Fraud in Education Criminal Profiles

Originally appeared Fraud Magazine, Nov/Dec 2017 Column: Fraud Spotlight

Fraud in education: Criminal Profiles
By Tonya J. Mead, PhD, MBA, CHFI, CFE
(Inactive)

The National Institute of Justice (NIJ) scoured its vast body of research and found that the best way to deter crime is to increase the certainty of being caught. Fraud examiners are skilled in the prevention and detection of fraud, intentional misrepresentations, and white-collar crime across most industries. (See “Five Things About Deterrence,” National Institute of Justice, tinyurl.com/ydcsxxfb.)

However, unlike the bank, retail, health care and insurance sectors, discovery of fraud within the education system is still evolving. School reform, growth of for-profit universities, expansion of distance learning programs, restriction of student loan debt forgiveness and school vouchers represent just a few challenges impacting the landscape.

In the September/October 2017 issue of Fraud Magazine I discussed the impact of educational fraud on national security. Part two takes a deeper dive into those directly involved — from perpetrator to victim. See the entire article, here for free.

Investment in education
U.S. taxpayers invest $606.5 billion for public elementary and secondary education annually, according to the 2013 National Center for Education Statistics.  (See “Financing education: National, state and local funding and spending for public schools in 2013,” tinyurl.com/mvq8hbc.) At the same time, venture capitalists infuse $2 billion into the education economy each year and anticipate significant investment gains according to Mark Koba, in his April 28, 2015, Fortune article, “Education tech funding soars — but is it working in the classroom?” (See tinyurl.com/mgeklnq.)

By the way, if you’d like to know more from a historical perspective on the environmental factors related to increased incidents of fraud in the education sector, see my article here on the Educator Fraud Prism.

These funds enable more than 100,000 public schools and 7,200 colleges to educate 75.2 million students and employ more than 4.6 million faculty and 5.3 million administrators and staff  according to The National Center for Education Statistics’ “Digest of Education Statistics, 2015 (NCES 2016-014), Chapter 2, tinyurl.com/zort7df.

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Add 3.4 million faculty, staff and administrators employed in private educational institutions, and we have roughly 13.3 million education-sector employees[RZ1] .

Employment in the education sector
How does the sheer volume of people employed in the education sector compare to other industries? According to the 2014 Bureau of Labor Statistics, 80 percent of all jobs in the U.S. are in the service industry. Within this sector (excluding state, local and federal government), the top four job producing subsectors are professional and business services (19 million), health care and social assistance (18 million), retail trade (15 million) and leisure and hospitality (14 million).

The number of employees in the educator sector tops 13.3 million. This is 1.66 times larger than those employed in financial activities (eight million) and 6.65 times greater than those working in information services (two million). (See Bureau of Labor Statistics, Table 2.1, “Employment by Major Industry Sector,” Dec. 8, 2015, tinyurl.com/ybgw4772.)

Potential for fraud in education

The ACFE, in its 2016 Report to the Nations on Occupational Fraud and Abuse (ACFE.com/RTTN), ranked the education sector as fifth in its top 10 list of reported fraud cases in 2014 and sixth in 2016 — at 5.9 percent and 6 percent, respectively. By the way, I’ve developed fraud resources particularly for the education sector. Anyone is welcome to use the information for personal, professional educational, commercial and training use; however proper citation will be required. Thanks for your support and appreciation!

Fraud Resources for the CPA, Accountants, Bookkeepers and Investigators

Back to the gist of the article, the reasons for this high fraudulent and criminal rates of deception are varied. However, all answers point to the NIJ’s conclusion that the certainty of getting caught is the best form of deterrence. As fraud fighters on the front lines, how can we increase the risk of detection? Let’s start with a criminal profile.

Criminal profile: fraudsters in education

My analysis of the investigation reports published during the periods of January 2012 to June 2016, by the U.S. Department of Education, Office of the Inspector General (OIG) revealed that insiders perpetrated 61 percent of the cases and outsiders perpetrated 39 percent. (See tinyurl.com/y9w4tyjh.) I’ll focus on insiders because they represented the bulk of reported cases.

Insiders

My evaluation of the insider-onlythreats revealed that 72 percent of the crimes were committed by C-suite executives such as chief executive officers; district superintendents of traditional schools; and owners of educational testing services, career academies, tutoring companies and charter schools.

Twenty-one percent of the insider crimes related to fraudulent actions, deception, and misrepresentations were committed by mid-level managers and technical experts such as contracting officers, district accountants, financial aid advisors, and teachers. In seven percent of the insider cases, fraud crimes were committed by lower-level employees, such as tutors and temporaries. The estimated total loss during this period by insider fraud was $330,582,986. (See Figure 1 below.)
 

Figure 1: Insider profile: 2012-2016 OIG prosecuted cases

Source: Office of Inspector General, U.S. Department of Education, 2012-2016

Dr. Mead Analysis of OIG Prosecuted Cases 2012-2016: Insider Profiles

Fraudulent actions, targeted departments and vulnerable documents

Fraud in educational settings can reach many departments. Insiders, with access to critical documents and data in various departments, can perpetrate it. Front-office activities of pre-admissions, registration, master scheduling, grant reporting and matriculation are vulnerable.

The risk of fraudulent misconduct doesn’t diminish in back-office operations. Administrators, vendors and outsiders exploit vulnerabilities in payroll, data management, information technology, finance, procurement and operations. Figure 2 below lists fraud actions, targeted departments and vulnerable documents.

Figure 2: Fraudulent actions, targeted departments and vulnerable documents
Source: “Fraud in Education: Beyond the Wrong Answer,” by Tonya Mead, Create Space, November 2016, amazon.com/author/tonyajmead

By: Tonya Mead, Author Fraud in Education: Beyond the Wrong Answer


Red flags of fraud in education

Much like fraud occurring in other sectors, we can identify fraud in institutions of higher learning and on the k-12 level by way of red flags. I identified several red flags from an analysis of cases prosecuted by the U.S. Department of Education OIG and the Securities and Exchange Commission. I also reviewed state criminal and civil cases from 2012 to 2016.

My analysis revealed several processes and functions that are at high risk to fraud, mismanagement and abuse. I also found that the level of threat varied by education subsector level. (See Figure 3 below where S = secondary, PS = post-secondary, IR = insider risk and OR = outsider risk.)

Figure 3: Functions at risk for fraud by level and perpetrator threat
Source: “Fraud in Education: Beyond the Wrong Answer,” by Tonya Mead, Create Space, November 2016, amazon.com/author/tonyajmead

By Tonya Mead, Author Fraud in Education: Beyond the Wrong Answer

Like most frauds, fraud in the education sector aligns with the statistics that conclude most fraud losses are committed by internal staffs of organizations. Most of the time, fraud is eventually detected because somebody from the inside or outside blows the whistle. For additional information on the types of fraud occurring in educational and institutional settings, see my dictionary of fraud terms compiled here.

I hope this column raises awareness that fraud in educational instutions isn’t an anomaly or an exception but a growing trend that fraud examiners shouldn’t ignore.

Tonya J. Mead, PhD, MBA, CHFI, CFE (Inactive), is the president of Shared Knowledge, LLC, a private investigations firm, http://ishareknowledge.com and blogger at http://edfraud.net.

She’s a recipient of the 2014 Cafritz Award for Excellence in Government Service and Public Leadership in recognition for her work in designing an investigative program for the Washington, D.C. public schools. Her email address is: tonya@ishareknowledge.com.


 

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