The School District Fraud Formula: How to Prevent Fraud in School Districts and Protect Student Learning and Teacher Salaries

Posted on October 17, 2018

To read the full report, click here.

To read the endnotes, click here.

Introduction

Over the last 20 years, the Arizona Auditor General has documented fraud involving taxpayer money and school personnel in 21 school districts—approximately 10 percent of all Arizona districts. After adjusting for inflation, nearly $26 million has been misused.1 The total losses are equivalent to the salaries of nearly 540 Arizona teachers earning the state’s average teacher pay in 2017.2

The incidents have occurred across Arizona, involving districts both large and small. However, each of the cases on the auditor’s list shares three common elements, creating a formula seemingly followed, all or in part, by district personnel that misused taxpayer funds meant for children and teacher salaries.

To prevent fraud, state policymakers should review this formula and learn from the activities that show up repeatedly in incidents of school district fraud and embezzlement, thereby protecting taxpayers, students, and teachers.

1. Request that Districts Have Strong Financial Oversight

Over the course of five years, a Topock Elementary School District official and her daughter managed to conduct almost 1,000 credit card transactions and steal some $236,000 from district students and teachers.3 The individuals bought gift cards, baby equipment, patio furniture, and alcohol and paid home utility bills. The official even wrote checks to herself and family members from the district’s checkbook.

These activities went undetected for years. In 2017, when the state auditor reviewed the district’s financials, the auditor found that the district “still did not have proper controls in place over expenditure processing, including the payment of credit card transactions.”4

This is the first common theme among the investigative reports involving Arizona school districts where fraud occurs: They consistently demonstrate poor accounting practices and weak fraud prevention measures.

A 2017 report from Phoenix Union High School District found that two employees managed to alter their wages on their W-2 forms to reduce the amount of taxes they owed by approximately $10,000 each between 2012 and 2015.5 Similar to the district oversight problems in Topock, the auditor reports, “Although district officials took prompt and appropriate actions after detecting Ms. Kendall’s fraud scheme, prior to this discovery, officials had not provided adequate oversight or maintained effective internal controls to ensure W-2 form amounts were appropriately recorded and processed.”6

Eloy Elementary School District was cited for similar lax oversight when it allowed the woman in charge of payroll to “alter work hours recorded in the payroll software for herself without being detected.”7 Tolleson Unified High School District officials “failed to exercise an appropriate level of oversight” for a bookstore employee who was in charge of “collecting payments, recording receipts in the receipt-processing system, making the associated deposit, and performing the monthly reconciliation without a thorough review by an employee independent of these functions.”8

Such findings are not unique to Arizona. In Louisiana, where teacher unions polled their members about going on strike in the 2018-2019 school year, school district audits have found similar problems.9 An audit of Caddo Parish Public School District says a district employee allegedly stole $260,000 and used the money for personal items.10 The audit blamed the district for allowing the fraud to persist, saying, “The School Board’s internal controls did not allow the detection of fraud or misappropriation in a timely manner.”11 An investigation of theft in the Ouachita Parish school system made a similar comment about weak financial oversight within that district.12

Time and time again, theft by school district personnel occurs in districts with poor financial transparency rules in place. While preventing all acts of fraud is impossible, parents, teachers, and taxpayers should demand districts take better care of student resources. Districts should at least be following state guidelines for procurement and other financial practices to limit the ability of employees to misuse taxpayer money.

2. Fraud Is Not Always Limited to One Incident

The second part of the fraud formula is related to the first: Fraud can go unnoticed for years, accumulating in small amounts at a time until a substantial sum is misused or unlawfully acquired.

In 2010, the Arizona auditor uncovered embezzlement in the Kyrene School District that had gone undetected for five years.13 In sum, a school principal had misused almost $90,000. In Yuma, a teacher misused more than $86,000 over the course of five years before he was caught.14 The executive assistant to the Glendale Elementary School District superintendent misused some $32,000 over four years before authorities uncovered the activity.15 Over and over again, school and district personnel find ways to skim money meant for students, often for years before being caught.

Small amounts stolen over time can result in substantial losses. The Topock incident cited above is notable because the district is small—only four teachers—and has an average teacher salary of just over $60,000 per year.16 This means that the stolen $236,000 is almost the equivalent of the district’s entire budget for teacher salaries for one year.

Topock lost an amount nearly equal to an entire year’s worth of teacher pay due to fraud that went unnoticed.

Again, the same problems exist in other states. In Oklahoma, a food service vendor overcharged the Oklahoma City school district for four years before the issue was resolved.17 The vendor settled with the district for an undisclosed amount. In Oklahoma’s Swink Public School District, some $235,000 was stolen over the course of five years.18 Obviously, such longer-term activity is related to the first part of the fraud formula (weak district financial oversight), but teachers looking for higher salaries should be asking those who oversee their salaries how misuse of education spending can persist.

3. Look for Creative Spending Habits

School district fraud makes for alarming news headlines, often because the perpetrators make extravagant purchases with the stolen funds.

In Scottsdale, a construction vendor was overpaid by $9,000 for his work in the district and sponsored a deepsea fishing expedition for district officials.19 In Ganado Unified School District, officials did not follow the rules for construction projects worth almost $3 million.20 The superintendent benefitted by having the vendor renovate the superintendent’s home bathroom, replace his backyard deck, install new blinds, and perform a “complete” kitchen remodeling project.21 According to the state auditor, “the Superintendent did not make any payments for 4 months until the Attorney General’s Office requested documentation regarding the home improvements, at which time he sent $40,163 by express overnight delivery.”22

In the Santa Cruz County School District, two officials misused district funds over the course of six years and paid for a wedding.23 One district official created a fake business and used district funds to pay for alcohol, a wedding band, mariachis, a tuxedo, and a host of other nuptial expenses. The district official also made personal car payments with district monies. The other district official cited in the auditor’s report “admitted to Auditor General staff that she needed money and ‘borrowed’ it from the County by writing checks to herself and family members.”24

One school official took school bookstore money and went gambling.25 In 2015, a Tolleson Union High School District employee was discovered to have embezzled more than $120,000 by fraudulently manipulating 374 school bookstore receipts. The state auditor reports the perpetrator went to casinos and gambled 76 times between 2009 and 2011 with more than $73,000 in district funds (November 2009 was a high point, where she spent nearly $7,000 at casinos). 26

Conclusion

Theft and embezzlement are an unfortunate, recurring problem in district schools around the country. Arizona’s Auditor General routinely investigates districts regarding misuse of taxpayer funds meant for students and teacher salaries.

Incidents of school district fraud have three notable characteristics in common, creating a formula for such illegal activities. Taxpayers and teachers should ask school district offices why fraud is allowed to persist, often for many years before it is caught. The longer theft is allowed to occur, the more harm is done and the less money is left for teacher salaries and student needs.

School districts should answer for sloppy fiscal oversight. As school district interest groups demand more money from the state general fund, policymakers should point to incidents of fraud and require district offices to review their accounting practices. Districts should be following state guidelines, and when audits report weak financial accounting— even in districts without ongoing fraudulent activity— lawmakers should demand better fiscal behavior before sending more state money.