In teaching any academic subject, case studies are a powerful way to educate. The unraveling of facts and circumstances–especially in real time–is an effective way to illuminate any topic. The children in Floyd County, Georgia, are getting such an education. Only this study is not academic. It’s real.
In May 2015, Leigh Patterson, the Rome Judicial Circuit District Attorney, filed a complaint in Floyd County Superior Court alleging that Floyd County school employees engaged in fraudulent practices. The primary individual named in the complaint is the school’s former director of maintenance, Derry Richardson, but as many as a dozen school employees may have been complicit. So how much was potentially stolen? Possibly over $3 million according to the Rome News-Tribune. The FBI and Georgia Bureau of Investigation are still performing the investigation, so we don’t know the full damage at this point. And as always, we are dealing with allegations until the cases are adjudicated.
What do we know presently?
Several school employees resigned just after the complaint was filed. The positions vacated included:
- Maintenance director
- Lead maintenance specialist
- Director of school improvement
- Operations coordinator
- Chief of operations
School officials have not said whether the resignations were related to the D.A.’s complaint. The D.A.’s filing also named relatives of Derry Richardson and family owned businesses (namely, a building and supply company and local contracting companies).
Prosecutors are accusing Richardson and others of using inflated purchase orders to defraud the school system.
The Association of Certified Fraud Examiners has repeatedly found that asset misappropriations are a common means of theft. The use of fake or inflated purchase orders is considered an asset misappropriation scheme.
Why is this method of fraud so common? Because it’s easy to pull off. Once someone has the power to purchase, they can direct large sums of money to outside parties or themselves. You see this same dynamic in governments where checks are physically signed; the signing of the check is the “power to purchase.” So in some asset misappropriation schemes, the check signer simply makes out a check to himself or a friend (with the money later being split up between the check signer and the friend).
Though the superintendent of Floyd County schools was not involved in the alleged thefts, it appears Jeff McDaniel lost his job as a consequence of the errant activity. McDaniel did receive a severance package in a deal approved by the school board in August 2015. (I can’t say I agree with the Board’s decision. I am not sure how the superintendent can be held accountable for the losses since fraud can surface in hundreds of ways.)
All entities should pay lots of attention to those who have the power to purchase. Persons with this authority include:
- Department heads
- Purchasing agents
- Elected officials
- School superintendents
- Finance directors
Most people don’t recognize the threats related to someone’s ability to authorize or approve a purchase, especially if that person can’t sign checks. But understand that checks are sometimes signed electronically with computer-printed signatures. Once a purchase is approved, the check will often be issued without any questions.
How can you combat this threat?
Implement a surprise audit policy. Periodically, review purchases. Here are a few suggestions for doing so:
- Call vendors (see if they are real)
- Review bids
- Examine payees on checks
- Examine signatures on checks (and endorsements)
- Review for compliance with purchasing policies
The element of surprise is critical. If fraudsters know someone will examine their documents, they will cover up or destroy the evidence. So don’t tell anyone when the audits will be performed. While you don’t want to advertise when the inspections will occur, you do want all parties to know that their work will potentially be reviewed. The threat of being found out is the deterrent. I think of surprise audits as first a preventive measure and then a means of detection.
Finally, make sure the surprise audits occur. If we say they’ll happen, and they don’t, then the threat of being caught (the deterrent) diminishes.
Fraud Prevention Guidance
For more information about fraud prevention, check out my book on Amazon. Click the book cover below.
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