Crundwell used the stolen funds to live a lavish lifestyle that included four months of vacation annually, hundreds of quarter horses, large farms, a vacation home in Florida, million-dollar RVs and more.
While she was enjoying her lavish lifestyle, the city of Dixon, with an approximate population of 16,000, endured reduction in staffing, cuts to the police budget, and neglect of public infrastructure, such as roads and parks.
While this case is unusual in its magnitude and duration, many other cases of occupational fraud—fraud committed by an employee using his or her role or employment for personal gain—occur every day throughout the country.
The Association of Certified Fraud Examiners “Report to the Nations” for 2018 revealed a typical organization loses 5% of revenues to fraud annually. The ACFE reviewed 2,690 cases of occupational fraud and determined a total loss of more than $7 billion, or an average of $130,000 per case. The report cited corruption, which includes conflict of interest, as the most common scheme.
School business offices can protect the district and its employees from fraud while maintaining the highest level of integrity with the community by ensuring proper internal controls are in place to identify, monitor, and address an employee conflict of interest.
Educating employees to recognize fraud in its various forms is the first step in controlling the potential for fraud within the district.
Educating employees to recognize fraud in its various forms is the first step in controlling the potential for fraud within the district.
Fraud and Corruption
Corruption, one of the most significant fraud risks for organizations, has several subcategories, including bribery, illegal gratuities, extortion, and conflict of interest, which includes purchasing schemes and sales schemes.
Conflict of interest is a type of fraud that can easily occur in an educational setting. When a school district employee, relative of an employee, board member, or relative of a board member has a substantial personal or monetary interest in a matter that could unduly influence his or her professional decision making, a conflict of interest has occurred.
Conflicts of interest do not necessarily constitute legal violations, if they are properly disclosed. In addition, a conflict of interest can exist even if no improper acts result from it.
Conflict of interest can be defined as actual, perceived, or potential.
- An actual conflict of interest exists when there is a direct conflict between one’s private interests and his or her professional duties.
- A perceived (or apparent) conflict of interest exists when it could be inferred that an agent’s or employee’s private interests improperly influence the performance of his or her professional duties and responsibilities.
- A potential conflict of interest exists when an agent’s or employee’s private interest could, in the future, conflict with his or her duties and responsibilities in serving an employer. Potential conflicts can often develop into actual conflicts.
Disclosing a conflict of interest removes or limits the possibility of an employee’s personal investment in an outcome. This doesn’t just apply to a contract, sale, purchase, or service; it applies to the decision making process, too.
When does a conflict of interest exist?
- If an employee, board member, or relative has a substantial interest in a commercial venture with whom the school district does business. “Substantial interest” means any monetary or proprietary interest, either direct or indirect. “Relative” can be defined as the spouse, child, child's child, parent, grandparent, brother, or sister of the whole or half blood and their spouses and the parent, brother, sister, or child of a spouse.
- If an employee, board member, or relative participates in the purchase of goods or services where conflict exists. This includes voting, approving, developing, introducing, administering, giving advice, recommending, attending meetings, providing information, influencing decisions, or directing an employee to approve.
Either of the above scenarios should flag an alert for conflict of interest, and the educated employee or governing board member must disclose it as such.
Educating Employees
Implementing best practices can help prevent fraud based on conflict of interest.
Require employees to fill out a conflict of interest form when hired and again annually; however, before any forms are filled out, be certain employees understand the terms and the scope of concern applied to conflict of interest
Require board members to fill out a conflict of interest form when elected and renew it annually. Again, be certain that all persons involved understand the definition of conflict of interest.
Thoroughly investigate allegations of inadequate disclosure of substantial interests and/or inappropriate participation when substantial interest may exist.
Conduct annual regularly scheduled district conflict of interest training for all employees and require acknowledgment that they were received and understood.
In Avondale Elementary School District, we have an online tool that provides the training for employees to review annually. It also tracks which employees have and have not completed the training and sends employees reminders about the requirement to complete the training.
Protecting Your District
If your district hasn’t done a fraud risk assessment recently, it may be time to do so. Some questions to consider include:
- Does your district have a conflict of interest policy?
- Are all employees aware of the conflict of interest policy?
- Is the policy implemented consistently and responsibly?
- Does management review the conflicts to consider whether they are still valid?
Risk assessments should be done regarding personal interest, job function, and vendor relations.
Here are some additional steps to get you started:
- Review your state laws to ensure you understand the rules of and consequences around conflict of interest.
- Review your district’s policy and procedures.
- Evaluate your district’s organizational risk, personal risk, job duty risk, and vendor relations risk.
- Train all district employees to recognize what constitutes a conflict of interest.
- Educate your vendors on conflict of interest policies and procedures.
- Establish an alert in your purchasing system that allows your district to monitor vendors who may have a conflict.
- Compare employee addresses with vendor addresses to ensure they are not the same.
- Conduct a vendor audit by reviewing ownership of businesses through state databases.
It’s critical to educate employees and colleagues, speak up, and encourage transparency. Taking these measures will go a long way in helping you protect your district against fraud due to conflicts of interest.