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HR Can Help Detect And Prevent Fraud

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CORRECTION: An example cited in this blog post about fraud that was discovered in the Wake County, N.C., school district back in 2004 included factual errors and may have misled readers. The district hired David Neter as its chief business officer in 2006, following the scandal, to incorporate better systems and processes to help safeguard the school system from future occurrences of fraud or other financial irregularities. He continues to be the Wake County district's chief business officer.

In his comment, "Fraud happens everywhere," which was pulled from a lengthy article in District Administration magazine in 2009, Mr. Neter was referring to the potential for fraud to take place within K-12 systems nationwide.

We regret the misimpressions.

In 2010, the Association of Certified Fraud Examiners (ACFE)- the largest anti-fraud training organization with more than 60,000 members-released their Report to the Nations on Occupational Fraud and Abuse, a compilation of data from 1,843 cases of occupational fraud worldwide from 2008-2009. In the report, ACFE notes that fraud typically lasts a median of 18 months before being detected. And, once fraud is discovered, 40.2 percent of the time the initial detection comes from a tip; 15.4 percent from a management review; 13.9 percent from an internal audit; 8.3 percent by accident; and the rest of the time via account reconciliation, law enforcement, confession, IT controls, etc.

ACFE also found that the median loss from occupational fraud was $160,000, but more than one quarter of the cases resulted in losses of at least $1 million. More than 85 percent of the perpetrators have never been convicted of fraud or a related offense and are caught due to living a lifestyle that suddenly seems above their means.

School districts are not exempt from fraud. There are cases from all across the country where employees and parents have been found guilty of stealing hundreds of thousands of dollars from districts in inventory (computers, paper, books, etc.), cash (from school sporting events or PTA/PTO events), credit cards, payroll (filing fake overtime), services, and more.

For example, a 2009 District Administration article called Fighting Fraud in Schools: Lax Controls Open Doors to Crimes, featured Wake County, North Carolina Schools, which lost $3.8 million by paying phony invoices to a local company. The company then kicked some of the funds back to a group of district employees to purchase luxury items.

ACFE, The Institute of Internal Auditors, and The American Institute of Certified Public Accountants has a free online resource called Managing the Business Risk of Fraud: A Practical Guide, which contains reference materials, a sample fraud policy and framework for fraud control, a fraud detection and prevention scorecard, and more. This guide can be used by businesses and school districts alike.

K-12 talent managers are typically responsible for monitoring fraud policies and managing prevention activities and services, such as hotlines for employees to report fraud. I encourage all talent managers to check out the Managing the Business Risk of Fraud Guide and other materials from fraud experts. It is important to understand the problem and strategies for how to help prevent your district from falling victim.

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