An Arkansas school district intended to spend taxpayers' dollars to buy education materials for early childhood programs. Those dollars were instead misused for personal purchases.
According to a February Democrat-Gazette article by Bill Bowden, a former Little Rock School District director of Early Childhood Programs spent over $230,000 of our tax dollars for personal purchases including knitting materials, pet products, bath mats, and furniture.
This is puzzling. Why would the perpetrator, Dr. Karen James, risk losing a nearly $109,000 annual salary job if caught, a salary over twice the median income in Arkansas? A classic book, "Other People's Money: A Study in the Social Psychology of Embezzlement" by Donald Cressey, revealed that employees commit fraud due to a combination of three factors: pressure, opportunity, and rationalization.
Policies that address opportunity can help prevent fraud. The American Institute of Certified Public Accountants considers segregation of duties, a principle that key business or government processes be dispersed to more than one person or department, key to reducing the opportunity for fraud and error.
The Arkansas School Finance Manual recognizes the importance of segregation of duties by stipulating that "Schools should have great internal controls to ensure that theft or fraud are minimized. They should have segregation of duties to ensure that one individual does not perform more than one key operational function."
In this particular case, proper segregation of duties would have required separating the functions of authorizing the purchase, purchasing goods and services, receiving the goods and services, and making the payment. Ms. James, however, was in essence responsible for all of the functions. This created an opportunity for her to submit fabricated receipts and record false transactions.
Segregation of duties may not always be easily implemented, especially when dealing with entities that have smaller staffing levels. The Arkansas Legislative Audit (ALA) recognizes the challenge of segregating duties for small governments in the Arkansas Legislative Audit Information Systems Best Practices document. ALA recommends that compensating controls should be designed to reduce the risk of error and fraud.
So what remedy is there for understaffed entities? Take an extreme case of a one-person department where the same person has to authorize the purchase, as well as buy and receive the commodities. The risk of fraud can be mitigated by identifying at least one other person to provide the oversight.
The 2019 guide "Segregation of Duties: Essential Internal Controls" by the Office of the Washington State Auditor recommends strong oversight and independent authorization of transactions. In the case of the LRSD, oversight could have been provided by the superintendent or a member of the school board.
The truth is when it comes to public funds, trust is not enough. Arkansas schools must trust but verify financial transactions at all levels through proper internal controls which are key to safeguarding government's assets.
Every local government, regardless of size, should ensure that they have proper internal controls to be effective stewards of tax dollars. State authorities such as the Legislative Audit should ensure that such controls are adhered to and failure to do so is punished accordingly to dissuade others from committing fraud. Preventing the misuse of public funds is superior to prosecuting those who violated the public trust and misused funds for personal gain.
The enigmatic and degrading nature of fraud is so severe that the state should take the steps included above to deter any future potentially fraudulent activity at all levels of government. Let us protect Arkansans from the unavoidable fiscal burden of fraud and ensure a more equitable and prosperous future for all Arkansans.
Mavuto Kalulu is a policy analyst with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas and co-author of "Access Arkansas: County Web Transparency." The views expressed are those of the author and do not necessarily reflect those of UCA.