AUD211 Fraud Detection and Investigation: Texas Association of School Business Officials / AUD211 / ©TASBO 2016

AUD211
Fraud Detection and

Investigation
Texas Association of School Business Officials / AUD211 / ©TASBO 2016

Table of Contents
Course Overview ..................................................................................................... 3
Course Description ..............................................................................................3
Essential Elements ...............................................................................................3
Course Objectives ................................................................................................3
Prerequisites ..........................................................................................................4
Performance Objectives ....................................................................................4
Chapter 1: Introduction to Fraud........................................................................... 5
Chapter 1 Overview ............................................................................................5
Why is Fraud Important?...................................................................................6
What is Fraud? ......................................................................................................6
The Fraud Triangle ..............................................................................................7
Who Commits Fraud? ........................................................................................9
What are the Red Flags of Fraud? .............................................................. 10
References and Samples Related to Commonly Used Terms .......... 12
Opportunities for Student Reflection and Practice .............................. 12
Summary .............................................................................................................. 12
Chapter 2: Common School District Frauds ........................................................ 13
Chapter 2 Overview ......................................................................................... 13
Common Fraud Schemes ............................................................................... 14
Campus Fraud Schemes ................................................................................. 14
Central Office Fraud Schemes ...................................................................... 19
Community Organization Fraud Schemes ............................................... 22
Summary .............................................................................................................. 24
Chapter 3: Fraud Detection .................................................................................. 25
Fraud Detection Methods.............................................................................. 26
The Fraud Hotline ............................................................................................. 27
Internal Audit ..................................................................................................... 30
External Auditors............................................................................................... 32
Data Analytics (Analysis) ................................................................................ 33
Summary .............................................................................................................. 37
Chapter 4: Fraud Prevention ................................................................................ 38
Fraud Prevention Definition .......................................................................... 39
The Hiring Process ........................................................................................... 39
Internal Controls ............................................................................................... 43
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Summary .............................................................................................................. 46
Chapter 5: Fraud Deterrence ................................................................................ 47
Fraud Deterrence Defined ............................................................................. 48
Fraud Awareness Program ............................................................................ 48
Legal and Personnel Action .......................................................................... 51
Publicizing the Fraud ....................................................................................... 54
Summary .............................................................................................................. 55
Chapter 6: Fraud Investigation ............................................................................ 57
Fraud Investigation Introduction ................................................................ 58
Fraud Investigation Components ............................................................... 59
Conducting Effective Interviews .................................................................. 69
Writing the Fraud Report ............................................................................... 74
Conducting a Fraud Post Mortem .............................................................. 75
Summary .............................................................................................................. 76
References ............................................................................................................. 78
Appendix A: Supplemental Materials ................................................................. 79
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Course Overview
In this section, you will find:
✓ Course Description
✓ Essential Elements
✓ Course Objectives
✓ Prerequisites
✓ Performance Objectives
Course Description
This course will prepare you to detect and investigate fraud at your school
district. The course will examine effective strategies to prevent, deter, and detect
fraud. In addition, this course will discuss common school district fraud
schemes. Finally, this course will focus on the main fraud investigation
components of collecting evidence, conducting fraud interviews, and report
writing.
Essential Elements
✓ What is fraud?
✓ What steps can a school district take to detect fraud?
✓ What steps can a school district take to prevent fraud?
✓ What steps can a school district take to deter fraud?
✓ How should a school district investigate fraud?
Course Objectives
✓ Provide a definition of fraud.
✓ Describe the three elements that comprise the fraud triangle.
✓ List the red flags of fraud.
✓ Describe common school district fraud schemes.
✓ Demonstrate the importance of a fraud hotline.
✓ Describe the role of the internal auditor in detecting fraud.
✓ Describe the role of the external auditor in detecting fraud.
✓ Describe the role of data analytics in detecting fraud.
✓ Describe how best hiring practices can prevent fraud.
✓ Discuss the importance of strong internal controls in preventing fraud.
✓ Discuss how fraud awareness training can deter fraud.
✓ Discuss the importance of prosecuting and terminating fraudsters.
✓ Describe the importance of publicizing school district frauds.
✓ Discuss the importance of assembling a fraud team.
✓ Discuss the importance of securing and collecting evidence from the fraud
scene.
✓ Describe the proper steps to take in conducting fraud interviews.
✓ Describe the key elements of a fraud report.
✓ Describe the importance of a proper distribution of the fraud report.
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✓ Discuss the importance of conducting a fraud “post mortem”.
Prerequisites
There are no required prerequisites for this course.
Performance Objectives
✓ Describe and define fraud.
✓ List the three elements that comprise the fraud triangle.
✓ Identify the red flags of fraud.
✓ Identify several common school district fraud schemes.
✓ Describe the importance of implementing and monitoring a fraud hotline.
✓ Recognize and describe the role of the internal auditor in detecting fraud at
a school district.
✓ Recognize and describe the role of the external auditor in detecting fraud at
a school district.
✓ List some methods of detecting fraud utilizing data analytics.
✓ Describe the role human resources plays in preventing fraud through proper
hiring practices.
✓ List several strong internal controls that prevent fraud at a school district.
✓ List strategies to ensure fraud awareness training can take place.
✓ Describe the importance of taking legal and personnel action against
fraudsters.
✓ List the reasons why publicizing school district fraud helps deter fraud.
✓ List school district members that should comprise the fraud response team.
✓ List methods to properly secure and collect evidence of a fraud.
✓ List the proper sequence of steps in conducting proper fraud interviews.
✓ List the key elements of a fraud report.
✓ List the key members of a school district who should receive the fraud
report.
✓ Discuss the importance of and list the steps in conducting a fraud “post-
mortem”.
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Chapter 1: Introduction
to Fraud
In this chapter, you will find:
✓ Chapter 1 Overview
✓ Why is Fraud Important?
✓ What is Fraud?
✓ The Fraud Triangle
✓ Who Commits Fraud?
✓ What are the Red Flags of Fraud?
✓ Chapter 1 Summary
Chapter 1 Overview
This chapter introduces the concept and importance of detecting and
investigating school district fraud. After completing this chapter, students will
understand the importance of fraud, the definition of fraud, the fraud triangle,
and common red flags that may indicate the presence of fraud at your school
district.
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Why is Fraud Important?
Every two years the Association of Certified Fraud Examiners (ACFE) publishes
their Report to the Nations on Occupational Fraud and Abuse (Report). The
Report is a research study based on actual cases of fraud reported by Certified
Fraud Examiners. In the 2016 Report, survey participants estimated that the
typical organization loses 5% of its revenues to fraud annually. To help quantify
this claim, a large school district with an annual operating budget of $1 billion
would lose roughly $50 million due to fraud, waste, and abuse. Even to a smaller
district, say with a $100 million dollar operating budget, predicted losses to
fraud, waste, and abuse would be predicted to be $5 million dollars.
In addition to the financial cost, there is a loss of trust that occurs after a fraud
is committed. School districts have a fiduciary responsibility to guard the
taxpayers’ money. Frauds like standardized testing fraud erode this trust and
account for a loss in goodwill for the school district with the surrounding
community. This can be seen with decreased support for volunteering with the
district or a lack of community support in future bond elections.
Board Policy CAA (LOCAL) Financial Ethics addresses school district fraud.
“The district prohibits fraud and financial impropriety in the action of its
Trustees, employees, vendors, contractors, agents, consultants,
volunteers, and others seeking or maintaining a business relationship
with the district.”
Since there is a significant cost associated with fraud it is important to be able

to define exactly what if fraud.
What is Fraud?
There are several different and somewhat confusing definitions of fraud.
According to LawDictionary.Com,
“Fraud consists of some deceitful practice or willful device, resorted to

with intent to deprive another of his right, or in some manner to do him
an injury.”
While the Association of Certified Fraud Examiners (ACFE) tries to narrow the
definition by focusing on the occupational aspect of the fraud committed. The
ACFE defines fraud as:
“Any activity that is clandestine, violates the employee’s fiduciary duties

to the organization, is committed for the purpose of direct or indirect
financial benefits to the employee, and costs the employing organization
assets, revenues, or reserves”.
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Simply stated for this class fraud can be defined as use of deception by a school
district employee for their own personal gain.
Now that we have a working definition of fraud, it is important for all employees
to know how and why fraud can happen at their school district.
The Fraud Triangle

Developed by criminologist Donald R. Cressey, the Fraud Triangle is a
hypothesis to try to explain why employees will commit occupational fraud. The
Fraud Triangle consists of three concepts or legs. These concepts consist of a
non-shareable financial problem, perceived opportunity, and rationalization.
Cressey hypothesized that all three legs need to be present before an individual
will cross the line from employee to fraudster.
Financial Pressure. The first concept or leg is a non-shareable financial

problem. The fraudster encounters some sort of personal or business
misfortune and believes that it is so terrible that they cannot go to anyone for
help. In their mind, they must take care of this embarrassing, un-shareable issue
on their own. Since it is usually an issue that is financial in nature, they may turn
to stealing resources from their employer to solve the problem. The un-
shareable financial problem could consist of large amounts of personal debt, a
failing business, some form of addiction (gambling, alcohol, or drugs), an
extramarital affair, illness of the individual or a family member, or simply
wanting to maintain a lifestyle that is currently beyond their means.
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## Fraudster’s Financial Pressure
1 Large Amounts of Personal Debt
2 Owning a Failing Business
3 Addiction (gambling, alcohol, drugs)
4 Having an Affair
5 Illness of Individual or a Family Member
6 Maintaining a Lifestyle Beyond Employee’s Means
The key is that the employee does not feel that they can share this problem
with anyone. They decide to solve it by stealing from their employer if they
perceive there is an opportunity to get away with the fraud.
Perceived Opportunity. The second leg of the Fraud Triangle is perceived

opportunity. The presence of an un-shareable financial problem is not enough
for an employee to commit fraud. The employee must also believe that there is
an opportunity to not only commit but also get away with it. The employee
must be in a position of trust and have the technical skill to manipulate or
circumvent internal controls in place to commit the fraud. The employee may
have knowledge of other employees getting away with a similar fraud or may
believe that internal controls and management oversight are weak in the area
they are thinking of exploiting.
## Fraudster’s Perceived Opportunity
1 They are in a Position of Trust
2 Have Knowledge to Commit Fraudulent Acts
3 Have Technical Skill to Circumvent Internal Controls
4 Believe that Internal Controls are Weak
5 Believe that Management Oversight is Lacking
In addition to perceiving an opportunity to commit the fraud, and an un-

shareable financial need, the employee must somehow rationalize their
fraudulent behavior.
Rationalization. The third and final leg of the Fraud Triangle is rationalization.
This is the employee talking themselves into committing the fraud. The most
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common rationalization fraudsters utilize is that they are just borrowing the
money. They fully intend to pay it back, at least at the initiation of the fraud.
Many keep detailed records of their borrowing. Other fraudsters believe that
they are actually owed the money they steal. They may have been passed over
for promotion, work a lot of overtime, or they haven’t gotten a raise in a couple
of years. Still others claim that the upper management of their organization are
crooked and stealing so they might as well get paid as well. They may also see
their fraud as punishing the unjust organization.
## Fraudster’s Rationalization
1 Only Borrowing the Money
2 They were Passed Over for Promotion
3 They Work Overtime without Being Paid
4 Have not Received a Raise
5 Upper Management Steals Money, Why Shouldn’t they
6 A Way to Punish Upper Management and the

Organization
Fraud Triangle Summary. While Cressey’s Fraud Triangle provides a good

framework for understanding fraud in a general context, it does not explain
every case of occupational fraud. In some cases, an individual may not have an
un-shareable financial problem or a rationalization; they may just be thrill
seekers that like to try to beat the system. Although this model may not account
for all cases of fraud, it does give us a starting point to explore the
characteristics and red flags of those that commit fraud.
Who Commits Fraud?

Position. The Association of Certified Fraud Examiner’s (ACFE) Report to the
Nations on Occupational Fraud and Abuse helps paint a very generalized
picture of who commits fraud. Fraud can be and is committed at all levels of an
organization. Employees, managers, and executives all partake in various fraud
schemes. However, the median loss of a fraud scheme increases as the status or
position of an employee increases in the organization. In 2016, the median loss
of a fraud was $65,000 for an employee compared to $173,000 for a manager
and $703,000 for an executive. This is probably accounted for by the manager’s
ability to have greater ability to circumvent internal controls and just more
access to an organization’s money and other assets.
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Gender. While fraud does occur at all levels of an organization, there are some
characteristics that seem to be prevalent in the commission of fraud. One
characteristic is gender. Men tend to commit fraud at an almost two to one
ratio to women. In 2016, men committed 69% of the fraud compared to only
31% for women. The median loss for the loss to an organization by a male fraud
is almost twice as much as one committed by a woman. In 2016 the median loss
for a male fraud was $187,000 and for a female was only $100,000.
Tenure. The tenure of an employee also plays a role in the frequency and
amount of the fraud. Almost one half of the fraud committed in 2016 was done
by employees that worked for an organization between one to five years.
However, the highest median loss to an organization was due to fraud
committed by employees with more than ten years of tenure.
Age. Age is another factor in the commission of fraud. The peak years for
frequency of frauds committed are from the ages of 36-45. In 2016 over 39% of
all reported fraud was committed by this age group. However, the highest
median loss to the organization was due for frauds committed employees over
sixty years of age ($630,000).
Educational Level. A final characteristic of a fraudster is their educational level.

The more educated an employee is the higher the median loss the organization
suffers. In 2016, the median loss for a fraud committed by a high school
graduate was $90,000 compared $300,000 if it was committed by an employee
with a postgraduate degree.
Looking at the statistics from the ACFE Report on who commits fraud, can we
create a profile of potential fraudsters? Can you just look at educated, male
employees that are over the age of 60 and simply target those individuals?
Probably not, because the ACFE study is just a generalized composite gathered
from those cases that members reported. In reality, fraud can be and is
committed by employees from all walks of lives. A better strategy is to
understand and look for the red flags of fraudulent behavior.
What are the Red Flags of Fraud?

Employee Red Flags. Rather than singling out employees based on gender,
tenure, and educational level, it is more-realistic and fair to focus on employee
behavior. Employees that are committing fraud may exhibit certain behaviors
that are known as red flags of fraud. Many of the red flags of fraud are related
to the un-shareable financial problem of the fraud triangle.
These red flags include high levels of personal debt. An employee may be going
through difficult financial times. Not all employees experiencing tough financial
times will turn to committing fraud, it just may make them more susceptible.
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Related to high levels of personal debt is living beyond ones means. An
employee that drives a car, or lives a house, or takes vacations that seem well
above their current financial status in the organization is a red flag. There may
be a reasonable explanation such as an inheritance or winning a lottery.
A third red flag is some form of addiction. If an employee becomes addicted to

gambling, alcohol, or drugs they may drain all of their savings and be in need of
extra finances to fund this addiction.
Another red flag could be an employee that is having an affair. That employee is
already a trust violator (marriage) and may need extra funds to maintain his or
her secret dating life.
Finally, the employee may just have a wheeler-dealer attitude. Like an

adrenaline junkie, this type of employee feels challenged and alive when trying
to get away with stealing money from the company.
# The Red Flags of Employee Fraud
1 High Personal Debt
2 Living Beyond One’s Means
3 Gambling Addiction
4 Alcohol Addiction
5 Drug Addiction
6 Having an Affair
7 Wheeler Dealer Attitude
Organizational Red Flags. In addition to individual employees, there are

organizational red flags of fraud as well. Organizations susceptible to fraud lack
competent personnel, proper policies and procedures, and adequate
documentation of business transactions. Red flags of fraud in an organization
also include weak or missing internal controls. These weak or missing internal
controls include no background checks on employees during the hiring process
and no separation of duties in the workplace.
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# The Red Flags of Organization Fraud
1 Lack of Competent Personnel
2 Lack of Proper Policies and Procedures
3 Lack of Adequate Documentation
4 No Background Checks of Personnel
5 No Separation of Employee Duties
References and Samples Related to Commonly Used

Terms
Association of Certified Fraud Examiners. (2016). Report to the Nations
on Occupational Fraud and Abuse. Austin, TX: Author.
Wells, J. T. (2011). Principles of Fraud Examination (3rd ed.). Hoboken,

NJ: John Wiley & Sons.
Wells, J. T. (2004). Corporate Fraud Handbook: Prevention and

Detection. Hoboken, NJ: John Wiley & Sons.
Opportunities for Student Reflection and Practice

• Look up your school district’s annual operating budget.
• What is the annual revenue amount?
• What would a 5% loss to Fraud amount to?
• What could be provided with that lost 5% due to Fraud?
Summary
In this chapter we discussed the definition and the importance of fighting fraud
in our school districts. In addition, we examined the Fraud Triangle and who
commits fraud. Finally, we developed an understanding of the red flags of
fraudulent behavior that you should look out for in employees at your district.
With this basic understanding of fraud, we will now look at some common fraud
schemes prevalent in school districts.
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Chapter 2: Common
School District Frauds
✓ Common School District Fraud Schemes
✓ Campus Fraud Schemes
✓ Central Office Fraud Schemes
✓ Community Organization Frauds
Chapter 2 Overview
Losses due to fraud happen in every type of organization. School districts are
certainly no exception to this statement. According to the Association of
Certified Fraud Examiners (ACFE) statistics, the median loss for a reported case
of fraud at an education organization totaled $62,000. That is more than the
average starting salary for a first-year teacher per incident of fraud. What also
makes school district fraud so reprehensible is that the money that is being
stolen was taxpayer money earmarked to help educate our students. Each dollar
claimed by a fraudulent act is a dollar taken out of the effort to educate our
youth.
The ACFE reports the most common fraud schemes per industry. In the
education industry, three schemes are most prevalent. These schemes are billing
schemes, corruption (such as bribery), and the skimming of cash. In this chapter,
we will look at some common fraud schemes committed at our school districts.
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Common Fraud Schemes
In this chapter we will look at several common school district fraud schemes.
These schemes include frauds committed at the school campuses, the finance
and accounting department, the purchasing department, construction, and non-
school district community organizations including booster clubs and parent
teacher organizations.
## Common Areas for School District Fraud
1 District Campuses
2 Finance and Accounting Departments
3 Purchasing Department
4 Construction Department
5 Booster Club and Parent Teacher Organizations
Campus Fraud Schemes

Campus frauds come in many different shapes and sizes. A school campus is
virtually a small to mid-sized business. A large high school has a budget in the
millions of dollars and may handle hundreds of thousands of dollars in cash.
This cash comes in forms of fundraising, gate receipts, parking fines, yearbook
sales, and cafeteria purchases to only name a few. Campus personnel may also
engage in non-financial frauds such as attendance and testing fraud.
## Campus Fraud Schemes
1 Student and Campus Activity Fund
2 Gate Receipts
3 Student Attendance
4 Standardized Testing
5 Tutoring Fraud
Student and Campus Activity Funds. The first campus fraud we will look at is
student activity fund. Whether your student activity funds are centralized or
decentralized, they are an area rife for fraud. The two main areas of student
activity fund fraud are unauthorized purchases using the student activity funds
and stealing the student activity fund fundraiser proceeds.
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Sponsors are directed to only spend student activity fund money on items that
directly benefit the students. In addition, the sponsor is to get the students to
approve how their club or group’s money is to be spent. A controlling sponsor
will often times mix in personal purchases with those of the student group.
Without an annual or at least periodic review of the student activity fund
purchases, a sponsor could use student funds for his or her own personal use.
A second student activity fund fraud that is often perpetrated is the stealing of
student fundraising money. Even districts with tight internal controls on
fundraisers are not immune from sponsor fraud. In the following paragraph, you
will be given a possible fraud scenario. Please read the facts of the case and
then discuss with your neighbor. What were the reasons the sponsor could
commit the fraud? What could be done to prevent this in the future?
The Case of the Kidney Transplant
At a large school district in Central Texas, a chess club member received the
terrible news that they would need a kidney transplant and be out of school of a
considerable amount of time. To make matters worse, the student’s parents had
a very high deductible health insurance plan. The other members of chess club
and the chess club sponsor decided to take action to raise money for their
fellow chess club member. The sponsor and the group organized a BBQ plate
dinner to raise funds. The sponsor and the chess club officers solicited
donations of meats, sides, and the use of a large smoker to facilitate the
fundraiser. The plates were sold for $8 a plate and the sponsor collected the
money. At the end of the fundraiser, the sponsor took the money to the home
of the ill chess club member and presented it to the student. Unfortunately,
$1,600 was raised but the chess club sponsor only turned over $800.
Fundraisers like plate sales and car washes are difficult to track. There is no
invoice to know how many items were purchased, no ending inventory to
determine if a profit was made. It is easy for a sponsor or student to skim cash
from these types of fundraisers. In addition, often a sponsor will “lose” the
fundraising money or have it “stolen” from them. A district needs to decide
what it will do in situations such as these. The district must determine if they will
hold the sponsor responsible for the loss of the student money or not.
• Does your school district have a fundraiser policy?
• Who approved student activity fund fundraisers at your district?
• What are some basic internal controls that can protect fundraising
funds?
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Gate Receipts. Another campus area susceptible to fraud is the stealing of gate
receipts. Gate receipts are collected for a number of school district activities. At
larger school districts, this may be done at the district’s large athletic complex
that is shared by all of the high schools. However, many districts collect gate
receipts at their campuses for sub varsity events and at middle schools for their
events as well. Please read the following fraud scenario. Then discuss the
scenario with a neighbor. How was the employee able to commit this fraud?
What does your district do in this situation? What could be done in the future to
prevent such a fraud?
The Case of the Missing Gate Receipts
Gibson High School in Kaline ISD was a perennial doormat in baseball. They had
suffered twelve straight losing seasons, including two winless ones. Almost no
one ever attended their games and so they stopped charging for their games
about five years ago. But miracles do happen, and Gibson HS has two pitchers
that are division I prospects if they don’t get drafted straight of high school.
Both pitchers are undefeated with miniscule eras below 1.00. The small town of
Gibson is more than excited to have a winning baseball program and is coming
out in droves to see the team make its way to a state title.
The baseball coach saw an opportunity to raise some badly needed funds to
replace some very outdated baseball equipment and upgrade the field. The
coach bought a poster board and a sharpie and made a sign that said, “Adults
$5, Children $2”. He brought an old cigar box from home and had a couple of
his junior varsity players collect the money at each home game. The coach
would take each game’s proceeds and head off to Academy to purchase new
baseballs, new bats, and even some new cleats for a couple of his less fortunate
players. However, he also used some of the proceeds to purchase himself a new
pair of Oakley sunglasses, a couple of trips to Sonic, and a new laptop computer
for his office.
A district needs to have a policy on the collection of gate receipts. There are
several steps that can be implemented to deter cash collectors from stealing the
proceeds. One control is the use of tickets. Although this is not foolproof, it is a
basic accountability system. If ten tickets were sold and the cost of each ticket is
$5, then there should $50 in the old cigar box. A second control is to have one
person sell the ticket and another person to collect the ticket on the way into
the venue. This is common at movie theatres. You buy the ticket at the box
office, then the ticket taker takes your ticket as you enter the theatre. The cash
at the box office should match up with the number of tickets the ticket taker has
in his possession.
• Does your district have a gate receipt policy and procedure?
• How often are gate receipts deposited?
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• Who counts the gate receipts?
• What controls does your district have to safeguard gate receipts?
• Could the district keep the coach from paying the vendors in cash?
Attendance Fraud. A third type of fraud is attendance fraud. Attendance may

be inflated to increase the average daily attendance figures for a school district.
An increase in attendance equates to an increase in state funding for a school
district. If the attendance is inflated, overpayment based on the attendance, and
a possible investigation by the state could occur.
The Case of the Award-Winning Principal
Mr. Johnson was a veteran high school principal that was recently assigned to
the district’s credit recovery campus. This was quite a step down in the eyes of
Mr. Johnson. As a high school principal Mr. Johnson was very concerned in
meeting his district’s directive to attain at least a 95% attendance rate. The
credit recovery campus he took over only averaged 65-70% attendance rate on
its best days. Mr. Johnson desperately wanted to return to the limelight of being
a high school principal. He believed if he could get his current campus’
attendance rate up to the goal of 95% as his ticket back to a high school.
Mr. Johnson implemented several incentive programs to increase attendance

with little to no success. No matter what Mr. Johnson tried, he could not get
attendance rates higher than that campuses traditional level of 70%. Mr.
Johnson then devised a plan to increase attendance rates to 95%. He simply
directed the attendance clerks to never mark more than 9 students absent on
any given day. This sent his attendance rates sky rocketing. Mr. Johnson even
received a district recognition award for most improved district attendance.
• Thinking of the fraud triangle discussed in chapter one, what was Mr.
Johnson’s problem, opportunity, and rationalization to commit fraud?
• Why is it wrong that Mr. Johnson inflated his campus attendance rates?
• Why did the attendance clerks go along with this scheme?
• What could be done to prevent this kind of fraud from happening in the
future?
Standardized Testing Fraud. We all know the pressure placed on school

districts to do well on the STAAR Test. Students, teachers, and principals face all
kinds of stress and anxiety each year. For students, failing to pass the exam
could mean not graduating. For teachers and principals, failure could mean
being reassigned or even losing their jobs.
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The Case of You’re Invited to the Eraser Party
While most of the examples are fictional, this one is an actual fraud that took
place in Atlanta, Georgia. In 2009, the Atlanta-Journal Constitution reported that
over 200 educators participated in a standardized testing cheating scandal. The
cheating took the form of giving students the correct answers during the test,
pointing to the right answers, and arranging poor performing students to sit by
high performing ones so they could copy their answers. However, the most
egregious of the cheating methods implemented by the educators were the
eraser parties. After the students took the test, teachers would get together to
have eraser parties. At these parties, they would order or bring food and
refreshments. Then the teachers would erase the incorrect answers of the
students and fill in the correct blanks. Investigators indicated that the cheating
by the Atlanta educators went back at least until 2005.
During the cheating scandal, the Atlanta public schools including their
superintendent received a great deal of publicity. The superintendent was
named superintendent of the year for the United States and was a highly
sought out as a speaker for conferences.
In 2015, three high level district administrators were sentenced to seven years in
prison, thirteen years on probation, plus 2,000 hours of community service, and
a $25,000 fine.
• Why would over 200 educators participate in a district wide cheating

scandal?
• Who should be held responsible for this fraud?
• What was the harm committed by these educators?
• What, if anything, could have prevented such a scandal in the first place?
Tutoring Fraud. Related to standardized testing fraud, is tutoring fraud. When

schools fail to make AYP for several years, one of the remedial steps they must
take is to offer tutoring to their students. However, this tutoring cannot be by
the school. It must be provided by third party tutoring organizations. These
organizations can be either non or for-profit organizations. The state provides
each district with a list of authorized tutoring providers. The parents can sign up
with any of the tutoring organizations on the state list. The tutoring company
provides tutoring and then submits an invoice to the school district for
payment. The school district must set aside 25% of their title I money to pay for
this tutoring. Under these conditions a nationwide, massive tutoring scam was
perpetrated on the taxpayers of America.
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The Case of Tutoring and a Free IPad
The urban San Antonio elementary school failed to meet AYP for a third
consecutive year. The state mandated that the school offer and pay for tutoring
for their students. The non-school district tutoring providers rushed to sign up
as many of the school’s students as they could. The competition for students
was fierce. Each organization offered different levels of incentives to lure the
students to their company. The most successful companies had a person
working on the inside. The tutoring companies would hire a teacher and pay
them for each of the students that they could sign up for tutoring. Other
companies found success in offering students a tablet, iPad or other brand, for
their signature on a tutoring contract.
Everything looked fine on the surface. The school had failed to properly instruct
the students, they could not meet AYP, and now the free market was going to
have a chance to rectify the situation. However, two things happened. In many
cases no tutoring actually took place. The company would find out how many
hours they could bill per student for tutoring, fill out the invoice, and then
submit it for payment. No tutoring ever took place. To add insult to injury, many
of the students never received their incentive tablets. This scam costed
taxpayers tens of millions of dollars nationwide.
• How could a fraud like this happen on a nationwide scale?
• What internal controls were in place to prevent a fraud like this?
• How can a fraud like this be prevented in the future?
In addition to campus frauds, several fraud schemes can take place at the
central office.
Central Office Fraud Schemes

Fraud schemes are not solely contained to district campuses. Many elaborate,
high dollar frauds can be conducted from the confines of central office. In this
section, we will examine common fraud schemes that can take place in payroll,
accounts payable, travel reimbursement, purchasing, construction, and
community organizations.
19
## Some Common Central Office Fraud Schemes
1 Ghost Employees on the Payroll
2 Fictitious Accounts Payable Companies
3 Double Dipping on Travel Reimbursement
4 Personal Purchase Card Purchases
5 Bid Rigging in Purchasing Contracts
6 Construction Frauds
Payroll Fraud. The most common payroll fraud is that of creating ghost
employees. Ghost employees are fictional employees that are made up by a
payroll employee. The ghost employee is entered into the payroll system just
like a regular living employee. The ghost employee is given fictional
demographic information. The payroll employee could just then pocket the
ghost employee’s check once it is issued. However, if it is a direct deposit
situation, the payroll employee may give the ghost employee their own bank
account number and just have the paycheck directly deposited into their own
account.
The Case of the Friendly Ghost Employee
According to information presented in court, from July 2009 through June,

2012, Daryl, who was employed as the warehouse supervisor for the school
district, placed first his wife, Erin and then a friend, Kailyn Pete, on the ISD
payroll as temporary employees. However, neither Erin nor Kailyn ever actually
worked as a warehouse employee. Daryl had the autonomy to hire temporary
warehouse employees on his own, and the authority to determine how many
hours they would be paid; and could do so unilaterally and without the
authorization or direct knowledge of anyone else. Daryl used this authority to
fraudulently verify that both Erin and Kailyn worked the hours indicated on their
respective timesheets, which included extensive amounts of overtime when he
knew that they in fact had not worked any of the hours. From July 2009 through
May 2011, Erin was paid $193,998.37. During the timeframe of June 2010
through May 2012, Kailyn was paid $90,041.05.
Daryl plead guilty to conspiracy and was sentenced to 33 months in federal

prison today by U.S. District Judge. Erin, and Kailyn each plead guilty on Dec. 4,
2014 to fraud upon programs receiving federal funds. They were both
sentenced to five years’ probation today by the Judge. Daryl was ordered to pay
$284,039.42 in restitution. He is jointly and severally liable with Erin for
$193,998.37, and jointly and severally liable with Kailyn for $90,041.05.
20
• What are some of the main issues with this Case?
• How was Daryl able to commit this fraud?
• What could be done to prevent this from happening in the future?
Accounts Payable Fraud. One common accounts payable fraud is similar to

creating a ghost employee. However, in this case a fictional company is created.
In this scenario, an accounts payable employee creates a fictional company that
they or someone they are scheming with control. This fictional company then
bills the school district for services (consulting companies are often used to
commit this type of fraud). The fraudster working in accounts payable
authorizes payment of the invoice to the fictional company. Often the address
of the fictional company will be a post office box to add another layer of
anonymity for the fraudster.
Travel Reimbursement Fraud. Some common purchase card frauds include

double dipping for travel reimbursement. A district employee may book his or
her travel using a district purchase card. Then when the trip is finished, turn in
receipts through the travel reimbursement system. Another fraud is using the
purchase card for personal purchases.
Purchasing Card Fraud. Purchase cards burst onto the scene over a decade
ago. The goal was to make the purchasing process more efficient and effective.
In addition, some purchasing card programs offered a cash back incentive
program for using the card. Today, purchase cards are used for everything from
purchasing office supplies to district travel. Because of the volume of purchase
card purchases, a district employee may be able to utilize the card for personal
purchases. Finally, controls that require proper authorization of purchase card
purchases needs to be activated.
Purchasing and Procurement Fraud. Several fraud schemes can originate in

the purchasing and procurement department. Once scheme is bid rigging. Bid
rigging can be conducted by two or three vendors colluding to share the bids
that come out of the school district. If it is three vendors, two will bid high on a
contract and the third will bid a little lower than the other two. This ensures that
vendor the contract. When the next contract is up for bid, another of the
colluding vendors gets to make the winning bid and the other two bid high.
This drives up the cost for a district because there is the elimination of true
competition.
Another way to rig the bidding process is to have a district employee collude
with a vendor. In this scenario the vendor will provide a kick back or other
incentives to the district employee. In return, the district employee will tip off
the vendor as to what they need to bid to be the winning vendor. This is a
classic case of bribery and corruption. This kind of fraud scheme significantly
affects the district because the higher costs may result in inferior products
21
being substituted for contracted ones. This is one way that the vendor can
afford to make the bribery payoff. Both of these two bid rigging schemes are
also common in the area of school district construction.
Construction Fraud. Texas school districts spend billions of dollars every year
on construction projects. This is an area that is wide open to large scale fraud.
Fraud in construction can come in many forms. One form is that of bribery. A
construction contractor or architect firm could approach a board member,
superintendent, or construction director with a bribe to influence the selection
process. Another fraud is product substitution. A contractor may substitute
inferior and cheaper products than called for in the contract at a construction
site. Finally, a contractor may simply overcharge for goods and services at a
construction site.
Community Organization Fraud Schemes

This may be the most difficult fraud for a district to handle. Community
organizations, such as booster clubs and parent/teacher organizations, are their
own separate entities. In fact, many of them are 501 (c) (3) organizations. They
are not under direct control of the school district, but their actions reflect
directly on the district. What helps muddy the waters is when school district
employees not only belong to these community organizations, however are also
serving in leadership positions.
The Case of the Creative Band Director
Mr. Flute was an award- winning band director at a local middle school. He
brought a lot of kids into the program and a lot of positive press to the district.
Mr. Flute also encouraged and helped grow the band booster club for his
campus. Everything was looking great for Mr. Flute and his successful band
program.
The next year, Mr. Flute was promoted to be the band director at a district high
school. Mr. Flute said his goodbyes to his middle school program and went
about the business of transforming his new high school one. About a month
into the new school year, a disgruntled high school band booster parent
contacted internal audit about the behavior of the new high school band
director. The angry parent claimed that Mr. Flute had her voted out as the band
booster president because she would not agree to his demands. One of the
demands was that Mr. Flute be added as a signer to the band booster bank
account and be given a debit card.
Internal audit investigated Mr. Flute’s actions as the band director at both his
new high school and previous middle school. The investigation showed that Mr.
Flute was a signer on his previous middle school band booster bank account
and also had a debit card. Further investigation unearthed that Mr. Flute was
running his middle school band program solely through the booster club bank
22
account. There were no transactions at all in his district band account. In
addition, Mr. Flute was now attempting to implement this same set up at the
high school.
• Why would Mr. Flute want to run his band program through a booster
club account instead of his district band account?
• Is it OK for Mr. Flute to be a signer on the booster club bank account?
• Is it OK for Mr. Flute to have a debit card?
• What should the district do in this situation?
• What kind of controls could be put in place to deter this from

happening in the future?

Terms
• Federal Programs Fraud:
http://www.mysanantonio.com/news/education/article/Two-top-SAISD-
officials-resign-2212324.php
• Tutoring Fraud: https://www.fbi.gov/contact-us/field-
offices/dallas/press-releases/former-tutoring-company-owners-admit-
defrauding-dallas-and-fort-worth-independent-school-districts
• Standardized Testing Fraud:
http://www.npr.org/2013/04/10/176784631/el-paso-schools-cheating-
scandal-probes-officials-accountability
• Money Laundering and Kick Back Fraud:
http://www.kansas.com/news/local/crime/article84035582.html

• Do a google search on school district fraud. What kinds of frauds show
up in the search?
• Do a google search on your school district and fraud. Did anything turn
up in the search?
• Did you already know about this fraud?
• What were the consequences of this fraud?
23
Summary
This chapter looked at some common areas of school district fraud. Common
areas for school district fraud include: campuses, the finance and accounting
department, the purchasing department, construction, and non-school district
community organizations including booster clubs and parent teacher
organizations. The chapter also reviewed several case studies of these types of
frauds. These examples are just a small list of the possible frauds that can take
place at a school district. In the next three chapter, we will look at ways a district
can detect, prevent, and deter these types of frauds.
24
Chapter 3: Fraud
Detection
✓ The Fraud Hotline
✓ Internal Audit
✓ External Auditors
✓ Data Analytics (Analysis)
Chapter 3 Overview
The previous chapter examined common school district fraud schemes. From
the examples in chapter two, it is clear that fraud can occur almost anywhere in
your school district. In chapter one, we saw that the Association of Certified
Fraud Examiners (ACFE) claims that those fraud schemes account for a 5% loss
of a school district’s revenue.
In this chapter, we will focus on four methods of detecting fraud. These four
methods to detect fraud include monitoring a fraud hotline, employing an
internal audit staff, utilizing your external auditors, and implementing data
analytics.
25
Fraud Detection Methods
Because of this loss due to fraud, it is imperative that a school district explore
strategies to detect any ongoing fraud. It is vital to detect and stop ongoing
frauds in a timely manner. According the ACFE the median loss of the fraud
increases dramatically the longer it takes to detect it.
In this chapter, we will focus on four methods of detecting fraud. These four
methods to detect fraud include monitoring a fraud hotline, employing an
internal audit staff, utilizing your external auditors, and implementing data
analytics.
## Fraud Detection Methods
1 Fraud Hotline
2 Internal Audit
3 External Audit
4 Data Analytics (Analysis)
26
The Fraud Hotline
A fraud hotline is an anonymous reporting system. This system is available to
employees, vendors, community members, and even students to report
incidences of fraud. The ACFE reported that hotline tips were the most common
detection method. In 2016, hotline tips accounted for 39% of all initial
detections of fraud cases. This is more than twice the next most common
detection method of internal audit.
It is clear from the above figure that establishing and monitoring a school
district fraud hotline is vital to detecting fraud in a timely manner. Once it is
established the fraud hotline can be utilized by a variety of district stakeholders
to report alleged fraud.
Who Reports? The Fraud Hotline should be available to all of the school district
stakeholders. The most important group are school district employees. It is
impossible for the internal auditors or upper management to know what is
happening in each workstation in the school district. However, an educated
workforce on what to report as fraud and how to report it, is a powerful fraud
fighting tool. The employees are the eyes and ears of a district wide fraud
27
detection program. They see what is going on in their campus or department
and know when someone may be acting in a suspicious manner. A large district
of 5,000 employees potentially has 10,000 sets of eyes looking out for red flags
of fraud and reporting them to the hotline.
In addition to employees, the hotline should be available to district vendors,

community members, and even students. Vendors might be aware of bid
rigging or other purchasing schemes. Maybe a district purchasing official
offered them a bribe. They could use the hotline to make an anonymous tip.
Parents and community members might be aware of a booster club or parent
teacher organization committing a fraud. The fraud hotline should be available
to them. Finally, students may be aware of a sponsor stealing student activity
funds. The student may want to call in this tip anonymously via the hotline to
avoid having to confront the sponsor.
How to Report. A fraud hotline should have several different tools to

communicate with the tipster. These communication tools include a dedicated
fraud hotline number. This phone number should only be utilized for fraud
reporting. If possible, to ensure anonymity, the phone number should have
caller ID disabled. A second reporting tool is an Internet based reporting tool.
This can be simply a fraud hotline email or an online form that the tipster can fill
out and send. Other tools are less technically savvy. These non-technology-
based reporting tools include an address such as a P.O. Box to send hotline tips.
A fax machine or even an answering machine are two more low technology
reporting tool examples.
28
Who Monitors the Hotline? The fraud hotline can be monitored in house or by
a third party. Many times, the hotline is monitored by the Internal Audit
Department. One advantage of internal monitoring is cost saving. The district
does not have to contract with an outside vendor to monitor the hotline.
Another advantage is time. The tips come directly to the district and can be
acted upon immediately. There are also some advantages to external
monitoring. One is an outside, objective party is monitoring the hotline. The
tipster may feel more comfortable informing someone outside the organization
about a possible fraud. In addition, the outside monitoring provides another
level of accountability to ensure that all hotline tips are addressed.
Marketing the Hotline. Whether you monitor the fraud hotline internally or
externally, the key is to let people know you have it and how to use it. One way
to market the hotline is to introduce new employees to the hotline during their
orientation. This does not have to be an all-day seminar on what fraud is and
how to detect it. Instead, new employees should be told that they have a
fiduciary responsibility to the district, students, and taxpayers to safeguard the
limited assets of the district. Let them know if they think something is wrong or
if someone is doing something fraudulent it is their duty to report it. Then show
the new employees the several different tools at their disposal to report
possible fraudulent activity. It is important to include a card or short handout
with the hotline information as a reminder of what they learned.
Besides new employees, existing employees need training and reminders

regarding the fraud hotline. The internal audit or accounting department could
provide annual training via a short video or even an online lesson. It does not
have to be a long training, just enough to remind them of their responsibility to
report and how to report fraudulent activity.
29
Finally, stakeholders outside the organization need to know about the fraud
hotline. These stakeholders include vendors and their competitors and other
community members. A great place to put information regarding the district’s
hotline reporting system is on the district web page. The best place to display
this information is a prominent link on the home page. Additional links could be
placed on the accounting, purchasing, and construction areas of the web site.
These links should take a stakeholder to information about what and how to
report fraudulent activities.
Whistleblower Protection. School district policy should protect the

confidentiality of the tipster. The district should also take steps to ensure there
is no retaliation against a tipster or whistleblower. These two protections help
ensure that employees feel comfortable calling in a tip without fearing for how
they will be treated at work.
Your district may have board policy, such as DG (LEGAL), that states,
“A board or its agents shall not suspend or terminate the employment of,
or take other adverse personnel action against, an employee who in good
faith reports a violation of law by a district or another public employee to
an appropriate law enforcement authority… A supervisor who suspends or
terminates the employment or takes an adverse personnel action against an
employee for reporting a violation of law shall be subject to civil penalties.
Gov’t Code 554.008”
Hotline Summary. Fraud hotlines are the number one way of detecting initial
frauds. Employees and stakeholders need to feel safe to report possible
fraudulent activity. The district needs to do their best to keep whistleblowers
anonymous whether the hotline is monitored internally or externally. Also, it is
important to market the hotline so stakeholders know how and what to report.
Internal Audit
Another important fraud detection tool is the Internal Audit Department.
Although not all districts have an internal audit function, many larger school
districts employ an internal audit staff. An internal auditor is an employee of the
district. However, thanks in part to House Bill 1 (2006), the internal audit
function reports directly to the school board or to an audit committee. This bill
was passed to help ensure that the internal auditors keep their objectivity and
independence. In addition, if a school district monitors its fraud hotline in-
house, often the internal audit staff maintains the hotline.
Internal Auditing Definition. The Institute of Internal Auditors (IIA) provides a

definition of Internal Auditing. Their definition of Internal Auditing states the
fundamental purpose, nature, and scope of internal auditing.
30
“Internal auditing is an independent, objective assurance and
consulting activity designed to add value and improve an organization's
operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control, and governance
processes.”
However, to accomplish their mission, district leadership must give the internal
audit department the authority to have access to the department and campus
information needed. The internal audit charter should spell out this authority.
An example of this charter language is:
“The Internal Auditor is authorized to direct a broad comprehensive

program of internal auditing within the District. Internal auditing
examines and evaluates the adequacy and effectiveness of the systems of
management control provided by the District to direct its activities
toward plans and procedures. In accomplishing these objectives, the
Internal Auditor is authorized to have full, free and unrestricted access to
all District functions, records, property, and personnel.” North East ISD
Internal Audit Charter
Role of the Internal Auditor. The internal audit function is to help safeguard a
school district’s assets. These assets tend to be financial in nature. However,
these assets can also include a school district’s reputation and goodwill. One
role of the internal audit staff is to perform an annual district wide risk
assessment. This risk assessment helps the audit staff to determine where in the
district they will focus their attention.
The risk assessment is done by determining which areas of the school district
operations are susceptible to fraud, waste, or abuse. Factors that the audit staff
reviews when determining the risk assessment of a department or campus are
budget, number of employees, previous fraud, date of last audit, strength of
internal controls, change in key management and interviews with key district
personnel. Once the key areas of a district are assessed, they are ranked based
on the outcome of the risk assessment. Those areas that are deemed the riskiest
are usually chosen to be added to the annual audit plan.
Developing and implementing the audit plan is another role internal audit. After
the risk assessment is complete, the audit staff develops and then conducts the
scheduled audits. There are three main types of internal audits. They are
compliance, performance, and financial audits. Internal auditors mainly perform
compliance and performance audits, financial audits are usually the
responsibility of the external auditors.
Internal Auditors as Fraud Detectors. Some areas of possible fraud are

identified in the risk assessment process. These areas should be included in the
audit plan. Other areas are unearthed during the performance of scheduled
audits. In addition to the risk assessment and unearthing fraud conducting
31
planned audits, an auditor has three other tools in their fraud detection tool
belt. These tools are surprise audits, petty cash counts, and inventories
Surprise audits are an effective tool in detecting fraudulent activity. The key
factor in surprise audits is the surprise. Without the element of surprise, the
fraudster has enough warning to change his or her behavior and try to cover
their tracks. Surprise audits can be used at a function or individual level.
Examples would be a surprise audit of payroll or of a cheerleading sponsor. For
surprise audits to be effective, the internal audit department must have the
support of upper management. Executive directors and principals may not be
willing to allow the surprise audit to take place unless the superintendent and
school board have given their support for this activity.
Petty cash counts are similar to surprise audits. They are done without warning
the organization with the petty cash account. The internal auditor shows up,
counts the cash on hand and sees if it matches their records. Some items to
look for are lack of receipts and personal checks being written for cash.
The final fraud detection tool is conducting inventories. Areas where inventories
could be conducted include: food service, general warehouse, district
electronics, textbooks, fixed assets, and transportation. Inventories can be either
surprise inventories or regularly scheduled inventories. Inventories can indicate
whether the district or individual departments are safeguarding district assets.
Inventories can also indicate if employees are stealing district goods or if
vendors are substituting inferior goods for contracted ones.
Internal Audit Summary. While not all districts employ an internal audit
department, many of the tools of the internal auditor has at his or her disposal
can be implemented by any district. A district an assign surprise audits, petty
cash counts, and inventories to other district personnel. In addition, a non-
internal audit district can contract with an external audit firm or bring in a
consultant to perform those duties.
External Auditors
All districts contract with an external audit firm. The external auditor’s main
function is to certify the financial statements of the school district. Detecting
fraud is a secondary function of an external audit. Because of SAS 99, external
auditors must brainstorm about fraud during the planning stages of the school
district audit. They are not part of the district, so they may reach out to key
stakeholders in the school district to help them plan for fraud. One method of
outreach is via a questionnaire.
The American Institute of Certified Public Accountants (AICPA) developed

Statements on Auditing Standards, they are called AU. The AUs provide
guidance for auditors and accountants in conducting audits. AU Section 316
32
address the role external auditors play in detecting fraud in a financial
statements audit. AU Section States:
"The auditor has a responsibility to plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement, whether caused by error or fraud.”
Many external auditors will send out a fraud questionnaire. This fraud
questionnaire will be sent to key personnel in the school district. The
questionnaire asks those stakeholders if they know of any instances of fraud in
the school district. The questionnaires are filled out by the stakeholders and
sent to the external auditors. They external auditors examine the responses and
then contact any stakeholders that answered that they had knowledge of fraud
in the school district.
A second step the external auditors take in planning for fraud is to contact the
internal auditors. The external auditor firm requests a sample of all of the
reports the internal audit staff issued. They also ask for any knowledge of fraud.
The external auditors ask for the internal audit reports to see if there is any
known fraud and to determine which areas have already been examined by the
internal auditors. If an area has been audited already by the internal audit staff,
the external auditors may decide not to examine it.
The questionnaire and the internal audit report review make up the bulk of the
external audit foray into detecting fraud. Every once in a while, the external
auditors will discover fraud during the conduct of their external audit plan.
However, sometimes during their audit, a district employee may feel more
comfortable reporting a fraud to the external auditor than to the internal audit
staff. The external auditors are not district employees and the tipster may have
less fear or being harassed for reporting.
Data Analytics (Analysis)

When it comes to detecting fraud the three previous methods of detection,
fraud hotline, internal and external auditors, can be rather expensive. However,
data analytics is a cost-effective method of fraud detection.
The Institute of Internal Auditors (IIA) defines data analytics, in their Global
Technology Audit Guide (GTAG) 13 as:
“Data analysis technology enables auditors and other fraud examiners to

analyze transactional data to obtain insights into the operating
effectiveness of internal controls and to identify indicators of fraud risk or
actual fraudulent activities.”
Data analytics is the examination of typical school district financial data. The
examination looks at data trends and then tries to spot anomalies. A simple
example would be a department’s budget. A department spends on average
33
$10,000 annually for training over the last five years. However, this year that
same department spends $20,000 on training. A district representative or
internal auditor may want to follow up on that doubling of travel expenditure.
This is just a very basic example.
Data Analytic Tools. There are several software tools that a district can utilize
to conduct data analytics. One of the most common, and effective, is a basic
spreadsheet program. Microsoft Excel is a powerful tool for doing basic data
analytics. It can handle a lot of data and has tools to help you sort and
manipulate that data.
Microsoft Access is the database counterpart to Excel. Access can also handle a
great deal of data such as financial transactions. With a basic knowledge of
linking tables and writing queries, Access is a great tool to generate reports and
link data from different data sources.
A step up from the Microsoft products are IDEA and ACL. These are two similar
data analytic products. These two software products allow you to run more
sophisticated queries and analysis. They will also create reports of anomalies in
the data and show trend patterns over time. Two disadvantages are the learning
curve and price. Both programs can be a little difficult at first to master. In
addition, both come with an initial and annual licensing fees.
These are all great data analytics tools to have at your disposal. All four of these
tools, Excel, Access, ACL, and Idea, can be applied in any area of the district to
attempt to detect fraud. The following are areas in which data analysis can be
effectively implemented to detect possible fraudulent activity.
Example: Payroll. One possible fraud scheme that can affect payroll is the
creation of ghost employees. A ghost employee is a fictional employee that is
created by a payroll or human resources employee. The ghost employee’s salary
and bank account information are entered into the system. Then the fraudulent
district employee actually collects the ghost employee’s salary. Data analytics
can be utilized to detect these ghost employees.
This is a simple data analysis. It is simply getting a list of all payroll employees,
then looking for matching bank account numbers. This may indicate that a
payroll employee has set up the ghost employee have their same bank account
information so they can access their direct deposit. However, this analysis may
create some false positives. Married employees may share the same bank
account.
Another way to use data analytics to look for ghost employees is to review their
payroll deductions. Most ghost employees will not have any payroll deductions.
They are fictional employees so they do not need medical or dental insurance.
Neither do they enroll in a 403B or 401K. A simple test is to have the system list
all employees with no payroll deductions. Finance or internal audit personnel
should then follow up on those employees to see if they are actual employees.
34
Example: Accounts Payable. Another common area to apply data analytics is
in accounts payable. It is possible for an accounts payable manager or clerk to
set up a fictional vendor. This scheme is similar to the payroll ghost employee
scheme. In the accounts payable scheme, an employee sets up a vendor, very
often as a consultant vendor, into the vendor master list. Once this fictional
vendor is set up, the accounts payable employee sends in fraudulent invoices
from the fictional company. The employee then authorizes payment on this
fictional vendor. The district pays for fraudulent invoice, a check is sent out
(often to a PO Box), and the accounts payable employee cashes the check.
There are several data analytical techniques that can be used in this scenario.
The first technique is to do an analysis of the master vendor list. This review
should include a check for duplicate or similar vendor names. Maybe the
accounts payable employee selected a name similar to an existing vendor so no
one would question payment of that vendor. In addition, you can check for
vendor addresses that match employee addresses. This would show a list of
employees that may be doing business, either legitimately or not, with the
district. This would be a list that the district would investigate.
There are several other data analytics that can be employed in the accounts
payable department. One is to look for purchases right under the purchasing
threshold and duplicate purchases on consecutive days. These purchases might
be split purchases used to get around district daily purchasing limits. You may
also want to look at purchases late at night or on weekends. These are
purchases after the workday is over and may be personal in nature. Finally,
purchases in round dollar amounts can be examined. Purchases of exactly $50,
$100, $1,000 could be an indication of the purchase of gift cards.
The thing to remember with data analytics is that it is not proof of fraud. It is
instead an indication that there is a potential there for fraud. It is the
responsibility of the district to follow up on these possible indicators of fraud.
Other Example of Data Analytic Techniques. The list on the following page is
a list of common fraud analytic techniques from the IIA GTAG 13.
35
Terms
• Association of Certified Fraud Examiners. (2016). Report to the Nations on
Occupational Fraud and Abuse. Austin, TX: Author.
• Coderre, D. (2009). Computer-Aided Fraud: Prevention & Detection.

Hoboken, NJ: John Wiley & Sons.
• Institute of Internal Auditors. (2011). Global Technology Audit Guide 16:

Data Analysis Technologies. Altamonte Springs, FL: Author.
• Institute of Internal Auditors. (2009). Global Technology Audit Guide 13:

Fraud Prevention and Detection in an Automated World. Altamonte
Springs, FL: Author.
36
• Search your district’s web site for information about a fraud hotline.
• Does your district have one?
• Who monitors the fraud hotline?
• How is it marketed to employees and community members?

Summary
This chapter examined ways a school district can detect fraud that is occurring
at their organization. The four methods discussed were fraud hotlines, internal
audit, external audit, and data analytics. Fraud hotlines are the most effective
method in detecting fraud. Auditors, both internal and external, also play a role
in detection. Internal auditors are tasked specifically to help safeguard the
assets of a school district, including detecting fraud. While external auditors are
not specifically tasked with detecting fraud, they do take fraud into
consideration when planning their annual district audit. Finally, data analytics is
a cost-effective method to detect fraud. Through careful examination of
financial trends and outliers, a district can design reports to help detect possible
fraudulent transactions.
It is important to identifying existing frauds that have cost the district a lot of
money. However, in the next chapter, we will examine fraud prevention. Fraud
prevention’s goal is to keep fraudsters and their fraudulent activities from
getting into your district.
37
Chapter 4: Fraud
Prevention
✓ Fraud Prevention Definition
✓ The Hiring Process
✓ Internal Controls
Chapter 4 Overview
In Chapter 3 we discussed detecting an ongoing fraud. Detection is a necessary
tool, but also an expensive one. Detection only roots out ongoing frauds that
have cost the district large sums of money. A more cost-effective approach to
fighting school district fraud is preventing the fraud in the first place.
38
Fraud Prevention Definition
Fraud prevention is the process of trying to keep fraud from ever entering your
school district. There are two main ways to prevent fraud. One is to keep
possible fraudsters from ever being hired into your organization. This involves
reviewing and possibly updating your hiring process. The other way is to
implement strong internal controls.
The Hiring Process

The first line of defense in preventing fraud in a school district starts during the
hiring process. A school district’s human resources department should
implement policies and procedures that will help identify potential red flags of
frauds in applicants. The crucial steps that a school district human resources
department can take are doing due diligence on all applicants.
## Hiring Process Fraud Prevention
1 Criminal Background Checks
2 Reference Checks
3 Credit Checks
4 Drug Testing
Criminal Background Checks. Pre-employment background checks are an

important piece to the fraud prevention puzzle. The fact that a district has a
background check as a term of employment may discourage potential
fraudsters from even applying. Others that are not deterred, and have
committed fraudulent offenses in the past, should be flagged and removed
from the applicant pool.
Background checks can be performed by the school district’s human resources

department or conducted by an outside agency. Some positions, like teacher,
require an extensive background check including fingerprinting.
Your school district should have board policy that dictated the procedure for
obtaining criminal background checks. DBAA (LOCAL) is one board policy that
addresses this issue:
“The District shall obtain criminal history record information on final

candidates for employment. All district employees have the potential for
contact with students. The district shall disqualify from employment a
person whose criminal history indicates that the person poses a threat
to students or employees” DBAA (LOCAL)
39
However, background checks will only pick up on the past crimes or frauds a
potential employee has committed. In addition to a criminal background check,
school districts need to conduct pre-employment reference checks.
Reference Checks. In today’s work environment, reference checks are a tricky

item. Many employers are reluctant to give either a good or bad reference on a
past employee. If they give a good reference and the employee commits bad
acts the new employer can they be held responsible? But if they give a bad
reference and the employee doesn’t get hired can they be sued? Some
organizations will only verify dates of employment and maybe let you know if
the past employee is eligible for rehire. Therefore, in some cases, reference
checks can be an ineffective way to gain valuable insight on an applicant.
However, reference checks like the background check, may prevent seasoned
fraudsters from applying. Also, simply calling a reference on a potential
applicant may give you a feel, even if they do not come right out and say
anything directly negative. Regardless, it is good due diligence to make that call.
The Case of Annie Get Your Wig
A large school district’s IT department’s director needed a new administrative

assistant. The department went through the human resources department to
post the position and select a group to interview. The director conducted the
interviews and decided to hire Annie. Annie had a long work history, over ten
years at the Texas Department of Corrections. She knew Word and Excel and
seemed a fit personality wise. The director offered Annie the position without
contacting her previous supervisor.
Everything was going well until the Federal Marshalls showed up one day
looking for Annie. It was alleged that Annie stole over $150,000 from the Texas
Department of Corrections. She used her previous supervisor’s purchasing card
to buy a new transmission for her dad’s truck, a gazebo for her backyard,
dozens of wigs (yes wigs), and many other items given as gifts to her friends
and family. She was arrested that day, handcuffed, and never seen again at the
school district.
Internal Audit investigated her activities during her employment with the
district. Annie was forging the director’s signature to create purchase orders for
electronic devices, such as iPods and tablets. She would order them, sign for
them, and then put them in her purse and take them home.
She would also order excess office supplies from a specific vendor. That office
supplies vendor offered gifts as incentives to order certain products. She would
order an excess of items like batteries and legal pads to receive and keep gifts
such as movies, tool kits, and tins of popcorn. Fortunately, she did not come
close to the $150,000 she stole from her previous employer; she was only into
the district for $5,000.
40
• How was it possible for Annie to get into the school district?
• What should the school district do to ensure this does not happen
again?
• Does checking references guarantee you will not hire a fraudster?
• How could the district prevent another Annie from committing these
frauds?
Credit Checks. In addition to conducting criminal background and reference

checks, a school district may want to conduct credit checks on potential
employees. A district may not want to conduct credit checks on all employees.
They may want to only do so on those that are in a position to handle money or
make financial decisions. Credit checks are the same as those that you get when
you attempting to get a mortgage or finance a car. These credit checks look at
your personal financial history. It has all that you owe in terms of credit cards,
mortgages, student loans, and other debt. The credit reporting agencies look at
all this information and then issue a FICO score. The higher the score the more
credit worthy an individual is. A low score indicates either current or past
financial issues.
Board policy DBAA (LOCAL) also gives a district guidance on whom to conduct a
credit check. DBAA (LOCAL) states:
“The district shall obtain credit history information on a candidate for

employment only when the credit history is related to the position for
which the person in being considered. The district shall comply with the
Fair Credit Reporting Act before obtaining job related credit history.”
DBAA (LOCAL)
It needs to be emphasized that a low credit score does not mean that someone
is a fraudster and should not be hired. Instead, it is an indicator that a potential
employee may currently be in financial distress. Also, we learned from chapter
one that of the legs of the fraud triangle is an employee with an un-shareable
financial problem. While a low credit score does not mean they will commit
fraud, it does indicate that they might be more susceptible to commit fraud.
This is just one factor that should be used in the hiring process.
The Case of Driving Mr. Daisy
A large Texas school district hired a search firm to conduct a nationwide hunt to
hire a new superintendent. After spending months and tens of thousands of
taxpayer dollars on the search, the board named the finalist. However, in Texas
there is a 21-day waiting period before the finalist can become the
superintendent.
41
During this 21-day waiting period, the local press did some research on the
finalist for a news story. What they found was troubling. The finalist had nine
unpaid tickets. These tickets varied from speeding to parking violations. The
finalist also failed to report to court for his tickets, thus losing his license. A little
more digging found that the finalist was in serious financial debt and had lost
two different homes to foreclosure.
Finally, there were news stories in the state that the finalist previously worked
stating alleged financial improprieties. These stories alleged that the finalist
tried to benefit from his position of assistant superintendent by selling a
software program he developed to his school district.
Once all this information hit the news, the finalist withdrew from consideration
for the superintendent position. The school district suffered a loss of money,
time, and reputation by naming a finalist with so much baggage.
• Who is a fault for naming this individual as a superintendent finalist?
• Does it matter that the finalist lost his driver’s license?
• Does is matter that the finalist lost two homes to foreclosure?
• Does it matter that the finalist tried to use his position to sell his district
a software program?
• What should the district do the next time they go out to search for a
superintendent?
Drug Testing. The final check a district may want to implement in the hiring
process is a drug test. Some positions, like bus driver, may already require a
drug test. Referring back to the first chapter, one of the red flags of fraud is
addiction to drugs and alcohol. This addiction can cause an employee to go into
financial distress. They may revert to stealing from the school district if hired to
feed their addiction. School districts may want to test employees that have
financial responsibilities.
Hiring Process Summary. The hiring process and human resources are the
gate keepers of your school district. Never hiring a fraudster or potential
fraudster is the most effective and efficient way to prevent fraud at your school
district. While a robust hiring procedure is vital, it will not identify every
potential fraudster. Some will sneak into your district. Still other employees who
have never committed a fraud in their past may in the future. Their financial and
family situations may change after they are hired, and they are now committing
or are susceptible to commit fraud. In these cases, it is necessary to put into
place internal controls that will help prevent an employee from committing
fraud against the school district.
42
Internal Controls
Internal controls are a second step in helping a school district prevent fraud
from occurring. The Institute of Internal Auditors (IIA) defines internal controls
as:
“A process, effected by an entity’s board of directors, management, and

other personnel, designed to provide reasonable assurance regarding the
achievement of objectives relating to operations, reporting, and
compliance.”
The key word in the IIA definition of internal control is process. Developing and
implementing strong internal controls truly is an organizational wide process.
From top management down to every district employee, everyone must play a
role. Upper management must insist that controls be put into place even if it
makes their roles more challenging. Upper management must also be careful to
not override or circumvent those controls. This sets a bad example and all
district employees will follow the tone set at the top.
District employees also play a role in the design and implementation of internal
controls. District employees are in the field and see what is actually happening
with financial or purchasing transactions. These employees should be recruited
to help strengthen or even suggest new internal controls. These internal
controls take many different forms. One of the most important of these internal
controls is separation of duties.
## Common School District Internal Controls
1 Separation of Duties
2 Purchasing Limits
3 Dual Check Signatures
4 Bank Account Reconciliations
Separation of Duties. One of the simplest, yet most effective internal control is
separation of duties. This is a vital control to implement into any financial or
purchasing function. An individual should not be able to perform a whole
financial or purchasing transaction on their own. Accounts payable would be a
great example of a function that requires separation of duties. One individual
should authorize the checks, while another person signs the checks. This could
prevent an accounts payable employee from creating fictitious companies,
billing the school district, and then cutting a check to make payment.
43
Another function that requires separation of duties is in purchasing. One
employee should not be able to request an item, authorize purchase of that
item, and receive that item. Instead, one person should request the item. The
request should then to a supervisor for approval. After approval is received
another employee should receive the item. This may not always be possible in
smaller school districts, but all effort should be made to split up these duties.
• What other school district functions require separation of duties to

protect the organization from fraudulent activity?
• What would you do if you are at a smaller school district?
Purchasing Limits. Besides separating key duties, setting purchasing limits is

another vital internal control. Purchasing limits can be set on a daily, monthly,
and even a per transaction basis. Many districts have a threshold that a
department can purchase before it must come up for board approval. This
attempts to ensure that all large purchases face school board scrutiny. Auditors
and other financial personnel need to be aware of purchases right under the
threshold and for split purchases. These types of purchases could be employees
trying to circumvent the purchasing threshold control put in place.
Another type of purchasing limit is those placed on district purchasing cards.

Purchasing cards allow individuals to purchase goods in a faster, more efficient
and effective manner than having to go through the regular purchasing
procedure. However, the district exercises much less initial scrutiny on a
purchase card purchase. One way to try to reign in card users is to set strict
purchasing limits and controls. An individual purchase cardholder may only be
able to spend $500 maximum on a single purchase and have a daily maximum
of $1,000. Supervisors or cardholders should monitor their purchases and
investigate any peculiar ones.
Dual Check Signatures. Another internal control is requiring dual signatures on

all checks issued. This internal control ties into separation of duties. However,
not only should duties be separated for the check issuing process, there should
also two signatures on each check issued. Dual check signatures should be
required for all payroll, accounts payable, student activity fund, parent
organization, and any other check that is tied to the district. This ensures that at
least two people looked at a check before it was sent.
Another internal control that is related to dual check signatures is safeguarding

check stock. All checks, whether at central office or at a campus, should be kept
under lock and key. This will prevent an employee from stealing and trying to
cash an unauthorized district check.
Bank Reconciliations. Along with separation of duties, bank reconciliations

may be the most important internal control to implement. A school district has
several bank accounts, whether they are centralized or decentralized. Either way,
44
it is vital that account holders reconcile their bank accounts each and every
month. If an employee is stealing deposits or performing any other fraudulent
activity, it should show up in the bank statements. The longest a fraud would
take place is a month, if proper and regular monthly reconciliations are taking
place. A bank reconciliation by a very thorough bookkeeper unearthed a
deposit shoring scheme.
Internal Control Example: The Case of the Carbon Copy
Frank was just filling in for a sick coworker at the accounting office. He assumed
the duty of collecting cash and checks from various departments and campuses
for the district. The procedure was simple. A department would bring Frank
their deposit. He would count the deposit and give them a receipt for it. Frank
would then place the deposit in a deposit bag and the armored car service
would take it to the bank.
After about a month of filling in for his coworker, Frank came up with a scheme.
When a department would send him a deposit that was just cash, Frank would
keep some of the cash for himself. But how would Frank cover his tracks? Frank
had to give the employee bringing the deposit the top of his two-part, carbon
copy receipt. Frank came up with a plan to write the amount of the cash deposit
very lightly so it would not go through all the way to the bottom copy. The top
copy would indicate that Frank gave them a receipt for $600, the amount they
brought to him. When the employee left with their copy of the receipt, Frank
would write in the amount of $300 on his bottom copy of the receipt and take
$300 for himself.
Frank continued this scheme for a couple of months. One day Sally brought
Frank a cash deposit of $1,000. Frank gave her back a receipt for $1,000. But
Frank only deposited $500 and kept $500 for himself. A month after Sally made
the deposit with Frank, she reconciled her bank account. She noticed that she
was $500 short on her deposits. She immediately called Frank to see what
happened. Frank stalled and stalled and claimed to not know what was going
on with the shorted deposit. After another month Sally contacted finance and
internal audit.
• What first steps would you take in this investigation?
• Was this internal control successful?
• What recommendations would you make to Frank’s supervisors?
• What should happen to Frank?
• What do you think the outcome of this investigation was?
45
Terms
• Bragg, S. M. (2010). Accounting Best Practices (6th ed.). Hoboken, NJ:
John Wiley & Sons.
• Wells, J. T. (2004). Corporate Fraud Handbook: Prevention and


• Contact your district’s human resources department
• Ask them what kind of background and credit checks they do on

applicants
• Ask them what their policy is on checking references
• Do you feel your district has an effective employee screening process?
Summary
We saw in chapter three how expensive it is to detect a fraud. In this chapter we
discussed how prevention is a more efficient and effective way of dealing with
school district fraud. The two main tools in preventing fraud is a thorough hiring
process and strong internal controls. The hiring process attempts to keep
fraudsters and potential fraudsters out of the school district. This is
accomplished by conducting criminal background, credit, drug, and reference
checks. The second tool is devising and implementing strong internal controls.
Controls such as separation of duties, bank reconciliations and dual check
signatures are just a few of the controls that should be put into place at your
district. In addition, these controls should be made known to district personnel.
46
Chapter 5: Fraud
Deterrence
✓ Chapter 5 Overview.
✓ Fraud Deterrence Defined
✓ Fraud Awareness Program
✓ Legal and Personnel Action
✓ Publicizing the Fraud
Chapter 5 Overview
In chapters three and four we discussed detecting and preventing fraud in your
school district. Detection and prevention are necessary; but can become quite
costly. Detecting a fraud means one has been going on for some time costing
your district precious resources. Preventing fraud also has a cost in performing
hiring checks, monitoring a fraud hotline, adding staff (auditors), and devising
and implementing internal controls. In this chapter we will examine the most
cost-effective and efficient manners in which to fight fraud through fraud
deterrence.
In this chapter we will provide a definition of fraud deterrence. In addition, we

will look at the components of a robust fraud awareness program including the
importance of the tone at the top of the district. Then we will discuss taking
personnel and legal action. Finally, the chapter examines the advantages and
disadvantages of publicizing an uncovered school district fraud.
47
Fraud Deterrence Defined
Fraud deterrence is the proactive identification and removal of the of the root
causes of fraud in an organization. Fraud deterrence is based on the idea that
fraud is not a random occurrence. Fraud can and will happen when the work
environment is right. Think of the opportunity and rationalization legs of the
Fraud Triangle. Fraud deterrence focuses the root causes and enablers of fraud.
The goal of deterrence is to improve a school district’s policies and procedures
to mitigate the factors that cause fraud. Fraud deterrence involves both short
term and long-term programs and training.
Fraud deterrence is different fraud detection. Fraud detection involves an

examination of past transactions and relationships and looking for non-
conforming patterns or outliers. These non-conforming patterns or outliers are
red flags of potential fraud. Deterrence focuses on elimination of the root
causes of fraud. Deterrence is a district wide approach to creating an
environment, a tone at the top, which tries to eliminate the causes of fraud.
Joseph T. Wells of the Association of Certified Fraud Examiners (ACFE) defines

deterrence at:
The modification of behavior through the perception of negative

sanctions. Employees who perceive that they will be caught engaging in
occupational fraud and abuse are less likely to commit it. (Corporate
Handbook on Fraud, pp. 405-406)
One way to increase employee perception of the probability of being caught

committing a crime is implementing a district wide fraud awareness program.
Fraud Awareness Program

A district can proceed with developing an organizational wide approach to
deterring fraud. This organizational wide approach is called fraud awareness. A
good fraud awareness program involves every employee of your district. A
district is in essence, creating an army of fraud fighters.
A fraud awareness program consists of five main components. The first two
components, internal controls and a fraud hotline, were discussed in previous
chapters. This chapter will focus on the other three components: the tone at the
top, a fraud risk assessment, and district wide training.
48
## The Five Components of a Fraud Awareness Program
1 Internal Controls
2 A Reporting Mechanism for Fraud (Hotline)
3 The Tone at the Top
4 Fraud Risk Assessment
5 District Wide Fraud Training
The Tone at the Top
The key component to succeed at deterring fraud at your school district is

creating the proper tone at the top. The tone at the top is simply upper
management’s tone or desire to create a fraud free or proof school district
environment. The tone at the top can entail many different pieces. One piece is
how they follow the rules. Does upper management follow district policies and
procedures? Or do they play loose and free with the rules of the district.
One simple example is vacation time. Does upper management charge

themselves for all their time off or do they “forget” to charge it once in a while?
Small items like proper charging of vacation time go a long way to determining
the tone about fraud at your district. The employees of the district are closely
watching upper management. If management acts in an ethical, lawful, fraud
free manner, so will the employees of the district. They will follow the lead of
upper management’s actions: good or bad. In addition to simply leading by
example to create a fraud deterring work environment, upper management can
take other proactive approaches such as creating a fraud awareness program.
Fraud Risk Assessment. A fraud risk assessment is a district wide look at areas
that may be susceptible to fraud. This assessment should be performed on an
annual basis. District internal auditors may perform this function or if no internal
audit staff, the accounting department or even the external auditors can
perform the assessment. The assessment should consist of an examination of all
departments and campuses.
Factors included in the assessment are the budget of the department and
function. A higher budget area could be riskier. Another factor is how much
cash is handled by the department or campus. Cash has a way of walking off
with employees. Changes in key personnel is another risk factor. A change in
key management could lead to an opportunity for personnel to commit a fraud.
A final risk factor is how long it has been since a department or campus has
been reviewed or audited.
49
These factors should be collected and put into a spreadsheet. The scores should
be tabulated and the risk for each department is ranked. The riskiest
departments and campus have the highest risk levels. The areas with the
highest risk levels should receive the most scrutiny. If your district has an
internal audit department, the departments and campuses that scored the
highest on the assessment should be included in the annual internal audit plan.
If your district does not have an internal audit department, the high-risk
departments and campuses may warrant an audit by your external auditors or
another consultant that specializes in fraud investigations.
The act of conducting an annual fraud risk assessment has a deterrent effect. By
interviewing key district personnel, the employees of the district see the actual
conduct of the risk assessment. They see that the district takes fraud detection
and prevention seriously. This also helps with shaping the tone at the top.
District Wide Training. The final component of the fraud awareness program is
training. Training is the key to an effective program. The three items that
employees need to be trained on are what they should report; that they have a
duty to report a suspicion of fraud, and how to report that suspicion.
## District Wide Training Components
1 What to Report to the Fraud Hotline
2 All District Employees have a Duty to Report Suspected Fraud
3 How to Report Fraud
You are not asking your employees to become junior Sherlock Holmes. Instead,
you should train them on the red flags of fraud. If they suspect something may
be fraudulent, they should report it to their supervisor, internal audit, the
hotline, or a supervisor above their supervisor if they believe their immediate
supervisor is in on the fraud.
The second item is training employees that they have a duty to report
suspected fraud. Each employee is responsible for safeguarding the assets of
the school district. This is a fiduciary duty that they have to the taxpayers of
their district. It should be stressed that this is not tattling, but instead
performing a key service for the district.
The final item to train district employees on is how to report a suspected fraud.
The fraud hotline should be highlighted in this aspect of the training. Let
employees know how to find and access the hotline. The different ways they can
contact district personnel regarding a fraud. Finally, let they know that there is a
way to report suspected fraud in an anonymous manner.
50
Training can be done in two phases. The first phase is in new employee
orientation. This training should highlight the three main items discussed above.
This training should also leave them with a take-away. Provide them with a card
or magnet with information on what to report and how to report. The second
phase of the training should be an annual training or at least reminder of the
fraud hotline for all district employees. This could be as simple as a reminder in
the employee newsletter, an email from internal audit, or actual training course
online.
## Opportunities for Fraud Training
1 Principal Meetings
2 Bookkeeper Meetings
3 District Leadership
4 Board Training
5 New Employee Orientation
6 Annual Employee Training (video)
Legal and Personnel Action

Once the fraud risk assessment sets the priorities for either the internal audit
annual plan or a special investigation is conducted by an outside agency, a
fraud may be uncovered. If a fraud is uncovered and proven through the
investigation, something must be done with the fraudster. There are two, not
mutually exclusive, paths a district can pursue. One is to take personnel action
and the other is to contact legal authorities.
Personnel Action. The personnel action taken by a district depends on a

couple of factors. One is the level of the fraud committed. If it is an employee
stealing time or office supplies, a district may not seek termination. In smaller
fraud cases, a letter of reprimand, restitution, or even placing the employee on
leave may suffice. However, if the fraud committed is substantial in nature, then
the district may seek to terminate the fraudster’s employment. These decisions
should be made with input from upper management, legal counsel, and the
human resources department.
51
According to the Association of Certified Fraud Examiners (ACFE), roughly two-
thirds (64.1%) of fraudsters are terminated. That means one-third of people who
commit fraud are allowed to remain with the organization they defrauded.
Some fraudsters may retire in lieu of termination and others pay restitution and
serve some length of suspension. But almost 6% receive no form of punishment.
Legal Action. If the fraud is financial in nature, legal authorities should be

contacted. If your school district has their own police department, they should
be contacted on all financial frauds. They can help with several facets of the
fraud investigation. They can arrest the fraudster and subpoena their bank
records. However, if you do not have a district police department, you should
contact your local police department. The amount or nature of the funds stolen
may require other policing authorities to be contacted. If the funds stolen are
federal in nature and of a substantial amount, the FBI should be informed.
The Association of Certified Fraud Examiners (ACFE) reports that only 59.3% of
all uncovered fraud cases were referred to some form of law enforcement. The
rate of referring to law enforcement is on a downward trend nationally. In 2012
and 2014, 65.2% and 60.9% of cases were referred.
52
According to the ACFE statistics from their 2016 Report to the Nations, over
40% of all uncovered frauds are not reported to law enforcement. There seems
to be a trending hesitancy to bring legal action.
Hesitancy to Act. Districts however tend to shy away from taking personnel or
legal action in some cases. They may let a fraudulent employee retire or resign
in lieu of termination to avoid a grievance hearing. The district may do a cost
benefit analysis and decide it would be more of a cost savings to let the
fraudulent employee quietly leave rather than fire them. The same applies with
legal action. The district may rather want an employee to just leave quietly,
rather than to get the authorities involved.
There are several reasons given for not referring to law enforcement. The
number on reason in the fear of bad publicity, followed by the belief that
internal discipline was sufficient; or that there was some sort of private
settlement. The fourth most given reason is interesting. They reason given is
that a law enforcement agency is too expensive.
53
The deterrence effect of taking personnel and legal action is powerful. If district
employees know fraudulent activities are taken seriously, they may think twice
before committing their schemes. The employees will know their actions could
lead to being fired or worse, being incarcerated. But for this to deter employees,
the district must publicize the consequences of fraudulent activity in their
organization.
Publicizing the Fraud

Once personnel or legal action it is imperative that information is shared with
other district personnel. This can be done through a press release if it is a large
fraud that has made the newspaper. However, smaller frauds and their
consequences should also be publicized. This can be a controversial proposal.
The district leadership may be leery to put this kind of news out to the public
and to district personnel. But without publicizing the consequences of the fraud,
the actual personnel and legal action has very limited deterrence effect on the
district as a whole.
54
## Ways to Publicize a School District Fraud
1 Press Conference (for large frauds)
2 Principal Meetings (for campus frauds)
3 Bookkeeper Meetings
4 Email
5 Employee Newsletter
6 Video

Terms
• Association of Certified Fraud Examiners. (2016). Report to the Nations
on Occupational Fraud and Abuse. Austin, TX: Author.
• Wells, J. T. (2004). Corporate Fraud Handbook: Prevention and


• Do you think your district would publicize a fraud committed at a
campus or central office?
• Why may they be hesitant?
• How could you convince the board and superintendent that this is an
important component to deterring future fraud?
Summary
In this chapter we discussed the importance of deterring fraud in your school
district. Deterrence is the most effective and efficient manner to keep fraud out
or your organization. Deterrence is also the most holistic approach. It requires
the whole organization to participate. This includes upper management creating
the proper tone at the top of non-tolerance for fraudulent behavior. This non-
tolerance begins with upper management and then extends down to every
employee. Tone at top is just one component of an overall fraud awareness
program.
In addition, a district should take this organizational wide approach to fighting

fraud. The other components of the program include a system of internal
55
controls, a reporting mechanism for fraud via a hotline, a district wide annual
fraud risk assessment, and fraud training for all employees. A final way to deter
fraud at your organization is to not shy away from or try to hide the fraud from
the community or district employees. It is important that a district take swift and
decisive personnel and legal action once a fraud is uncovered and proven. This
action should not be done is silence or in the shadows. By letting the
community and the district personnel see the consequences of committing
fraud it may deter the next potential fraudster from doing so.
The first five chapters of this course dealt with identifying, detecting, preventing,
and deterring fraud. In the next chapter we will examine a uniformed approach
to conducting a fraud investigation at your school district.
56
Chapter 6: Fraud
Investigation
✓ Fraud Investigation Introduction
✓ Fraud Investigation Components
✓ Conducting Effective Interviews
✓ Writing the Fraud Report
✓ Conducting a Fraud Post-Mortem
Chapter 6 Overview
In the first five chapters of this course we discussed the definition of fraud,
common school district fraud schemes, how to fight fraud focusing on fraud
detection, prevention and deterrence. This final chapter focuses on what to do
once a fraud is uncovered or reported. This chapter lays out an organized plan
for conducting a fraud investigation.
The first topic covered in this chapter is developing and fraud team. This is a
group of key district employees that may need to be involved in the
investigation and handling of a school district fraud. A second topic is the
investigative process. The investigative process consists of contacting the fraud
team, gathering information, conducting interviews, and writing the fraud
report. The final topic addressed in this chapter is conducting a fraud post-
mortem. A fraud post-mortem is simply dissecting the total fraud investigation
and tries to convey any lessons learned from going through the whole process.
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Fraud Investigation Introduction
Fraud investigations are a tricky endeavor at best. Usually the district is alerted
to a potential fraud by an anonymous tip via the fraud hotline. The district must
start the investigation with little evidence, no one to contact for further
information or direction and must also balance the rights of the individual
accused of committing the fraud with the district’s need to know what really
happened.
Real Life Example: Those Pesky Federal Programs Employees
This example took place at the federal programs department of a school district
in South Texas. The two employees involved, the executive director and the
compliance monitor, were steering training contracts to their wives and not
disclosing their relationship to the district. The wives of the two employees
would open new companies once they were paid right up to the purchasing
threshold of $25,000 so their contracts did not have to go to the board for
approval.
Unfortunately, this was not the only scam being perpetrated out of the federal
programs department. The school district had eleven portable classrooms
(portables) located at eleven Catholic schools throughout the district. These
portables were district property, even though they were located at these
parochial schools. District personnel, usually the wives of the two federal
program employees, provided training to parochial school teachers at those
portables. In addition to paying for that training with federal funds, the federal
programs department also paid for the maintenance and upkeep of those
portables with federal funds.
The compliance monitor contracted out with several individuals to provide the
maintenance on the district portables. The payments for the maintenance
followed a similar payment pattern of that for the training. Maintenance
payments were made to individuals almost right up to the $25,000 purchasing
threshold. Once a contracted individual reached $24,900, he would not receive
any more payments that year. Instead payments for portable maintenance
services would start going to the original contracted maintenance individual’s
relative. Sometimes the maintenance payments would go to a sister or to a son.
No one ever got paid over the magic $25,000 threshold.
The big question is why. Why did the compliance officer pay for maintenance
work in this manner? Why didn’t the compliance monitor simply do a request
for proposal and bid out the maintenance contract like several other district
contracts are done? It turns out the compliance monitor had a very good reason
to pay the maintenance personnel in this manner.
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The compliance officer received one half of the payments he authorized to the
contracted maintenance workers. Each month after they were paid, the
compliance officer would meet with each of the maintenance workers and
receive his “share” of the payment. This was a classic kick-back scheme. This
scam had gone on for several years and involved about a dozen portable
maintenance vendors.
• What would you do if you received this as fraud hotline tip?
• Who would you contact?
• Does your district have a procedure in place for handling fraud tips?
Fraud Investigation Components

The example above is a real-life example. This kind of case can fall into the lap
of a district at any time. To make matters even more tenuous, the director of
internal audit was brand new at the district and the fraud tip was also sent to a
local troubleshooter reporter. The factors surrounding this fraud, especially the
early news coverage, can put a lot of pressure on an unprepared district. This
chapter will help you prepare your district for such a fraud. It will help you
identify key district personnel that should be contacted once a fraud is known,
and help you put a plan in place to navigate your way through a challenging
fraud investigation.
A fraud investigation has four key components. The first component we will
look at is assembling the fraud team. The second is how to properly gather
information and evidence. The third is to conduct effective interviews. The
fourth component is writing a fraud report. The final component is to conduct a
fraud post-mortem.
## Four Components of a Fraud Investigation
1 Assembling the Fraud Team
2 Gathering Information and Evidence
3 Conducting Effective Interviews
4 Writing the Fraud Report
5 Conduct a Fraud Post Mortem
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Assemble the Fraud Team
This component of a fraud investigation ties into the tone at the top discussed
earlier in the course. District employees need to know that fraud will not and is
not tolerated at your school district. As such, and as part of a fraud awareness
program, they all should be somewhat familiar with what is fraud, that they
have a duty to report fraud, and how to report that fraud. Because of the
environment that is not tolerant of fraud and the knowledge of their role in
fighting fraud, district personnel should be able and willing to help in a fraud
investigation.
However, only certain members of a district will be part of the fraud team. Key
personnel need to be informed immediately when a major fraud has been
reported or uncovered. These personnel include the superintendent and board
president. They are the two main leaders of the district and need to know what
is happening in the district. Those are not the only district that will need to be
informed, but they must be kept in the loop from the beginning. Plus, with the
superintendent and board president informed and supporting the investigation,
other district personnel will get on board with the investigation as well.
The fraud team will include members from different departments throughout
the school district. Key members include personnel from the internal audit,
police department, the district’s attorney, accounting, human resources,
purchasing, information technology, and the district spokesperson.
## Key Fraud Team Personnel
1 Director of Internal Auditing
2 Chief of Police
3 School District Attorney
4 Chief Financial Officer
5 Executive Director of Human Resources
6 Executive Director of Purchasing
7 Executive Director of Information Technology
8 School District Spokesperson
Director of Internal Audit. If you have an internal audit department, the first
person you will want to contact once a fraud is uncovered is the director of
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internal audit. In many cases the internal auditor may be the first person to
know about a school district fraud. The director of internal audit may have
knowledge of the fraud via the fraud hotline especially if it is monitored
internally by the internal audit department. In addition, the internal audit
department may uncover a fraud during one of their planned audits.
The director of internal audit will most likely conduct the investigation. The
auditor will assemble the fraud team and assign duties. They will collect
evidence, conduct interviews, and delegate data and other information
collection tasks to the other members of the fraud team. The auditor will also
act as a liaison with law enforcement agencies and other government agencies
that may also be investigating the fraud.
If your district does not have an internal audit department, another individual
within your district should be tasked with coordinating fraud investigations. This
most likely would be an employee from either human resources or accounting
and finance department. Regardless of who is running point on the fraud
investigation, if your district has a police department, the chief of police should
be notified.
District Police Department. If your district has a police department, the chief
or a representative should be included on the fraud team. The police
department can play an important role during a fraud investigation. The police
department can help in securing evidence. They have experience in preserving
the chain of evidence if a computer or other evidence needs to be secured. In
addition, the police department can subpoena bank records of suspected
fraudsters. They can require district employees to turn over their personal bank
records if there is probable cause that an employee is stealing money and
depositing it into their bank account. Finally, the police department has the
power to arrest. Once an investigation is concluded and it appears that the
employee did commit fraud, the police department can arrest the individual and
start the legal proceedings.
School District Attorney. It is imperative to contact the school district attorney

before the fraud investigation begins. This does two things. First it alerts the
school district attorney that there could be a wide range of legal activities that
they may find themselves involved. A fraud investigation could lead to
personnel and legal action. Both of which the attorney could become involved
with. Even more important, it is good to notify the attorney and work under
their direction. If you work the fraud investigation under the attorney’s direction
there is a little more protection for the district. The district is working the
investigation under the attorney-client privilege. This gives a little more of a
safeguard to records request while the investigation is ongoing.
Chief Financial Officer. Because of the financial nature of most school district
frauds, the Chief Financial Officer should be a member of the fraud team. The
CFO and his staff have an intimate knowledge the financial systems, policies,
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and procedures of the district. They are the subject matter experts when it
comes to financial transactions and internal controls for the district. This
knowledge is vital to conducting a successful fraud investigation. At some time
during the investigation, the lead will need access to financial data and
transactions. With the CFO and his or her staff already on board, it will be easier
to already have a point of contact to be able to collect the information and data
needed to successfully pursue the fraud investigation.
As mentioned earlier in this chapter, in lieu of an internal audit department the

CFO may lead the fraud investigation. Another department that could lead the
investigation could be the human resources department,
Executive Director of Human Resources. The human resources department

plays a key role in every fraud investigation. As mentioned above, they may lead
the investigation if your district does not have an internal audit department. The
police department is contacted because the fraud investigation may lead to
legal action. In the same manner, human resources should be contacted
because the fraud investigation could lead to personnel action. In addition to
personnel action at the end of the investigation, human resources may play
many roles.
The human resources department are often experts in conducting in-district

investigations. These are not fraud investigations, but they are personnel
misconduct related. They know the rules of conducting these investigations and
understand the rights that they employees they investigate have. The human
resources department can answer questions regarding the privacy rights of
suspected employees and help guide internal audit on the investigative path.
In addition, human resources can help pull any personnel information that may
be required for the investigation. Items such as demographic information and
any prior disciplinary action may aid in the investigation. Human resources may
also want to put the individual suspected of fraud on leave. They can take on
this role if directed to do so by the executive leadership of the district.
Executive Director of Purchasing. There are many fraud schemes that include
the abuse of the purchasing function. Quite often the alleged fraud involves the
theft of goods. In these cases, the purchasing department will need to
participate in the fraud investigation. The purchasing department has
established policies and procedures that direct the acquisition of goods and
services at a school district. The purchasing department can provide the
investigators the rules and regulations that district personnel must follow. The
purchasing department can also provide investigators with all of the purchasing
transactions made via the purchase order system or via purchasing cards.
Executive Director of Information Technology. Many frauds are conducted

online. Several functions of a school district’s major financial and purchasing
processes are all done via computer. Examples are travel reimbursement,
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payroll, and ordering goods and services. A fraudulent employee may be savvy
enough to use the online system to commit their fraud. A representative from
the IT department would be necessary to be able to track fraudulent employee’s
actions online.
In addition, an employee may keep track of the fraud on their computer. There
could be spreadsheets that track the amount of money they stole, because they
believe they will pay it back someday. They may also have emails to others
involved in their fraud sitting on their computer. In these cases, an IT technician
would be required to be able to access the alleged fraudster’s computer
without disturbing the contents of the computer. If the computer, and the data
that implicates the fraudster, is not handled in a proper manner that evidence
may become tainted and thrown out by a judge if the case goes to trial.
District Spokesperson. One of the first people to contact regarding a fraud is

the school district spokesperson. The district spokesperson will probably be
contacted right after the superintendent and school president are informed. It is
vital to stay out in front of the fraud. Often the fraud investigation may be
leaked to the press by the tipster or even district personnel. By contacting the
spokesperson early in the investigation, they can begin to create a narrative
regarding the discovery and handling of the fraud. The executive management
team may even decide to be proactive and issue a press release if they feel the
fraud will eventually be leaked to the press.
Fraud Team Assemble Summary. Probably not all of the members of the fraud
team will participate in the actual investigation. However, they will not be
caught off guard and unprepared to assist if they have been properly briefed on
the situation from the beginning. Once the fraud team is assembled and
informed it is time to begin the investigation.
Gathering Information and Evidence
Once the fraud team has been assembled and informed and a lead investigator
is selected, it is time to start the investigation. The first step in the investigation
is gather information regarding the alleged fraud and secure any known
evidence. There are five main components of information and data gathering.
The first step is to secure the actual hotline tip. The second step is the review
information regarding the department or campus where the alleged fraud took
place. The third step is to gather information about the alleged fraudster. The
fourth step is to gather physical evidence. The final step is to secure any
electronic evidence related to the alleged fraud.
## Information and Evidence to Gather in a Fraud Investigation
1 The Actual Tip
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2 Department Information Where Alleged Fraud is Happening
3 Personnel Information of Alleged Fraudster
4 Physical Evidence
5 Electronic Evidence
Gather the Actual Tip. Depending on your district’s fraud reporting

mechanism, the lead investigator may or may not receive the tip directly. The tip
may come in via the fraud hotline, so it is probable that the director of internal
audit will receive the tip directly. However, the tip is not always sent in through
the hotline. If this is the case, the lead investigator on the fraud needs to receive
and examine the tip immediately. The tip has a lot of information that is vital to
getting the investigation off to a good start. From the tip, the lead investigator
should be able to determine which fraud team members will be involved in the
actual fraud investigation.
In addition, the tip may make it clear is there is a need to assemble the fraud
team. Often, the fraud hotline tip is really just an employee complaint about
management or a coworker or it may be more of a personnel issue. The review
of the tip by the lead investigator saves the district time and resources of
looking into non fraud claims.
Furthermore, reviewing the tip leads right into the other steps of information
and evidence gathering. The tip will lead you on which department and possibly
which employee that you need to focus your attention.
Gather Department Information. Once the fraud tip is reviewed and it is

deemed that an investigation is warranted, the lead investigator should gather
information about the department where the fraud took place. The information
needed may vary depending on the nature of the fraud tip. But in general,
certain items should always be gathered. This information includes the
department’s organizational chart and key contact information, departmental
policies and procedures, any special compliance rules or regulations the
department that the department must follow, any past departmental audits, and
finally general information about the department from their web site.
## Department Information to Gather
1 Organizational Chart
2 Department Policies and Procedures
3 Compliance Rules and Regulations
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4 Past Departmental Audits
5 General Web Site Information
Organizational Chart. The first piece of information that the lead fraud
investigator should gather is the departmental organizational chart. The
organizational chart gives the investigator a clear picture of the key personnel
and the reporting structure of the district. Along with the organizational chart,
the investigator should acquire the contact information for all key departmental
personnel. Once the key department contacts are identified, the investigator will
know who to contact to obtain the department’s policies and procedures.
Department Policies and Procedures. The department’s policies and procedures

are an important document for the investigator. The policies and procedures
give the investigator a good overview of the department’s operations. It also
may identify any weaknesses in internal controls that the alleged fraudsters may
have exploited. This document also provides criteria that is expected to be
known and followed by all departmental employees. The failure of the fraudster
to follow these policies and procedures may lead to personnel action by human
resources at the end of the investigation. In addition, the policies and
procedures may identify certain laws, rules or regulations that the department
must comply.
Compliance Rules and Regulations. The department under investigation may

have to comply with certain state or federal rules and regulations. It is important
to get this information to help shape your investigation. These compliance
issues bring whole set of rules and regulations and possibly laws that the
fraudster may be exploiting. In addition, funding may be tied to compliance
with these rules and regulations. If the fraud puts the district out of compliance
with these rules and regulations, the funding tied to these rules and regulations
may trigger other agencies to investigate this fraud. An example would be if an
employee is alleged to have stolen federal funds. This may trigger the U.S.
Department of Education and the FBI to become involved in the investigation.
One way to see if the department has had non-compliance issues in the past is
to examine past departmental audits.
Past Departmental Audits. Past departmental audits can take many forms. One
can be an audit done as part of the annual audit plan or a special audit
(possible a fraud audit) by the internal audit department. The internal audit
report contains a wealth of information for the fraud investigator. The report
tells a background story on the department, what was looked at (scope), what
procedures were followed, any findings, and the recommendations made by
audit. The audit report also shows when the last time anyone looked at the
department.
Other audits to look for include any audit of the department by the external
auditors. While external auditors are not specifically geared to find fraud, they
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may have some information on the strength or weaknesses of the department’s
internal controls and other miscellaneous information about the department.
Different government funding sources may also conduct audits on the
department under investigation. It is important to find and review those audit
reports to information that can help direct your investigation.
General Web Site Information. The final piece of information to gather is

miscellaneous information about the department. One of the best sources for
this general information is the department’s own web site. The web site may
include information about their vision, mission, a code of ethics. This
information may give you some idea about the tone regarding fraud for this
department. The department’s web site will help the investigator become
knowledgeable about and comfortable where the alleged fraudster works and
may have committed fraud. The next step is to gather information on the
alleged fraudster.
Gather Personal Information on Alleged Fraudster. The investigator should

gather four types of personal information on the alleged fraudster. These four
types of personal information are human resources or demographic
information, payroll information, public information (via the county clerk), and
social media or internet search information.
## Personal Information to Gather on Alleged Fraudster
1 Human Resources Information
2 Payroll Information
3 Public Information (via the county clerk)
4 Social Media Search
Human Resources Information. The lead investigator should contact the human
resources department to gather information on the alleged fraudster. Or even
better, human resources department should grant the lead investigator read-
only access to the human resources department database. This allows for
quicker access to records the lead investigator requires. Some of the
information that the required is the alleged fraudster’s address, employment
history with the district, and names and addresses of alleged fraudster’s
dependents.
The lead investigator should print out a basic demographic screen shot on the
alleged fraudster. This screen shot should include their name and address. This
information will be used in the fraud investigation. The lead investigator may
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look to see is there is vendor that has a matching address of the alleged
fraudster. In addition, the address may be used when searching the county clerk
database to search for tax liens, marriages, divorces, and the registration of
businesses (see paragraph on public information).
Along with the address, the lead investigator needs to know the employment
history of the alleged fraudster at the school district. This information is utilized
in two ways. One way is to be able to build a rapport with the alleged fraudster
once he or she is interviewed. The second way is to identify other areas or
departments where he or she may have committed a similar fraud.
Finally, the lead investigator should identify the names and addresses of the
alleged fraudster’s dependents. Again, this will help with the county clerk
database. This will enable the lead investigator to see if there is a business
owned and operated by the dependent of the target of the investigation. After
the lead investigator collects human resources information on the alleged
fraudster, he or she needs to turn to the payroll department for further
information.
Payroll Information. The lead investigator should collect information from the
payroll department dealing with the alleged fraudster. This payroll information
consists of the alleged fraudster’s current salary, any supplemental pay received,
any travel reimbursement, and absences.
The payroll information gives the investigator an idea of what kind of lifestyle
the alleged fraudster could live. This can then be compared and contrasted with
any reports of red flags of fraud such as extravagant lifestyle.
Supplemental pay and travel reimbursement are areas that are susceptible to
fraud. A high rate of supplemental pay transactions could indicate that the
employee is submitting fraudulent supplemental pay requests. Travel
reimbursement can take place in many forms. One instance is when an
employee pays for travel via a purchasing card and then turns in receipts for
reimbursement. This is known as double dipping. In addition, an employee
could create false receipts, lie about mileage, covert first-class tickets into coach
tickets and then pocket the difference (although not too many district
employees fly first class).
A final piece of the payroll information puzzle is employee absence reporting.

There are two reasons to look at employee attendance. One is that a red flag of
fraud could be that the employee or a dependent is fighting an illness. If the
employee is taking large chunks of personal time off (PTO) that could be an
indicator of a serious illness. A second is if the employee never takes PTO. An
employee that never takes PTO might be conducting a fraud so they never take
time off because if they do, their replacement could find their fraud. Also, if no
PTO is reported they could be stealing PTO. They take the day off but do not
report it or enter it into the attendance system.
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One the lead investigator collects human resources and payroll information
pertaining to the alleged fraudster, it is time to conduct a public information
search. A key tool for conducting this search is the local county clerk’s web site.
Public Information. There are several key documents that individuals file with the
county clerk. These documents include tax liens, foreclosures, marriage and
divorce decrees, and business registrations. Many of these records can be
accessed through the county clerk’s web site and are available for no charge.
Key Public Information Documents include:
• Tax Liens
• Foreclosure Documents
• Marriage Licenses
• Divorce Decrees
• Business Registration (DBAs)
The first key document to look for is any tax liens filed against the alleged
fraudster. A tax lien is a right claimed on a property for a debt owed. In this
case, state and federal government can place a lien on the property of an
individual that has failed to pay their taxes. An individual may owe the IRS back
income taxes. In addition, a business may have a lien because of failure to pay
payroll, sales, or other taxes. The failure to pay taxes could be interpreted as
one of the red flags of fraud, a severe financial problem. The same goes for
foreclosures. This is another indicator of a person in financial distress.
Another set of documents that an investigator can access from the county
clerk’s web site are marriage licenses and divorce decrees. A divorce can be
another indicator of a red flag of fraud. Divorce can bring on a severe financial
strain to an individual. There is the loss of the spouse’s income, attorney fees,
and possible alimony and child support. The marriage certificate can be helpful
in determining if an individual is married to a vendor that does business with
the district or even married to someone that he or she is conspiring with to
commit a fraud.
The final, and maybe most important, document that can be accessed is the
business registration or Doing Business As (DBA) form. The DBA shows the
name and address of the individual registering the business. This is a helpful
document when the lead investigator thinks that the alleged fraudster owns a
business that is doing business with the district. Or even worse, that the
fraudster created a fictional company and is simply billing the district for non-
existing services. The lead investigator can match the alleged fraudster’s
demographic information obtained from the human resources department with
the information on the DBA form. In addition, the investigator can also attempt
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to match the name of the alleged fraudster’s dependents to that of the
company on the DBA.
Once the data at the county clerk’s website is thoroughly mined, it is time to do
a more general search on the alleged fraudster. A good place to begin is a
simple google and Social Media search.
Social Media Search. This is a fairly new tool for a fraud investigator. Over the
last decade, almost everyone seems to have some form of social media
presence. The social media medium has exploded. Employees may be on
Facebook, Linked In, Instagram, Twitter, and one of any of the dozens of dating
web sites. Employees share almost every aspect of their life. This is an arena that
a clever fraud examiner can gather a lot of information on an alleged fraudster.
• What are some other popular social media sites?
• What are some things that people post online?
• What can a fraud investigator learn from these posts?
• Does your district have a social media policy?
A fraud investigator can see a lot about the lifestyle of an alleged fraudster. Are
they going on elaborate trips? Do they live in large mansion? Are hey living
beyond their means? Once again, these are just indicators of a potential fraud.
But they are red flags that do need to be further researched.
After all of this initial information is gathered and organized, it is time to devise
an interview schedule. The information gathered will point you in the direction
of whom to interview, and what to ask.
Conducting Effective Interviews

It is extremely important to approach conducting interviews in a systematic,
measured approach. The lead investigator needs to develop an interview plan
before jumping into the actual interviews. This section examines:
• Identifying Individuals and Order to Interview
• Interview Tips
Identifying Individuals to and the Order to Interview. After gathering the

fraud tip, departmental information, and information about the alleged
fraudster, it is time to determine whom to interview. In addition, it is just as
important to determine the correct order in which to conduct the interviews.
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## Order of Fraud Investigation Interviews
1 The Tipster
2 Fraudster’s Supervisor
3 Fraudster’s Co-Workers
4 Collaborators
5 The Alleged Fraudster
The Tipster. The first interview to be interviewed is the person calling in the
fraud tip. This may or may not be possible depending on whether the tipster left
any contact information via the fraud hotline. They can help clear up any
questions you may have about the tip. The tipster can also provide any other
information that they may have omitted from their original tip. They may have
only left a very little bit of information because they are wary if the hotline is
truly anonymous. This contact is a good time to try to get the tipster to sign a
statement regarding the facts of the case.
Supervisor. After talking to the tipster, the next interview session should be
with the alleged fraudster’s supervisor. This interview has three components.
The first is as a courtesy to the supervisor. He or she is informed that there will
be an investigation in their department. They are also informed that some of
their department employees will be interviewed. Second, the supervisor can
provide important details regarding the alleged fraudster that the investigator
could not get from simply looking at district and public information. The final
component is to get the supervisor to agree to keep the investigation private.
Only those involved in the interviews need to have knowledge of the alleged
fraud. This is important so the alleged fraudster is not tipped off about the
investigation and destroys important evidence.
Coworkers. Following the interview with the supervisor, the investigator will be
able to identify the coworkers of the alleged fraudster to interview. These
coworkers of the alleged fraudsters can provide invaluable information. This
information includes:
• Any suspicions of the fraud
• Information on alleged fraudster’s lifestyle (red flags)
• Knowledge of internal controls and ways to circumvent them
The information from the coworkers is time sensitive. Once you start to
interview the alleged fraudster’s coworkers, it is almost certain that he or she
will become aware of the investigation. It is vital to conduct the coworkers’
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interviews in a timely manner and then almost immediately move on to
collaborators and then the fraudster.
Collaborators. By talking with the coworkers, the investigator should know if

the alleged fraudster acted alone or collaborated with others. Collaborators
could include:
• Coworkers (same department)
• Other District Employees
• Supervisors
• Vendors
Collaborators may come forward and share information regarding the fraud, if
they believe that by doing so will be beneficial to them. The collaborator may
feel that they will escape termination or legal action by providing this
information. It is important for the investigator to refrain from making promises
of leniency. The investigator does not have the power to grant immunity for the
collaborator’s statements on the alleged fraud. Once all of the interviews are
completed, it is time to meet with the alleged fraudster.
Alleged Fraudster. While the previous interviews are more information seeking,
the interview of the alleged fraudster is a little different. The investigator may
still have some questions regarding the fraud. However, most of those
questions should be answered during the previous interviews. The interview
with the alleged fraudster has three components. One is to establish a rapport
with the alleged fraudster. Two is to verify the information that the investigator
learned from the other interviews. Three is to seek and admission of committing
the fraud.
• Establish Rapport
• Verification of Information
• Admission Seeking
As with all interviews, the investigator should build a rapport with the alleged
fraudster at the beginning of the interview. This can be accomplished by
discussing the alleged fraudster’s history with the district. Topics for rapport
building can be gleaned by the investigator by reviewing the alleged fraudster’s
personnel file and from the interviews with their supervisor and coworkers.
Topics such as the following can be used to establish rapport:
• How long have you worked for the district?
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• Which departments have you worked in?
• I see you went to XYZ college, when did you graduate?
• I see you are a XYZ fan, did you see the game last night?
Once a rapport is built with the alleged fraudster, the investigator should ask
questions to fill in any gaps that they have in the fraud story. The previous
interviews should provide most of the information, but there still may be some
holes. This phase of the interview informs the alleged fraudster that you have
done your homework and know enough about the alleged fraud for it to be a
problem for them. They may start doing a cost benefit analysis in their head
about how to mitigate the punishment they may receive. This leads the
investigator to the next phase of the interview, admission seeking.
The final aspect of the alleged fraudster interview is to seek an admission by the
alleged fraudster. This is a tricky proposition at best. Sometimes the alleged
fraudster is more than ready to confess to committing the fraud. They have
carried this secret around with them so some time and are relieved to be able to
confess. This is a best-case scenario.
More likely is that the alleged fraudster will continue to work the fraud. They will
not easily confess and still think that they can beat the allegations. They will
participate in the interview trying to see if the investigator knows what actually
happened. If they feel that the investigator knows what happened and there is
no other way out, they may now decide to admit what they did. However, some
fraudsters will never admit to any wrongdoing. This is a real possibility in fraud
cases.
Once an alleged fraudster admits to committing the fraud, it is important to get

a signed statement. There are two ways to take a signed statement. One is to
have the fraudster write the statement, have the investigator review it, then
have the fraudster sign it. The other is to have the investigator craft the
statement, have the fraudster review it, and then sign it. Either way is
permissible. The main thing is to get a signed statement.
Interviewing Tips
This is just a note on interviews. Before the investigator begins to conduct

interviews, he or she should decide on a few items. These items include:
• Location of Interviews
• Interview Settings
• Questions
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• Note Taking
These are four items an investigator must decide on before beginning the
interviews. The location of the interviews is important because the investigator
does not want to tip off the alleged fraudster that an investigation is taking
place. In addition, is it feasible to bring interviewees off site to conduct
interviews? Once a location is decided, it is time to focus on the setting.
The main question with setting is whether it should be at the employees work
area or in a neutral room? The interviewee will feel more comfortable at their
workstation; however, others may see and hear the conversation. In a neutral
area like a conference room, they may feel a little intimidated to answer
truthfully. Also, with setting, the interviewee should not feel like they are being
held against their will. They should have access to the room exit and be told
that they are free to leave at any time.
Before conducting any interview, the investigator should develop a list of

questions to ask. The list of questions should be tailored to meet the needs of
each interview. It is important to have a set of questions prepared, so the
investigator can focus on the responses of the interviewee and not be worrying
about what question to ask next. There is still the ability to ask unscripted follow
up questions. The list is just a guide.
Finally, note taking must be planned for. Much of human communication is

nonverbal. It is difficult to take notes and focus on the nonverbal responses of
an interviewee. One way to address this is to audio record the interview. This
can be problematic, because if this case ever goes to trial that tape is
discoverable. A better strategy is to have another person take notes during the
interview. The lead investigator can ask the questions while the note taker
records the responses.
After an interview is completed, one of the members of the interview team

should compose an interview memo. An interview memo is a one or two-page
summary of the interview. The memo should contain the following information:
• Date and Location of Interview
• Person or Persons Interviewed
• Interviewer and others Present
• Summary of Interviewer’s Notes
The interview memos should be collected and stored in a safe place. Once all of
the interviews are completed and all of the information is gathered, it is time to
write the fraud report.
73
Writing the Fraud Report
The key product to come out of the fraud investigation is the fraud report.
Future employment and legal action hinge on the results of this document. This
report should tell the story of the investigation. It should also include any
findings and recommendations made by the lead investigator. The key
components of the fraud report include:
• Background Narrative
• Listing of Findings
• Listing of Recommendations
• The Executive Summary
• The Distribution List
Background Narrative. The background narrative tells the story of the fraud. It
begins with the tip received, then gives background on the department and
individuals involved. Finally, it gives an overview of the investigation. The goal of
the background narrative is twofold. One is to generate interest. Why is this
investigation important and why it should be taken seriously? Two is to give the
reader an overview of what happened so that the findings and
recommendations make sense.
Findings. The findings are a list of what the investigator identified as out of
compliance with district rules and regulations or laws. A finding has five
components:
• Condition
• Criteria
• Cause
• Effect
• Recommendation
A condition is the state of matters. If the employee in question circumvented

internal controls, that would be the condition. The criteria are the standards that
must be followed. Standards could be district policies and procedures, federal
or state laws, or even grant stipulations. Therefore, the condition would be
some deviation from the criteria. The cause states why the current condition
had deviated from the criteria. The effect states the damage caused by the
deviation from the criteria. The last element of a finding is the recommendation.
74
Recommendations. Recommendations address the findings. They are
suggestions to address the condition. Recommendations attempt to bring the
current condition back into compliance with the criteria. The recommendations
are not just created out of the blue by investigators. Recommendations should
be a collaborative process. The investigator should seek input from the
department in question’s employees, managers, vendors, best practices from
other districts, and possibly governmental agencies that oversee some aspect of
the district. Once a recommendation is suggested, it should be implemented by
the department or campus in question. The investigator should follow up on the
efficacy of the recommendation after it is implemented.
Executive Summary. After the fraud report is written, the investigator should
write an executive summary. The executive summary is a one or two-page
document that gives an overall summary of the investigation. This is a great
document for executive staff. It briefs them on the investigation and its
outcome. They can then decide if they want to read through the actual fraud
report.
Distribution List. Once the report and executive summary are completed, it is
time to distribute those documents. The distribution list is vital to having the
recommendations implemented. Usually, the investigator does not have the
power to implement the recommendations listed in the report. However, a
targeted distribution list can be a powerful tool. It is important to get the report
into the hands of the people with power in your district to implement changes.
This report may also be sent to outside organizations as well. These

organizations could include the following:
• State, Federal and Local Law Enforcement Agencies
• Texas Education Agency
• Department of Education
• News Agencies (via FOIA requests)
Once the report is finalized and distributed the fraud investigation is not over.
There is still on important component left to complete, the Fraud Post- Mortem.
Conducting a Fraud Post-Mortem

A fraud post-mortem is simply an analysis of the fraud. It looks at what
happened, how did it happen, and how can it be prevented in the future. Some
districts may have policies requiring a post-mortem to be conducted after the
fraud investigation. At one district, board policy states:
75
After any investigation substantiates a report of fraud or financial
impropriety, the Superintendent or designee shall analyze conditions or
factors that may have contributed to the fraudulent or improper activity.
The Superintendent of designee shall ensure that appropriate
administrative procedures are developed and implemented to prevent
future misconduct. These measures shall be presented to the Board for
review. CAA (LOCAL)

Terms
• Ferraro, E. F., & Spain, N. M. (2006). Investigations in the Workplace. Boca
Raton, FL: Auerbach Publications.
• Rabon, D. & Chapman, T. (2007). Persuasive Interviewing: A Forensic Case

Analysis. Durham, NC: Carolina Academic Press.
• Wells, J. T. (2011). Principles of Fraud Examination (3rd ed.). Hoboken, NJ:

John Wiley & Sons.

• Google school district fraud
• Pick a story to investigate
• Who conducted the investigation?
• What kind of evidence did they require?
• What was the outcome of the investigation?
• Conduct a Fraud Post-Mortem on the case you read.

Summary
This chapter discussed four major aspects of investigating school district fraud.
The first aspect is the assembling of a fraud team. The fraud team should be
developed before any fraud is ever detected. It is a proactive move to be
prepared with the key personnel in place should a fraud be detected. The
second aspect is to gather important information and evidence. The key to a
successful fraud investigation is being able to obtain and assess the information
necessary to conduct a proper and thorough investigation. This information and
evidence will direct to tone and manner of the investigation and leads directly
to the next key aspect, conducting effective interviews.
76
Interviews should be based off of the information and evidence gathered.
Interviews begin from the outside and work their way to the alleged fraudster.
The two main kinds of interviews are information gathering and finally
admission seeking. A signed statement should be obtained of any confession.
The final aspect is the writing of the fraud report. This is an important
document. It is the culmination of the investigation and lists findings and
recommendations to be implemented. The key to the report is getting it into
the hands of district personnel that an implement the changes necessary to
prevent this kind of fraud in the future.
77
References
Association of Certified Fraud Examiners. (2016). Report to the Nations on
Occupational Fraud and Abuse. Austin, TX: Author.
Bragg, S. M. (2010). Accounting Best Practices (6th ed.). Hoboken, NJ: John Wiley
& Sons.
Coderre, D. (2009). Computer-Aided Fraud: Prevention & Detection. Hoboken, NJ:

John Wiley & Sons.
Ferraro, E. F., & Spain, N. M. (2006). Investigations in the Workplace. Boca Raton,
FL: Auerbach Publications.
Institute of Internal Auditors. (2011). Global Technology Audit Guide 16: Data
Analysis Technologies. Altamonte Springs, FL: Author.
Institute of Internal Auditors. (2009). Global Technology Audit Guide 13: Fraud
Prevention and Detection in an Automated World. Altamonte Springs, FL:
Author.
Rabon, D. & Chapman, T. (2007). Persuasive Interviewing: A Forensic Case

Analysis. Durham, NC: Carolina Academic Press.
Texas Education Agency. (2012). Financial Accountability System Resource Guide:

Module 4 Auditing (Update 15). Austin, TX: Author.
Wells, J. T. (2011). Principles of Fraud Examination (3rd ed.). Hoboken, NJ: John
Wiley & Sons.
Wells, J. T. (2004). Corporate Fraud Handbook: Prevention and Detection.

Hoboken, NJ: John Wiley & Sons.
78
Appendix A:
Supplemental Materials
In this appendix, you will find:
✓ Fraud Prevention Organization

✓ Internal Audit References
✓ Federal and State Governmental Fraud References
✓ School District Board Policies
Fraud Prevention Organization:
• Association of Certified Fraud Examiners
Internal Audit References:
• Institute of Internal Auditors

• Texas State Auditor’s Office
Federal and State Governmental Fraud References:
• Government Auditing Standards (Yellow Book)

• Texas Education Agency (FASRG)
School District Board Policies Resources:
• BBF (LOCAL) Board Member Ethics

• CAA (LOCAL) Financial Ethics
• CFC (LOCAL) Audits
• CFC (LEGAL) Audits
• CHE (LEGAL) Vendor Relations
• DBAA (LEGAL) Criminal History and Credit Reports
• DBAA (LOCAL) Criminal History and Credit Reports
• DBD (LEGAL) Conflict of Interest
• DBD (LOCAL) Conflict of Interest
• DG (LEGAL) Employee Rights and Privileges (Whistleblower)
• DH (LEGAL) Employee Standards of Conduct
79

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AUD211

Fraud Detection and

Texas Association of School Business Officials / AUD211 / ©TASBO 2016

Since there is a significant cost associated with fraud it is important to be able

“Fraud consists of some deceitful practice or willful device, resorted to

“Any activity that is clandestine, violates the employee’s fiduciary duties

The Fraud Triangle

Financial Pressure. The first concept or leg is a non-shareable financial

1 Large Amounts of Personal Debt

2 Owning a Failing Business

3 Addiction (gambling, alcohol, drugs)

5 Illness of Individual or a Family Member

6 Maintaining a Lifestyle Beyond Employee’s Means

Perceived Opportunity. The second leg of the Fraud Triangle is perceived

## Fraudster’s Perceived Opportunity

1 They are in a Position of Trust

2 Have Knowledge to Commit Fraudulent Acts

3 Have Technical Skill to Circumvent Internal Controls

4 Believe that Internal Controls are Weak

5 Believe that Management Oversight is Lacking

In addition to perceiving an opportunity to commit the fraud, and an un-

1 Only Borrowing the Money

2 They were Passed Over for Promotion

3 They Work Overtime without Being Paid

4 Have not Received a Raise

5 Upper Management Steals Money, Why Shouldn’t they

6 A Way to Punish Upper Management and the

Fraud Triangle Summary. While Cressey’s Fraud Triangle provides a good

Who Commits Fraud?

Educational Level. A final characteristic of a fraudster is their educational level.

What are the Red Flags of Fraud?

A third red flag is some form of addiction. If an employee becomes addicted to

Finally, the employee may just have a wheeler-dealer attitude. Like an

# The Red Flags of Employee Fraud

1 High Personal Debt

2 Living Beyond One’s Means

7 Wheeler Dealer Attitude

Organizational Red Flags. In addition to individual employees, there are

1 Lack of Competent Personnel

2 Lack of Proper Policies and Procedures

3 Lack of Adequate Documentation

4 No Background Checks of Personnel

5 No Separation of Employee Duties

References and Samples Related to Commonly Used

Wells, J. T. (2011). Principles of Fraud Examination (3rd ed.). Hoboken,

Wells, J. T. (2004). Corporate Fraud Handbook: Prevention and

Opportunities for Student Reflection and Practice

• What is the annual revenue amount?

• What would a 5% loss to Fraud amount to?

• What could be provided with that lost 5% due to Fraud?

## Common Areas for School District Fraud

2 Finance and Accounting Departments

5 Booster Club and Parent Teacher Organizations

Campus Fraud Schemes

## Campus Fraud Schemes

1 Student and Campus Activity Fund

The Case of the Kidney Transplant

• Does your school district have a fundraiser policy?

• Who approved student activity fund fundraisers at your district?

The Case of the Missing Gate Receipts

• Does your district have a gate receipt policy and procedure?

• How often are gate receipts deposited?

• What controls does your district have to safeguard gate receipts?