CPAs beware of school fraud

By: Tonya Mead, PhD, School Psychologist, MBA, M.Ed, Retired CFE, CHFI

CPAs must beware of school fraud. Why? Turning a blind eye to corporate jets, luxurious homes, vast real estate and $1 million in cash can mean a loss of certification, the requirement to pay restitution and a jail sentence. If you have already read this article, I have provided an update on another school fraud incident in the next two paragraphs. If you are unfamiliar with the original article, please jump to the subheading: Original article- School fraud may lead to loss of CPAs designation.

Update about school fraud: Routine school audits discover school fraud

A two yearlong financial audit of now-closed Seeworth Academy Charter School, Oklahoma discovered more than one-quarter of one million dollars that were misappropriated by the school superintendent, Janet Grigg. Once the audit was publicized, queries were raised about the chronic lack of oversight and failure to act by board members of Seeworth Academy. It was suggested that Seeworth’s financial auditors advised the  on numerous occasions over a decade, to institute financial controls and to increase oversight. Further, there was a whistleblower provided a written letter to the board alleging improprieties that was dismissed.

The audit alleged that there were about $10,000  spent at the online shopping network QVC, $2,500 spent at the local casino, $11,500 in debt withdrawals for expenditures at local clothing retailers, and $15,000 made out to the former superintendent, Janet Grigg in cash.

Interestingly, in addition to the recommendation for criminal charges,  there were calls for Oklahoma to reform its legislative laws and regulations. According to State Superintendent of Public Instruction Joy Hofmeister , “a lack of structure and accountability in state law has allowed for this apparent fraud. Charter school boards aren’t even currently required to undergo training for their fiduciary roles. We continue to call for the legislature to strengthen oversight of charters.”

Red flags of fraud in education: Additions based on this case

  • The financial and bank statements of the school’s corporate account and associated school’s tax identification number were diverted for management outside of the standard process (even though statements were mailed to the school’s address).
  • Improper ATM cash withdrawals, improper debt card withdrawals, and improper checks.
  • Checks made out to cash to the superintendent.
  • Shredding of financial documents.
  • The refusal of a $1 million donation on the condition that an independent audit takes place.
  • Lack of internal checks and balances as the superintendent played the roles of: superintendent, chief financial officer, and human resources director.
  • An inactive, inattentive and dismissive board.
  • Unauthorized bonus payments to the superintendent.
  • Payments to the superintendent’s for her personal home mortgage.
  • The continued use of a state department of education vehicle leased to the school even after the car insurance had lapsed.
  • Dismissal of the whistleblower after she sent a letter to the board outlining possible improprieties.
  • The removal of a vocal board member who had questioned the integrity of the financial operations of the school.
  • State department of education letter of findings questioning lack of transparency and accountability.
  • Separate accounting for cash payments for the following: cafeteria operations, basketball ticket sales and concessions.

Original article: School fraud may mean loss of CPA designation

This is exactly what happened to former CPA (emphasis on former) Neal Prence. He is soon to be sentenced to federal prison “for his role in covering it all up after he pleaded guilty to one count of tax conspiracy.” (para 6). Mind you, Prence was not auditing the books of an aggressive small business owner with hungry eyes ready to pounce on any and all deals. He was minding the store of a public charter school operation.

Related articles

The back story

U.S. Attorney David Hickton charged Prence based upon an elaborate scheme of grant fraud concocted by Dr. Nick Trombetta, founder of the Pennsylvania Cyber Charter School. In the end, the the former CPA was called “a willing, long-term and eager participant in a criminal enterprise” and “an absolutely essential participant in an illegal scheme to divert $8 million in public money into the pocket of Nick Trombetta.” (para 9).

Federal funding to the states for educational purposes

Not yet convinced about the massive amount of federal funding allocated to the 50 U.S. states?  Education reports that “federal, state, and local governments budget $734.2 billion or $14,484 per pupil to fund K-12 public education. The difference between spending and funding is $94.29 billion or $1,860 per pupil. The federal government provides 7.8% of funding for public K-12 education.” That’s a lot of dough. For your convenience, I’ve downloaded data tables by state of the 2020 actual funding and projected 2021 and 2022 funds. They have been posted here. The tables were most recently updated July 1, 2021.

CPA Responsibility

Fraud detection is addressed in AU Sections 316 and 240. Even so, practitioners in the auditing profession argue that fraud detection is not within its purview.   Attorney Greene disagrees.  Regardless of where you stand as the reader of this blog, victim organizations, once fraud is uncovered “often assert a malpractice claim against the CPA firm.” (para 1, line 15).

Red Flags for Fraud

Generally, some of the red flags for fraud are:

  1. Rounded dollar amounts.
  2. Duplicate transactions.
  3. Multiple vendors with same and/or similar addresses.
  4. Multiple employees with same and/or similar addresses.
  5. Weekend and after-hours journal entry posts.
  6. Shell companies (multiple transactions within arms length).

But the experienced CPA and compliance officer knows this already. If you are interested in examining the Red Flags for Fraud, specifically in the education sector, click here for my free resource. The resource lists fraud acts by department and identifies the documents and data most likely to be manipulated in an educational setting.

Related articles

Free Resource

Fraud Acts by Department (Specifically related to the education sector). This resource is taken from the book: Fraud in Education: Beyond the Wrong Answer

About Tonya Mead

Tonya J. Mead, PhD, MBA, M.Ed, CHFI,  CFE,  PI,  is the founder of Shared Knowledge LLC a private security and detective agency. Dr. Mead, formerly a certified K-12 Administrator and School Psychologist, is author of Fraud in Education: Beyond the Wrong Answer and president of Shared Knowledge, LLC If you like her work, please support her at Patreon.