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Fraud, Ethics and Conflict of Interest

Humble ISDJune 2008

Shawn K. Faciane, Internal Audit Director

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SAS 99 (Statement on Auditing Standards)

Requires School Districts to assess the risk of fraud and take proactive steps to diminish the risk

Internal Audit sent a self-assessment questionnaire in Spring 2008 to all campuses and departments asking about their awareness of fraud and internal controls in place to diminish risk.

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Proactive Steps for SAS 99

Local Policy CAA (Local) Conflict of Interest

DBD Legal/Local/Exhibit

Educator Code of Ethics DH Legal/Local/Exhibit

Employee Handbook

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Other Policies with SAS 99 in mind

Board Policies can be accessed at www.humble.k12.tx.us/trustees.htm, then click Board Policy Online,

TEA Financial Accountability System Resource Guide (FASRG) www.tea.state.tx.us/school.finance/audit/resguide13/far/FAR.pdf

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What is Fraud?

Fraud, unlike an error, is intentional and usually involves deliberate concealment of facts.

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Fraud TypesINTERNAL: Fraudulent Financial

Reporting “Cooking the Books” Maintaining multiple

sets of books

Misappropriation of Assets

Stealing Misuse Employee Time

Corruption Bribery Kickbacks Conflicts of Interest

EXTERNAL: Bid-rigging Billing for products not

delivered Charging for services or

products used on another job

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RationalizationIncentive/Pressure

Opportunity

FraudTriangle

Elements of Fraud – Fraud Triangle

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Opportunity

Absence of internal controls Ineffective controls Ability of management to override

controls Overstepping the duties of one’s job

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Incentive/Pressure

Reason or pressure to commit fraud inability to pay one’s bills, drug or gambling addiction, desire for status symbols – house, car, etc. need to meet testing, earning or

productivity targets

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Rationalization

Justify the crime I was only borrowing the money I had to steal to provide for my family I am underpaid on my job I was entitled to the money

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Reduce Risk of Fraud

Removing any of the 3 components normally prevents fraud.

The easiest one to remove is OPPORTUNITY – by having a strong system of internal controls!

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CAA (Local) Policy Overview

Fraud and Financial Impropriety Fraud and Financial Impropriety (see CAA

Local for full text)

The District prohibits fraud and financial impropriety … in the actions of its Trustees, employees, vendors, contractors, consultants, volunteers and others seeking or maintaining a business relationship with the District.

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CAA (Local) Policy Overview

Definition and prohibition of fraud and financial improprieties

Requires prompt reporting, investigation, and follow-up of suspected fraud

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CAA (Local) Policy Overview

Definition (see CAA for full text)Shall include but not be limited to – Forgery or unauthorized alteration of

any document … Misappropriation of funds, or other

District assets, including employee time.

Impropriety in the handling of money

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CAA (Local) Policy Overview

Reporting (see CAA for full text)Any person who suspects fraud or financial impropriety in the District shall report the suspicions immediately to any supervisor, the Superintendent or designee, the Board President, or local law enforcement.

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CAA (Local) Policy Overview

Responding (see CAA for full text) …Shall promptly investigate reports of

potential fraud or financial impropriety …Shall take or recommend

appropriate disciplinary action, which may include termination of employment

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Educator Code of Ethics

The Educator Code of Ethics applies to all School District Employees.

Standard professional practice & conduct

Campuses/Depts should review as part of employee training done at beginning of school year

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Employee Handbook

Incorporates policies CAA and DBD Includes Educator Code of Ethics (Per

State Board for Educator Certification) Employees acknowledge receipt of

handbook with a signed form

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Tone at the Top Set an ethical tone at the top - conduct

your own activities on a high ethical level Far more powerful than what is stated or

preached are the actions demonstrated and reinforced by those at the top

Maintain a culture of honesty and high ethics - clearly communicate to employees the behavior that is expected of them

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Conflict of Interest

A potential conflict of interest exists for employees who make job-related decisions that would allow them to give preference to a vendor in exchange for anything of excessive personal benefit to themselves, family, or friends.

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Conflict of Interest Situations

Accepting personal gifts from vendors, Having ownership in a significant part of

another company or business that is a vendor of Humble ISD, or

Having close or family relationships with vendors.

Loss is dollars needlessly spent on overpriced or unnecessary goods or services

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Conflict of Interest Questionnaire

Required by board policy With over 4,000 employees – it is

difficult for Purchasing to be aware of all employee/vendor relationships

The form creates awareness of employee/vendor relationships.

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Conflict of Interest Questionnaire Should be completed at least annually, or

when it occurs To be completed by 1) Board members and

2) employees in a position to affect a financial decision involving the business entity or real property

Will be posted on Humble ISD Internal Audit web site.

http://www.humble.k12.tx.us/pdf/ConflictofinterestQuestionnaire.pdf

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Conflict of Interest Form

Complete by August 31, 2008 Supervisor should sign off Send completed forms to Purchasing

Dept. – Keep a copy for yourself Disclosure only required for “yes”

response when employee is the owner

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Who will complete a form?

Campuses Principals Asst. Principals Secretary/Bookkeeper Budget Managers Club sponsors (send only those with a “yes”) Any others who recommend a purchasing

decision

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Who will complete a form?

Leadership Team Departments

Assistant/Associate Superintendents Executive Directors Directors and the Equivalent Coordinators Secretaries with Purchasing

Responsibility

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Who will complete a form?

Committees that review bids Purchasing Department Finance Department Federal Programs Department Any other individuals with purchasing

responsibility

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Immediate Family Defined

DEC Local The term “immediate family” shall include:

1. Spouse2. Son or daughter, …3. Parent, step-parent, parent-in-law ….4. Sibling, step-sibling, sibling-in-law5. Grandparent and grandchild

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DBD (Local) Policy Overview

Disclosure Disclosure (see DBD for full text) An Employee shall disclose to his or

her immediate supervisor a personal financial interest, a business interest, or any other obligation or relationship that in any way creates a potential conflict of interest …

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Questions?

Contact Shawn K. Faciane, Internal Audit Director, at extension 8009.