​The School Embezzler

A school system employee takes advantage of poor oversight and weak internal controls to divert funds to her personal purchases.​

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A Circuit Court judge in Blount County, Tenn. has approved a US$5.3 million civil judgment against a former Alcoa City Schools administrative assistant who confessed to stealing from the school system from 2007 to 2013, the Knoxville News-Sentinel reports. A Tennessee State Comptroller's audit uncovered the theft in 2012, spawning a one-year criminal probe that discovered that Kathy Ann Winters had diverted money from a fund she oversaw for special education, special needs, and low-income students to her personal bank account and had used a school system credit card for personal purchases. Winters, who is currently serving a 40-month sentence, created false invoices for services and expenses and forged her supervisor's signature on them. An attorney for the Alcoa Schools said Winters took advantage of a loophole in the accounting system. Since her conviction, the school system has implemented additional layers of accountability for the system, the attorney said.

Lessons Learned

Although this story describes a successful fraud prosecution based on a Tennessee State Comptroller's investigation, we cannot be completely satisfied with the outcome, given both the amount of time it took to detect the fraudulent behavior and the lack of attention to addressing the most likely root causes that allowed Winters to perpetrate her crimes. I'm referring to a lack of oversight, including a robust audit regime, and weak internal controls, especially over financial management. These are two of the most fundamental elements that need to be strong in combating fraud.

Oversight. The U.S. does not have a consistent national framework or requirements for establishing or contracting an audit function on a regular basis. Such a requirement also may be lacking in many other developed nations. Most U.S. states do have a state comptroller with audit and investigative powers, but requirements for school boards and districts to have internal audit functions vary widely. Where such requirements exist, exemptions to those requirements are set quite differently. For example, the state of Tennessee uses a centralized model, with a state Department of Education internal audit function. By contrast, Texas requires any state agency with an annual operating budget exceeding US$10 million, or more than 100 full-time equivalent positions, to have an internal auditor. However, that law does not apply to independent school districts and charter schools, which may do so voluntarily. In New York, almost all school districts are required to establish audit functions, along with audit committees. New York school districts with less than eight teachers, expenditures of less than US$5 million in the previous year, or an enrollment of fewer than 1,500 students are exempt.

School districts with an active internal audit function that regularly conducts risk-based audits of treasurer duties and financial management controls would be more likely to detect fraud at an earlier stage than occurred in this story.

A second aspect of the need for better oversight is stated directly in the Tennessee State Comptroller's investigative report: "The supervisors association (the school body that was supposed to oversee the Treasurer's activities) did not assume oversight responsibility over the organization's operations. The minutes of committee meetings infrequently reflected discussions of the financial operations, purchases or acquisitions, and personnel policies. Management should, to the extent possible, exercise greater oversight of the organization's operations. Such association oversight should include a review of monthly bank statements, a listing and description of monthly expenditures, and bank reconciliations." That not only states the problem clearly, but also raises the question of consequences for those who did not discharge their responsibilities appropriately.

Internal Controls. With regard to the role of weak internal controls, this story simply refers to an accounting "loophole" that has since been closed, but the state Comptroller's investigation report provides a more complete picture of the kinds of internal control lapses that create ideal conditions for fraud:

  • ​Duties were not segregated adequately within the school association steering committee. The person responsible for maintaining accounting records also was involved in disbursements, receipting, and bank deposits. The school district also had gaps in its financial management policy framework. For example, it did not have a credit card usage policy.
  • Appropriate documentation for all purchases for goods and services received was not required or provided in many cases. The system did not require a minimum of two signatures on all checks issued. The director of Alcoa Schools also did not follow the schools' policy that requires the director to approve all purchase orders and travel reimbursements.
  • The former treasurer was allowed to serve a term of eight years on the school board steering committee, but its bylaws clearly state that each representative may serve for a maximum of six years over any nine-year period. ​
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