Trust, freedom, integrity.
A pair of recent million-dollar heists at Canadian universities have shown that the culture of collegiality these post-secondary institutions strive to foster, not to mention the complexities of mixing business and academics, expose them to financial cheats who are constantly devising sophisticated and subtle new ways to skim from school coffers.
Annual surveys of 20-plus university auditors reveal that their institutions quietly endure some level of financial crime year after year – five- and six-figure sums routinely go missing, much of it unrecoverable. Yet they are more reluctant than companies in other industries to install and enforce safeguards, even in a time of budget crunches, when spending is being watched especially closely.
Last month, police charged a University of Waterloo copy centre supervisor with fraud totalling $955,000 little more than a month after similar charges were brought against two York University employees accused of taking more than $1.2-million over nearly three years. Studies show most frauds at universities total between $10,000 and $50,000, but seven-figure thefts are hardly a rarity: A quarter of all Canada’s occupational frauds are worth at least $1-million.
Notions of collegial self-governance – a system of decentralized authority and co-operative stewardship involving academic staff and administrators alike – are embedded in universities’ DNA.
“Because of collegiality and the trust factor, it’s a little bit more difficult to instill the regular controls that we would see in other institutions, like in the corporate world,” said Dominic Peltier-Rivest, an associate professor at Concordia University who studies fraud prevention and detection.
The controls with the broadest impact are anonymous whistle-blower hotlines, surprise audits (or spot checks), and thorough fraud training for faculty and staff, Dr. Peltier-Rivest said, especially as tips are by far the best method of detection. Dr. Peltier-Rivest led a study across all sectors that showed median losses at organizations using these measures were less than half those at other companies, and the crimes were detected six months sooner.
But these fundamental controls are still absent or underused at many schools. Three years ago, a group of internal auditors began circulating an annual fraud survey through the Canadian Association of University Business Officers (CAUBO). In the first year, 18 of the 23 responding universities – mostly large and medium-sized institutions, as well as some small schools – reported at least one fraud over $5,000, while two had more than six frauds in five years. But only one-third had a fraud policy, less than a quarter performed fraud-risk assessments, and even fewer used a whistleblower hotline.
Mark Britt, the director of internal audit at the University of Toronto, hopes the surveys are creating momentum to strengthen safeguards, and said he has seen more universities “that have adopted fraud policies, that have adopted either internal or external hotlines.” Still, only six of 20 universities in the 2011 CAUBO survey had hotlines.
“There’s the myth that a hotline is a snitch line and is going to foster mistrust,” Dr. Peltier-Rivest said.
Some universities have turned to technology to sniff out fraud. In 2010, the University of British Columbia adopted a data analytic tool that several universities use to hunt for unusual transactions. The program uncovered a $460,000 fraudulent cheque scheme. John Mwotassubi, a financial manager in UBC’s medical school, was convicted of theft.
“Someone like that, with knowledge and authority in a supervisory role, if they decide to commit a fraud, it’s very difficult for a system to prevent that,” said Michael Hartwick, UBC’s director of internal audit.
The most common weakness the CAUBO surveys identified was a lack of separation of duties and supervision. The same person – usually a mid-level administrator – initiates, records and reconciles transactions, such as invoices.
“They may have very tight controls over the payment and accounting for tuition fees, but then in some of their decentralized areas, like the cafeterias, the parking, some of the back-office stuff, the controls there are just not as strong because it’s not part of their core services,” said David Elzinga, a veteran fraud investigator and partner at Grant Thornton LLP.
York University has filed a lawsuit to recover the $1.2-million it says it lost through dozens of suspected fraudulent transactions, such as invoicing for work that was not done. The two accused – formerly an assistant vice-president and the director of maintenance – allegedly circumvented controls by keeping most invoices small, and drafting emergency sole-source contracts to siphon off larger sums. York has revised its policies and formalized whistleblower protection.
Million-dollar heists aside, Dr. Peltier-Rivest worries most frauds aren’t expensive enough to grab a university board’s attention within budgets of hundreds of millions of dollars. Several university administrators were unavailable or declined to be interviewed, but some said privately that fraud is regularly on their radar, and reported fully to board members.
Fraud losses usually are not recouped from those at fault, although schools sometimes claim insurance. So with universities across the country having to cut spending to balance budgets, there is an extra imperative to “hang on to all the dollars we have to work with,” Mr. Britt said.Report Typo/Error