sums, and those made payable to employees, likely indicate that fraud is being perpetrated.
The article reports that the charter school is required to present the school district with an annual independent audit for review, but the audit is focused on appropriate use of state school funds rather than the use of outside money provided to the nonprofit learning center. When a significant portion of an organization’s funding comes from external sources, the need for an audit, as well as a fraud risk assessment, is even greater. Even small organizations should spend at least a few hours every year to consider fraud risk.
This case also points out the importance of conducting thorough background checks of potential employees, including verifying information with previous employers. While this is a good idea for all employees, it is even more important for employees who will be handling cash and writing checks.

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