Blind Spot

July 26, 2010

SAN FRANCISCO – Colleges do a relatively good job of preventing cashiers and low-level employees from stealing, but they’re largely inept when it comes to monitoring mid- and upper-level managers who are the most likely to perpetrate significant fraud at an institution, an expert on such crimes said at the National Association of College and University Business Officers annual meeting here Sunday.

Angela Morelock, a forensic accountant who has investigated dozens of fraud cases, said colleges have dangerous blind spots when it comes to catching criminals in their midst. While the Association of Certified Fraud Examiners (ACFE) estimates that 41 percent of fraud cases are carried out by individuals at the management level, universities and other organizations devote most of their resources to monitoring lower-level employees, Morelock said.

The trend lines do not bode well for colleges, Morelock added. Given the soft economy, many colleges have cut administrative staff who served oversight functions, just as heightened financial pressures might provoke employees to commit fraud, she said.

“I do know one thing: Desperate people tend to do desperate things,” said Morelock, a partner with BKD, LLP, a certified public accounting firm.

Universities have been particularly remiss when it comes to monitoring athletic departments, often because “political” pressures make it difficult or uncomfortable to ask hard questions about the sports side of the house, Morelock added. While not naming names, Morelock alluded to a recent case at the University of Kansas, where athletic staffers sold men's basketball and football tickets valued between $1 million and $3 million.

“It’s time to touch the untouchable,” Morelock said, encouraging business officers to more closely monitor athletic departments.

Just as a person’s earnings typically increase with each additional level of education, embezzlers are likely to make bigger scores with every additional degree. Indeed, fraud perpetrators with only a high school diploma cost organizations a median of $100,000, compared with a median of $300,000 for those with postgraduate degrees, according to ACFE.

A common vulnerability for colleges is in the selection of vendors. In an increasing number of cases, employees have created fake vendors and steered business toward those “companies.” The employee will hire a legitimate company to do the work, but charge an institution significantly more under a doctored invoice.

“The selection of vendors is a critical risk,” Morelock said.

A number of colleges have created new safeguards in recent years in an effort to reduce the risks. Among them are the eight campuses of Indiana University, which have enacted a series of reforms, including mandatory background checks of all employees, time clocks for non-salaried employees and a new whistle blower policy that encourages employees to come forward when fraud is suspected.

Indiana’s experience suggests there are multiple barriers to reform. Faculty were particularly critical of background checks, and there’s been great resistance to a new policy that forces departments to use campus-wide vendors rather than individually selected suppliers.

“That has been extremely unpopular,” said Kathleen McNeely, associate vice president for financial services at Indiana.

While there is a cost saving rationale to the vendor policy, it’s also part of Indiana’s overall effort to strictly limit the number of people who can select vendors at all.

If there is pushback from faculty and staff, it’s often because they feel reforms are invasive and excessively bureaucratic, McNeely said. University officials had pushed for mandatory credit checks, particularly for about 200 employees in finance, but critics expressed privacy concerns and successfully fought off such a policy. Fraud experts suggest credit checks should be conducted regularly, citing the fact that an employee’s financial problems are often a motivator in fraud cases.

There are a few simple changes colleges can make to help detect fraud, Morelock noted. Among those steps is instituting a mandatory vacation policy. Fraud activity is often detected when an employee is away from work and others step in to handle their duties, Morelock said. By requiring employees to take some vacation days, an institution can increase the chances of uncovering something amiss, she said.

College officials also need to rely more upon “gut” instincts, Morelock added. It’s fair to become concerned or suspicious, for instance, if an employee with a $35,000 salary shows up at work in a new convertible Mercedes or gambles a lot – a common characteristic of fraud perpetrators. There is sometimes a reluctance to read anything into an employee’s personal behavior, but to take that position is to ignore warning signs, Morelock said.

Sometimes the signs of fraud are quite obvious. During her Power Point presentation, Morelock showed a copy of a gloating handwritten quotation an embezzler at an unidentified organization had hung on a cubicle wall.

“Oh what a tangled web we weave when first we practice to deceive,” the note read. “But once we’ve practiced for a while, oh my, how we’ve improved our style!”

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