The University of Iowa was at the center of a major financial scandal when officials accused a machine shop manager of diverting nearly $1 million of university money to his undisclosed business. This case is a primer for university departments that must generate self-supporting revenue, has equipment or supplies inventories, or makes purchases with pcards.
Recapping Local News Reports
The former manager of the University of Iowa's Physics and Astronomy machine shop was arrested after a state audit accused him of using university staff and equipment to make nearly $1 million for himself.
University officials' concerns began when whistleblowers shared that the manager had a business he had not disclosed through its conflict of interest reporting mechanisms. Upon further review, university officials found that the manager used university resources for his company.
The university then placed the manager and two others on administrative leave and referred the matter to the State Auditor's Office, which had the resources for a thorough examination. In a 305-page report, the auditors explained how the manager used university staff and equipment to complete projects for his company from 2017 to 2021.
Instead of depositing the earnings into university accounts, the manager funneled the money into his personal and business accounts, amassing $943,635. The audit also identified $6,313 of improper personal purchases with a university-issued procurement card. The university is now exploring how to recoup its losses and the wages paid to the three employees while on administrative leave.
The state auditor's report stated that although the manager's personal business provided the same services as the machine shop, it lacked some necessary tools:
"... while he had machines and tools at his disposal at his personal shop which would allow him to complete some work, his personal shop was not a complete shop and did not have the same capabilities as the (university's) machine shop."
State Audit exposes $943,000 fraud scheme at University of Iowa's Physics Department | KGAN TV
Implications
The implications following an incident like this are pretty significant:
- Financial loss – The university lost nearly $1 million due to misappropriation of funds by the manager. Additionally, the university paid wages to employees on administrative leave during the investigation, further straining finances.
- Reputational damage – Incidents like this can harm a university's reputation, causing a loss of trust among students, faculty and staff, and the public.
- Legal and administrative costs – The university will incur expenses related to legal proceedings and efforts to recover the misappropriated funds. It may also need to invest in improved oversight and auditing processes to prevent future incidents.
- Operational disruptions – The investigation and subsequent administrative actions likely disrupted normal operations within the department. This could affect ongoing projects and research activities.
Countermeasures to Fraud
The auditors' report examined the period from July 1, 2017, to October 31, 2021. What allowed the situation to remain unnoticed for such a long time? The department's controls were inadequate in preventing the issue, and its detection measures were insufficient to signal alarms.
Preventive controls proactively counter errors, fraud, or other unintended consequences before they happen. Fraud can occur when a trusted employee receives little or no oversight, opening a window of opportunity. Most employees won't act on this opportunity, but some will, like the one in Iowa.
Segregation of duties does not require a large staff or complicated procedures. Supervisors in small departments can compensate by boosting the detective controls at their disposal, essentially conducting regular mini-audits to ensure critical activities are on track.
Be transparent, and don't do this work in secret. You want your team to know you're paying attention! The simple knowledge that you're watching may be your best preventive control. But that does not suggest you must be a micromanager or constantly looking over your team's shoulders.
Regular use of control activities lets your team know you are engaged and interested, not that you don't trust them. Your team should understand that you ask questions and expect answers.
Of course, there will occasionally be mistakes. You find those with detective controls.
Detective controls alert you to errors, fraud, or other unintended consequences so you can act to correct the problem.
Tips are by far the most prominent means for outing fraud. The Association of Certified Fraud Examiners reports that tips are the principal means for detecting fraud. Within the education industry, tips provide the first clue in 44% of fraud cases.2
WSU Policy Reminders
13.01 / Deposit of Cash ReceiptsThe policy's primary thrust is that WSU Financial Operations is responsible for processing and depositing money received by and for the university.
The Med Center fraudster diverted university money into an account at a credit union. WSU has two credit unions on its campus. Neither credit union is for depositing money intended for WSU. Of course, the Med Center had a similar policy, and the fraud occurred anyway.
WSU provides an anonymous way to report wrongful conduct when something looks amiss:
3.58 / Protection from Retaliation for Reporting Wrongful ConductKey passages:
Wrongful conduct includes, but is not limited to:
- A violation of applicable state or federal laws or regulations.
- A violation of WSU or Kansas Board of Regents policy.
- Using university property, resources, or authority for personal gain or other non-university-related purposes.
To make a good-faith disclosure of suspected or known wrongful conduct, call or submit an anonymous report via the University hotline website (WSU EthicsPoint Compliance Hotline).
If the reporting employee believes the reported conduct remains unresolved, they may submit a report to the University General Counsel. Reports and investigations will be confidential to the extent possible under the law and consistent with the need to research and investigate the matter.
2 St. Louis Shenanigans - How a Trusted Employee Stole More than $5 Million