Lack of Internal Controls Allows Repetitive Small Thefts To Really Add Up

|||Lack of Internal Controls Allows Repetitive Small Thefts To Really Add Up

Lack of Internal Controls Allows Repetitive Small Thefts To Really Add Up

October 2013

A recent article in the Los Angeles Times exemplifies how relatively small repetitive thefts can translate into large dollar amounts when allowed to perpetuate undetected over many years.  In this circumstance a Rialto school district accountant is accused of embezzling between $1.8 and $3.16 million of school lunch money, in weekly increments of more than $4,200, over eight years.  While the article reports that “Law enforcement agencies and the state Department of Education are investigating why the loss was not discovered sooner” the answer is most likely related to a lack of internal controls, including proper segregation of duties.  School Board members are now properly questioning the oversight of the lunch money.

The Los Angeles Times summarizes the situation as follows:

“Judith Oakes, 48, faces 16 felony counts and the prospect of up to 11 years in prison if convicted of all the charges in what Rialto police say is the largest white-collar crime case they have ever handled.

Oakes, who was allegedly caught on video stuffing school lunch money into her bra, was charged Tuesday.

As nutrient services accountant, Oakes oversaw the lunch money collected from the district’s 29 schools, along with related state and federal funds. The investigation into Oakes remains ongoing and police are planning to question other district officials as part of the probe…

[Rialto Police Capt.] De Anda said Oakes said “she had unfettered access to enormous sums of money over the years — much of it in cash.””

Ms. Oakes self-reports that she had “unfettered” access to cash would certainly suggest that she saw an opportunity to commit the fraud, and that she likely (and accurately) perceived her fraud would go unnoticed based on a lack of supervision and cross checking.  Opportunity is one of the three components of the fraud triangle.   School board members now lament the apparent lack of a proper control environment:

“We have to ask: How could this person get away with this for so long? How did someone not catch her sooner or discover earlier that money was missing and the figures weren’t adding up?” school board Vice President Edgar Montes asked last week.”

One on the key components of internal control is segregation of duties, which require separating the tasks of (i) asset handling, (ii) recording transactions and (iii) comparison or review of transactions or balances.  Such separations prevent an individual from being in a position to both perpetuate and conceal a misappropriation of funds.

Further, as is often the case, there were red flags related to the discrepancy between Ms. Oakes’ compensation and lifestyle.  The Los Angeles Times reports that while her annual pay was around $77,000, she “by all accounts lived a luxury lifestyle that included two homes, off-road vehicles and expensive trips”.

While the school district is currently working to recover its money and implement new policies to properly oversee the lunch funds in the future, had a proper control environment been in place from the beginning it could likely have prevented this situation.

Fulcrum Inquiry performs internal control assessments and forensic accounting services.

Monthy Archives