Conflicts of interest can present significant fraud risks for school districts. They are also one of the most difficult areas of fraud to investigate and document — and, if you’re not careful, an improper investigation can create counterclaims and civil actions against your district and fraud examiners.
How and why do these conflicts arise? How can you spot the warning signs that might indicate a conflict of interest?
Conflict of interest is sometimes confused with corruption, which is defined as an “actual abuse of public office to gain personal benefits.” Corruption usually requires the agreement of at least two parties, as well as some kind of benefit, payment or bribe.
In contrast, conflicts of interest involve several aspects and occur in situations where an individual could prioritize his/her private interests over official obligations. Conflict of interest is a complex concept. Because all public officials have rightful interests that stem from their private lives, conflicts of interest cannot be easily prevented or banned.
Spotting a Red Flag
So what are the “red flags” or warning signs one should look for? Red flags within an institution are related to its organizational structure and how its policies and procedures are implemented.?Signals that could reveal fraud may either result from the fraud itself or from the attempt to conceal it.?
What are some red flags you may encounter, involving vendors/contractors, specific individuals or internal departments?
- Inadequate financial resources — Was a vendor selected that doesn’t have the cash to support itself until payment is made? A desperate company may do desperate things … or go under in the middle of a contract.
- Poor record of performance — Is a vendor being paid for one thing but delivering a cheaper substitute, or not delivering at all?
- Reputation for dishonesty — This may seem obvious, but a person or vendor who is known to be untruthful about small things is likely to be dishonest in other ways, too.
- Prior complaints or criminal or civil actions, or a history of fraudulent conduct — Good procurement practice calls for background and litigation checks, and this is why.
- A vendor who is owned (directly or indirectly) by the contracting employee — Look out for shell companies used to conceal ownership.
- Family ties with a procurement employee — Family ties, known as nepotism, are the conflict most people recognize. Texas state law requires school trustees to sign an annual disclosure revealing any potential conflicts of interest involving vendors; however, there may not be such a requirement for procurement staff.
Unless you take steps to prevent or uncover conflicts of interest, your district may suffer from the effects of corrupt practices, abuse of public office, unethical conduct, violation of trust, or other illegal activities. Conflicts of interest can also erode your taxpayers’ and parents’ confidence in the district’s integrity.
As citizens, we expect that individuals in positions of authority in public administration, public institutions and public services will be held to high standards. Your taxpayers expect public officials to carry out their duties with integrity, honesty and impartiality, not allowing their private interests to jeopardize official decisions and governance. That is why conflicts of interest in all their forms represent a significant risk in your day-to-day work as a school administrator or employee.