This is the eight in a series of articles on red flags and this week's article focuses on student or departmental activity funds. Red flags may represent subtle or somewhat more obvious vignettes that "something is wrong with this picture" that can be sometimes overlooked by executive management or supervisors. Accordingly, an essential aspect of internal controls is to train appropriate staff to increase their awareness of and to be monitoring for various red flags that are relevant to various control areas.
Red flags associated with student or departmental activity funds include:
- Turnover of staff that have various roles related to student club or activity group oversight or sponsorship responsibilities;
- Indication that select principals, student club sponsors or activity group sponsors have delegated their approval responsibilities for approving activity group financial transactions;
- Lack of select principal’s, student club sponsor’s or activity group sponsor’s detailed review and approval of proposed purchases;
- Lack of a vendor’s itemization of services provided including date, times, location and services rendered;
- Lack of central business office review of amounts paid by clubs and groups across all campuses to individual vendors for issuance of IRS 1099 form;
- Lack of approval in writing from the principal and central business office before a new student or activity club or group is started;
- Lack of approval in writing from the principal and central business office before a new fundraiser is started;
- Lack of cooperation in providing copies of financial records to the central business office;
- Lack of specified caps on the number of fundraisers per group, club or activity per school year;
- Lack of financial reports from the club or group sponsor and/or campus principal to the business office at the conclusion of each fund raising activity;
- Lack of financial reports from the club or group sponsor and/or campus principal to the business office on at least a quarterly basis;
- Campuses and club sponsors lack access to a copy of the campus activity manual and business procedure manual;
- Lack of consistent practices in recording ALL exchanges of money on either a tabulation sheet and receipt book;
- Select student club sponsors or activity group sponsors did not use only authorized receipt books with pre-numbered receipts;
- Lack of consistent cash handling and financial management practices by ALL campuses and sponsors as specified in the campus activity manual;
- Lack of consistent use of the same accounting system on all campuses for recording financial transactions;
- Inadequate segregation of duties, including directing a separate person from the activity fund accountant or bookkeeper to receive cash receipts;
- Not making nightly or prompt deposits, and not involving someone to make deposits that is separate from the activity fund accountant or bookkeeper;
- Lack of separation of duties between receiving and depositing money;
- Indications of cash-on-hand being used as a “local bank” to cover purchases, check cashing, loans, advances or reimbursements;
- Evidence that missing fundraiser financial records, including used receipt books, and lack of consistent storage in accordance with the district’s record retention procedures;
- Lack of monthly reconciliations of all activity funds across all campuses;
- Evidence of unusual pattern in deposits in transit in monthly reconciliations of activity or club fund bank accounts;
- Lack of evidence of principal’s or designee’s initials and dates indicating their reviews of activity fund reconciliations;
- Lack of attendance at training on financial management practices for campus activity funds by principals, club and group sponsors, or athletic staff;
- Lack of details related to roles and responsibilities connected to student or activity groups in job descriptions and lack of evidence that these were addressed in annual performance evaluations; and
- Lack of a local policy that upon dissolution of any “Agency Fund” organization that any remaining cash balance be transferred to the campus principal’s activity fund or other designated account(s).
Any indications or observed red flags should be promptly evaluated and consideration be made for prompt follow-up or investigation. In most instances, red flags are signs that relevant manuals for practices, procedures, processes and key controls should be reviewed and modified, as needed, and staff should receive additional relevant training to improve their skills and expertise. Red flags should be covered during after-action reviews to evaluate strengths and opportunities for improvement. Invariably most red flags are more recognizable as 20/20 hindsight.
It’s important to note that red flags do not stand on their own as an indication that fraud has occurred. When should a school official refer a matter to law enforcement? In all instances, this should be done only after consultation with the district's attorney-on-retainer, which was covered in a prior article titled Internal Control Tip of Week - When Do You Refer a Matter.