An “F” for Fraud​​
An inspector general reports on billing fraud in the Chicago Public Schools.​

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​​The Chicago Public Schools (CPS) inspector general alleges that a former employee stole more than US$870,000 from the district through a fraudulent billing scheme, The Chicago Tribune reports. According to the inspector general's annual report, an employee at Clark High School conspired with co-workers and vendors to submit fake reimbursements for purchases and file fake purchase orders between 2009 and 2013. The employee also allegedly received kickbacks from vendors for fraudulent purchases from companies. The employee has since resigned, and CPS is moving to bar the companies involved in the scheme from doing business with the district. A criminal investigation is underway.

Lessons Learned

As this story and the related 2014 Annual Report of the CPS inspector general observe, a wide range of fraudulent activities occur in school systems on a regular basis. The latter report reveals that the top complaints — from about 1,300 filed in 2014 — related to residency, inattention to duty, contractor violations, tuition fraud, and misappropriation of funds. I have not found any report that quantifies the total impact, but if the level of malfeasance found in the CPS case were replicated across all the school boards throughout the United States, it could total more than US$1 billion a year — a significant waste of taxpayer dollars and an affront to trust in public institutions.

Typically, boards of education in the United States have some kind of fraud prevention and detection policy in place that requires all employees, school board members, consultants, vendors, contractors, and other parties maintaining any business relationship with the district to act ethically, with due diligence and in accordance with all applicable laws. Boards assign a superintendent or equivalent leadership position responsibility for developing internal controls, policies, and procedures to prevent and detect fraud, financial impropriety, or fiscal irregularities within the district. They also expect every member of the district's administrative team to be alert to any indication of fraud, financial impropriety, or irregularity within his or her areas of responsibility. Further, school boards usually have an accountability requirement: District employees who suspect fraud, impropriety, or irregularity in relation to fiscal or other resources are expected to report their suspicions immediately to their supervisor or the superintendent, who then is responsible for initiating necessary investigations, and taking appropriate action, if warranted.

However, an inevitable complex patchwork of state and district regulations, combined with ongoing budgetary constraints and governance regimes that often rely on local and volunteer resources, among other factors, make it difficult to consistently implement an effective fraud prevention and detection regime. Here are some targeted suggestions to help make these regimes more effective based on a review I conducted of several different state and school district oversight and audit reports:​

  • More thorough school board governance. Increasing dissatisfaction with the governance of school boards can be found in numerous news stories and state/district inspection/audit reports, particularly related to significant fraudulent activities uncovered in many school districts across the United States. Despite the important role that school boards play in governing schools across the country, virtually no empirical research exists that examines the governance structure — and its effectiveness — with respect to the board's responsibility to address fraud issues. Although several school board inspection reports I found pointed out that external audit programs were legally mandated, few districts had internal auditors and audit committees. School district governance is a partnership between the school board, the school organization, and the community in which it serves. Two specific measures that should be considered are 1) more comprehensive board education on responsibilities and strategies related to fraud and auditing; and 2) more consistent structuring of board audit committees and related internal audit activities, even if they are part of a larger finance committee and supported by volunteer resources. Once these measures are in place, the board then should actively oversee implementation to ensure they are working well.
  • ​​Consistent, mandatory codes of conduct and ethics training. Statewide oversight reports I examined often noted that ethics training for teaching and administrative personnel existed but was not applied consistently across districts. The adoption of a code of ethics for all school system staff was more rare. School leaders also should be educated concerning appropriate actions in common fraud prevention areas. They need to understand the importance of internal auditing, know the language in local policy, and rigorously follow up.​​​ 
  • Strengthen internal controls, especially over the most fraud-susceptible risk areas. Another consequence of budget stresses and a reliance on external auditing, complaints, and whistleblower-driven processes to deal with fraud is that schools are often behind the curve in preventing and detecting fraudulent activities. Inspection reports frequently provided recommendations, but typically only related to the disciplining of employees or contractors, and much less frequently in relation to systematic changes to controls or procedures that should be changed or improved. In addition to educational and accountability related measures, school districts should undertake regular assessment of risk-prioritized fraud activities and direct their targeted prevention and detection efforts to those areas. Given the kinds of fraud, such as employee theft, documented in the Chicago Public Schools case, some specific control measures to consider include: 1) increased segregation of financial approval authorities over more than two employees, and 2) increased monitoring and scrutiny of frequent bidders and contractors for school supplies and services. To help avoid the potential for "stringing" contract bids — falsely splitting an overall contract amount into smaller pieces to avoid limits on noncompetitive contracting — school boards should consider either lowering the dollar limit or eliminating it entirely.​
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