Audit hasn't found fraud

Dallas ISD audit hasn't found fraud, but that's not its aim

Kent Fischer. McClatchy - Tribune Business News. Washington: May 3, 2008.

Abstract (Summary)
Two professional fraud hunters, however, were skeptical of Mr. Lowe's assertion, given that the Dallas Independent School District's 2006-07 finances are undergoing a routine "comprehensive audit," not a "forensic audit" in which auditors scrub the books for criminality.

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May 3--When Dallas school officials recently reassured the public that a long-overdue audit of district finances has not turned up any fraud, they failed to mention that their auditors are not specifically looking for fraud.

"No one stole anything," school board President Jack Lowe said at a meeting last week. "There's no money missing."

Two professional fraud hunters, however, were skeptical of Mr. Lowe's assertion, given that the Dallas Independent School District's 2006-07 finances are undergoing a routine "comprehensive audit," not a "forensic audit" in which auditors scrub the books for criminality.

"It sounds like wishful thinking," said James Ratley, president of the Association of Certified Fraud Examiners. "Generally, audit techniques are not designed to detect fraud. Auditors may well have [told district leaders] 'We found no indications of fraud,' but that doesn't mean a whole lot because their purpose is not to look for fraud."

The comments of Mr. Lowe and others came over the last several weeks after trustees received reports on the district's overdue audit. At a meeting last week, district auditor Deloitte & Touche laid out, in broad terms, widespread problems within the district's finance departments.

Deloitte director Reem Samra told trustees that the district lacks an "effective internal control environment," that employees are inadequately trained and that top officials had failed to properly oversee financial transactions. Auditors found these problems everywhere they looked, including financial accounting, grant compliance and anti-fraud programs.

Despite that, Mr. Lowe said he believes "with a high degree of certainty" that there is no wide-scale fraud or theft at the district.

"My question would be: How does he know?" Mr. Ratley asked. "To say that no fraud is present [in that environment] is like me saying that there are no speeders right now on I-35."

Generally, annual audits do not proactively search for fraud. Instead, they aim to verify financial statements, most often by comparing transactions and spending against policies, procedures and internal controls.

Annual audits are not the same thing as intently looking for wrongdoing, said Sandy Alexander, a certified fraud examiner and president of CFO Pros, a Dallas fraud investigation firm.

"Very few frauds are uncovered under the course of an annual audit," Mr. Alexander said. "Most frauds are discovered by whistleblowers."

DISD spokesman Jon Dahlander said Deloitte brought in forensic auditors to examine payroll. The audit team found "a relatively small number of exceptions, all of which have been accounted for." In auditing lingo, an "exception" is a payment or transaction that should not have occurred.

The district did not respond to a request for details on how many payroll problems auditors discovered and how much they amounted to.

Payroll accounts for about $1 billion a year in district spending, roughly 85 percent of DISD's expenditures. That would mean the remainder of the district's spending, roughly $160 million, is yet to be scrutinized by fraud examiners.

Mr. Lowe said the district recently created two new investigative departments capable of conducting fraud investigations. He said he would like those departments -- the Office of Professional Responsibility and a new Internal Audit office -- to conduct fraud investigations for the district.
"We do have an in-house fraud audit team, and I have a lot of confidence in them," Mr. Lowe said.