Tackling Fraud - Prevention and Cure for Independent Schools

The greatest risk is generally posed by those with the most financial control in the school, being the senior employees and even governors.

No school operates with an expectation that its own staff or governors might be capable of misappropriating its assets. In the majority of cases, school employees and governors act with integrity and are beyond reproach. However, individuals may commit fraud for a variety of reasons and often a fraud is the culmination of complex personal circumstances. It is not enough to adopt a relaxed approach to financial management, and to attribute any incidences of fraud to bad luck. There are positive steps all schools can take, to properly regulate financial accountability, both to reduce the likelihood of falling victim to fraud and to minimise the impact of fraud if it does occur.

Reducing the Risk of Fraud

There are two key areas of focus which will reduce the risk of falling victim to a fraud. First, robust financial management procedures should be implemented and followed. Secondly, comprehensive staff policies should be introduced and staff trained in their application.

Financial Management

Governors of a charitable independent school are charity trustees and as such have a legal duty to protect the school's finances from the risk of fraud and to ensure that their school has appropriate internal financial controls.

It is usual for a committee of the governors to be responsible for overseeing the effectiveness of the school's internal financial controls but it is important for there to be a culture of control throughout the school, created by the governors and the senior management team.

As well as setting appropriate controls, it is important that the governors monitor that the controls are working, especially by exercising budgetary control and monitoring the school's financial performance against budget. The finance committee should look at more detail, but it is important that all governors (recognising some will not have a financial background) are provided with financial information in a format they can understand and remain briefed on key aspects of the school's financial position and performance.

The school's external auditors should also add value in scrutinising the school's existing financial procedures. The external auditor's role is to identify and assess the risk of a material misstatement in published accounts and care should be taken to appoint an external auditor with the right skills and experience to audit an independent school.

Governors should ensure that their financial controls are working in practice and are developed as necessary. Specifically, governors may control the school's budget, monitor the school's performance against its budget, and carry out spot checks of transactions and payments made on the school's behalf.

Internal Policies and Procedures

Robust internal policies should also be implemented and followed by all staff. The essential policies are likely to be:

• Anti-bribery and corruption policy - this policy should set out staff responsibilities in upholding the school's position in relation to bribery and corruption and should also provide guidance on dealing with bribery and corruption issues.
• Whistleblowing policy - this policy will encourage staff to report any unlawful or unethical conduct in the workplace. Staff should be reassured they will not be subject to any detriment if they do raise a concern about a colleague.
• Disciplinary procedure and rules - this procedure will be followed where a potential incident of fraud needs investigation.

Staff will be introduced to these policies and procedures during induction and periodic refresher training may be helpful where a policy is amended or newly introduced. Appropriate training ensures that staff are aware of their obligations and properly support the school in implementing best practice and deterring malpractice.

Responding to an Incident of Fraud

Despite robust procedures, a school may still fall victim to fraud. Where this happens, it is important that the school limits both financial and reputational damage.

Internal and Police Procedures

Where fraud results in financial loss, it is likely to be a criminal offence and the police may be notified. On occasion, an act of dishonesty may not cause the school to suffer financial loss, but may nevertheless cause other damage, whether to the school itself or to a third party. In these circumstances, it may not immediately be clear whether a criminal offence has been committed. Where there is any uncertainty, a report to the police should be made in any event. It is then for the police to decide what further action to take, if any.

Where the school is making a report to the police, care should be taken not to 'tip-off' the individual. This could prejudice a police investigation and could lead to criticism of the school. In extreme cases, the police may even take action against those who have committed the 'tipping-off'.

Where an incident of fraud is uncovered, the school will want to deal with it swiftly. In most cases, this will involve serious disciplinary action. Schools must be mindful that a police investigation will take priority over any internal investigation. In some cases, the police may require all internal procedures to be put on hold pending their investigation. In these circumstances, the individual is likely to be suspended on full pay which will be an ongoing cost to the school.

What we would always seek to achieve is a situation where the police allow a school to progress its own internal procedure at the earliest opportunity, relying on evidence obtained in the police investigation where this can be agreed. It is also possible that the individual may resign rather than face the prospect of being dismissed.

In any event, the school should maintain close contact with the police and cooperate before commencing any internal investigation that has been put on hold whilst a police investigation is prioritised.

Reporting Obligations

The governors of charitable schools are under a legal duty to report any serious incidents to the Charity Commission (Commission) when they are discovered. Any incident that results in, or risks significant loss of a school's assets, or harms a school's work or reputation, should be reported as a Serious Incident Report (SIR).

There has been an increase in school fraud cases reported in the media over recent months. In some cases, an incident has only come to the Commission's attention after having been reported in the press or disclosed by a third party. This can be damaging for a school and the Commission would subject the school's actions and procedures to far greater scrutiny than if a SIR had been made. Conversely, where a school has approached the Commission to make a SIR in a timely and measured way, the Commission is likely to recognise and appreciate the openness of the school in doing so, as well as the compliance by the charity trustees with their reporting duties.

Whilst the Commission expects schools to take steps to reduce the risk of staff committing fraud, it is a fact that this risk can never be completely extinguished. A school requires robust policies and procedures to best deter fraud, whilst being mindful of its timely reporting obligations to the Commission to help maintain confidence in the effective management and governance of the charity.

For more information, please contact our Independent Schools specialists Barney Northover on 0117 314 5395 or Simon Bevan on 0117 314 5238.

This article first appeared in the May 2015 edition of Funding for Independent Schools.