Lessons Learned from Fraud and Mismanagement: Strategies for Mitigation

1. Lessons Learned from Fraudand Mismanagement March 2019

2. Presenters Legal Audit Back Office • Brian Holman, Partner Matt Miller, CPA, Partner Shawn Rubin • Musick, Peeler, & Garrett, LLP Scott Gustafsson, CPA, Partner ExED • b.Holman@musickpeeler.com Vavrinek, Trine, Day & Co srubin@exed.net • mmiller@vtdcpa.com • sgustafsson@vtdcpa.com

3. Governance • Leadership Team • Vision & Mission • Internal Controls • Managing Human Capital • Ensuring Accountability • Board of Directors • Composition • Oversight Responsibility • Long Term Plan • Providing Support to Management

4. Legal Issues • Open Meetings • Brown Act • Failure to Comply with Government Agencies • Tax Returns (IRS and FTB) • Secretary of State – Statement of Information (registration and every other year filings) • Non-Profit Status – Determination Letters • Related Entries (Foundation, Support Corp, LLC) • Conflict of Interest • Laws and Policies • Failure to Plan Ahead • Growth, Risk Management, Construction Problems

5. Understand your areas of risk • WHAT COULD LEAD AN ORGANIZATION TO FAIL? • Charter Compliance Issues • Legal Status of the Non-Profit Organization • Not Planning Ahead • HOW IS FRAUD DEFINED? • WHAT ARE THE DIFFERENT TYPES OF FRAUD? • WHAT IS MISMANAGEMENT? • WHAT CAUSES MISMANGEMENT? • Do you have an established weekly review schedule? • Have you developed school site systems and procedures to ensure segregation of duties?

6. Avoid Mismanagement and RevocationKey Compliance Areas • Authorizing Agency • State Audit Guide requirements • Reporting requirements: Interim Financials, Consolidated Application, CALPADS • Local Control Accountability Plan (LCAP)aligning services and expenses • California School Dashboard • Federal Uniform Guidance

7. What are Internal Controls Systems of policies and procedures designedto prevent fraud, waste and misappropriation Regulatory Compliance ReliableReporting ProtectAssets Efficient Operations

8. Who needs internal controls? Board of Directors Administration Management Teachers Office Managers Food Service Vendors & Subcontractors Volunteers

9. Fraud Risk Assessment The most cost-effective way to limit fraud losses is to prevent fraud from occurring. This risk assessment is designed to help organizations review the effectiveness of their fraud prevention measures. • Is ongoing anti-fraud training provided to all employees of the organization? • Is an effective fraud reporting mechanism in place? • To increase employees' perception of detection, are the following proactive measures taken and publicized to employees? • Is the management climate/tone at the top one of honesty and integrity?

10. Protecting Yourselves Where does financialmisconduct most often occur?

11. The Fraud Diamond:Considering the Four Elements of Fraud Rationalization / Attitude Those involved in a fraud are able to rationalize a fraudulent act as being consistent with their personal code of ethics. Some individuals posses an attitude, Character or set of ethical values that allows them to knowingly and intentionally commit a dishonest act. Opportunity Circumstance exist – for example, the absence of controls, ineffective controls, or the ability of management to override controls – that provide an opportunity for fraud to be perpetrated. Capability Personal traits and abilities that play a major role in whether fraud may actually occur even with the presence of the other three elements.

12. ACFE Report to the Nations Highlights - 2018 • Overall highlights from the most recent ACFE Report to the Nations • Over $7 billion in total losses • 50% of corruption cases were detected by tip. Most common initial detection method • Internal control weaknesses were responsible for nearly half of frauds • Only 4% of perpetrators had a prior fraud conviction • Asset misappropriation schemes were the most common

13. ACFE Report to the Nations Highlights - 2018 • The red flags of fraud • Understanding and recognizing the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. • In 85% of cases fraudsters displayed at least one behavioral red flag and in half of the cases multiple red flags • 6 behavioral red flags have been the most common since 2008 with much consistency • Living beyond means • Financial difficulties • Close association with vendors/customers • Control issues / unwillingness to share duties • Divorce / family problems • “Wheeler Dealer” attitude

14. Examples of Fraud • Bank cash confirmation (unwilling to take no for an answer) • Church fiduciary accounts (everybody worries about their money they forgot to worry about other people’s money) • Inventory (Individual was taking items deemed obsolete or being saved in the warehouse and taking the items to the pawn shop) • Worst control you can have is the one that you think is operating effectively that actually is not working

15. Where do you have the least comfort? • Examples of suspicion of fraud or actual loss? • Conflict of Interest • Collection/Depositing of Cash • Bank Accounts • Payroll • Purchasing & Credit Cards • Weak Supervision • Lack of accountability • Lack of transparency in decision making

16. Dealing with the Fraudster INTERVIEW THE FRAUDSTER AND OTHER POSSIBLE PARTICIPANTS • Ensure management and witness involvement • Consider involving a Certified • Fraud Examiner • POSSIBLE HUMAN RESOURCE ACTIONS • Placing on administrative leave • Other discipline • Termination for cause DEVELOP GAME PLAN & FACT FINDING • Secure documents and records associated with the alleged fraud • Cancel checking accounts • Monitor payroll for suspicious activity • Delete subject’s password and access to computers and school • Notify vendors involved • Keep a log of events with dates and people involved • Contact Insurance Carrier to file possible claim • Notify local Police Dept.

17. Charter School Insurance Know your Insurance policy Review coverage limits every year Key employees and accounting personnel covered/bonded Assess events that can trigger additional coverage Is student accident included (playground, sports, etc.) Weekend events Construction projects

18. Thank you for attending!