Friday, April 6, 2012

School Activity Fund Frauds: An Accident Waiting to Happen Monday November 12, 2007

monday, november 12, 2007

School Activity Fund Frauds: An Accident Waiting to Happen

The following article appeared in the Washington Post on November 9, 2007 (Student Money Vanishes, but Few Are Punished Activity Funds Are Often Plundered and Mismanaged by Adults). I have maintained for a long time that management of these funds was an accident waiting to happen. As an internal auditor for Fairfax County Public Schools I observed firsthand the types of abuses that occur regularly in school activity funds. Despite reporting mechanisms such as independent audits that show control weaknesses many of the abuses are repeated year after year. This is in large part due to who controls the funds, lack of effective policies and procedures, and an overall position that these are not material to the financial statements and therefore do not warrant attention.

Across the United States millions of dollars are collected each year for student activity funds. These funds are under the direct control of the principal of the school. While the funds may seem immaterial (from several hundred dollars up to hundreds of thousands of dollars) when you consider the amounts collected by school district the number easily reach millions of dollars a year.

Student activity money is collected from vending machines, sporting events, bake sales and other activities approved by the school principal.

The funds are supposed to be used to promote the general welfare, education and morale of students through activities such as field trips, school publications etc.

The funds are the responsibility of the school principal.

School districts are supposed to have policies and procedures covering the collection, safeguarding, and expenditure of school activity funds.

The funds should be audited each year by an independent accounting firm.

However the reality is that procedures for collection, safeguarding and dissemination are not always followed. Not all the money collected is recorded in the school's accounting system. Funds are not promptly deposited and are kept in insecure locations (unlocked desks) or safes with access by multiple personnel. Funds are spent for purposes other than the benefit of students. School principals routinely give the responsibility for oversight of the funds to individuals not properly trained. Due to lack of internal resources (such as internal auditors) funds are not audited on a regular basis. Additionally the school districts external auditors may not even be aware of the funds available and therefore do not look at whether appropriate internal controls are in place.

While at Fairfax County Public Schools I reviewed reports issued by an external auditor hired on a contract basis to review the school activity funds. The control weaknesses identified by the external auditor occurred year after year without little if any changes. In addition eventhough the State Education Department mandated that EVERY SCHOOL ACTIVITY FUND BE AUDITED EVERY YEAR, there was no requirement that the State Education Department be provided with a copy of the report. The cost to the County was over $250,000 and was borne by the taxpayers rather than being paid for by the Student Activity funds (over $40 million dollars collected).

There needs to be greater oversight by school officials including internal auditors. There should be minimum standards for individuals responsible for student activity funds. Additionally when problems are identified prompt action needs to be taken. The cost of independent audits or audit oversight for these activity funds should be be funded by proceeds collected.

There are many public school districts where the internal audit department has responbility for auditing school activity funds. Unfortunately many of those same public school districts do not adequately fund internal audit functions to maintain effective oversight of internal controls for student activity funds or other school district operations.

What happened in the District of Columbia should be a wake up call for public school districts across the United States.

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