posted on: Monday, February 23, 2009

By Gary Snyder

This is the forth edition of a series of articles on nonprofit fraud. This installment focuses on the embezzlement of funds slated for school children. Thefts come in various packages from schools, clubs, Parent-teacher organizations, unions, and programs. Schools range from elementary to secondary to post-secondary to vocational.

Since the problem is so massive, this article will focus on elementary and secondary schools. The crisis is equally as great at universities and vocational institutions.

As philanthropy for elementary and secondary schools has increased in excess of 100% over the past 5 years, the swelling of governance and management misdeeds have inflated in tandem.

Over the years, we have seen embezzlement, theft, forgery, racketeering, extortion, grand larceny, and falsification of records by those who we entrust our children. They have breached their fiduciary duty by self-dealing, negligent management of assets, and conflicts of interest.

We have also found misallocation, mismanagement, misappropriation, and malfeasance at an increasing rate, some on a massive scale. We have seen it locally, regionally and statewide.

Prosecutors have been unveiling misdeeds, in record numbers, by those with whom we put our faith. Schools are the new breeding ground for bad actors. Our role models involve Superintendents, Board members, presidents, chief executive officers and staff. They have benefited by breaching their fiduciary duty with self-dealing, negligent management of assets or conflicts of interests, some on a massive scale.

The overabundance of fiscal malfeasance and misdeeds has shortchanged our children by more than a billion dollars. More importantly, however, students are learning that the generosity of donors and taxpayers has been illegitimately shared with the role models that they are supposed to emulate. They have been stripped of their role models.

The number of dollars and schools is astounding. This is a snippet of educational malfeasance and mismanagement:

• In Michigan, Superintendents or Board members stole over $8 million, in five districts.
• In Arkansas, over 7 years, a secretary/data analyst stole $884,000.
• In New York, $11 million was embezzled by Superintendents in 2 school districts
• In Colorado, a Superintendent and CFO took $2.25 million
• In Missouri, a gambling-addicted Superintendent helped himself to $850,000
• In North Carolina, 2 school districts were raided for $2.2 million
• In Illinois, $1.5 was misappropriated
• In Utah, a part-time secretary and a contract pilfered $5 million
• In Hawaii, $200 million was lost in excessive compensation and poor investments
• In California, two schools had to be substantially demolished and reconstructed because no one checked to see if they
were either on an earthquake fault or on land containing cancer-causing chemicals or land saturated with methane gas
and other toxic chemicals, costing the district $300+ million.
• In Michigan, the district spent more than $26.7 million on school renovations only to tag some of them for closure.
• In Texas, a charter school defrauded the government of $6 million by inflating enrollment and lunch money.
• In Florida, a school district paid commissions on property purchased and non-compete bidding amounting to over $200
thousand.
• In Michigan, a superintendent helped himself to $400,000 over 7 years.
• In New York, a superintendent and deputy superintendent padded their paychecks, vacation and sick days in the amount
of $216,000
• In Michigan, an ex-convict was awarded a no-bid contract for $568,000 and never performed the services because he
was in jail…and no one knew.

Any school, whether private or public, should meet strict financial standards or face severe consequences. Here are 13 lucky fiscal controls that can create such a setting and stave off the embarrassment of pilfering:

1. When hiring employees, perform background checks
2. Require two signatures on every check. One should be an officer, preferably the treasurer.
3. Implement cash controls. Never leave people alone with money and do not leave money without people
4. All collections should be under the control of at least two people
5. Use tickets for cash events. Tickets make it easier to count the number of tickets vs. the amount of cash collected
6. All disbursements should be made by check and supported by documents
7. Someone other that than the person who signs the check should do the reconciliation
8. All adjustments should be approved by the executive
9. Create a Finance Committee. The Finance Committee should monitor, on a monthly basis, all transactions and review bank
statements
10. Conduct annual audits. An Audit Committee is responsible to make sure that the numbers add up; there was reconciliation
between request forms and receipts situations; and work with the auditor who checks the work
11. Actual results should be compared with budget and to prior years and should be done by management and monitored by
Finance Committee
12. Write down the rules. A one-page policies and procedures prevent people from straying. Structure makes people—Board
and staff—feel more comfortable
13. Get bond insurance. As part of the Board’s risk management program, fidelity bonds can recover some or all of the stolen
or embezzled funds.

There is a total lack of interest and concern with the astonishing prevalence of malfeasance in the schools. As we continue to document the squandering by corruption of billions of contributors’ dollars, the typical response is that it is a cost of doing business. Watchdog agencies, Board members, the media and donors alike, share that untroubled attitude.

The problem with fraud is not that it happens, but that there were no precautions put in place to thwart it. Few Board members have been forced to resign, or are fired, for failure to address this important issue in a preventative way.

While the vast majority of charities follow the law, staff and Board members should not assume that their agency falls into that category. Consider the abovementioned pre-emptive measures so that their experience with their school is a good one.

The previous articles on nonprofit fraud were on veteran, government, and accounting malfeasance. Upcoming articles will be on cultural fraud, attorney misdeeds, school theft, healthcare and nonprofit/political fraud.
Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.