GASB 84, Fiduciary Activities, has been released and is now effective for reporting periods beginning after December 15, 2018. (GASB 95 was issued in May 2020, which extends the effective date to reporting periods beginning after December 15, 2019.) This standard will have a large impact on agency funds—an element of government that often has less emphasis on effective financial controls. The implementation of GASB 84 will hopefully cause governments to address any weaknesses in agency fund controls and in turn reduce the risk of fraud. When addressing internal controls for custodial funds, it is important for governments to consider the effects of administrative involvement and the role it may play in fund classification.

Perspectives on Fraud and Controls in Agency Funds

The fraud triangle is a framework designed to explain the reasoning behind a worker’s decision to commit workplace fraud. The three stages, categorized by the effect on the individual, can be summarized as pressure, opportunity, and rationalization. Money also plays a major part in the increased risk of fraud. In many cases, agency funds (now called custodial funds in response to GASB 84) provide both opportunity and money.

An example of this kind of situation is school activity funds. These agency funds are used to record and report funds collected at an individual school level for booster clubs, athletic teams, and other school-related groups. In most situations, these school activity funds are run primarily by students and other advisors. In some cases, school employees will act as advisors. The revenue generated by these funds is typically in cash, so all incurred expenses are paid in cash or through the use of personal checks and credit cards. Without a well-designed internal control environment, these funds could be stolen with relative ease by anyone with direct access and the other two legs of the fraud triangle—pressure and rationalization. While it is very difficult to identify pressure and rationalization in others, organizations can set up internal controls to dramatically limit the opportunity for fraud.

Many people think of a strong control environment as being focused on money spent appropriately. While strong cash disbursement is important, ensuring that you have a complete cash balance to work from is critical. In many instances, fraud cases within student activity funds involve skimming or pocketing money before it ever makes it to the bank for groups and clubs to spend on their programs and activities. All of us have likely seen a sign at a register that says, “if you are not offered a receipt, your purchase is free.” This example illustrates exactly what those stores are doing—ensuring all cash collections get recorded by their system so they can set up clear reconciliation controls to capture any and all cash that should be in their bank account.

Once cash and other funds have been collected and deposited, groups and clubs can set up clear cash disbursement controls to require receipts and then request someone outside of the check writing process to reconcile the bank statement with the receipts that have been collected. In these small clubs and groups, a student or different faculty advisor would perform those reconciliation and oversight controls.

CRI is Here to Help You Avoid Fraud

While this is just one example of a strong control environment for a school activity fund, there are many types of agency/custodial funds out there that make certain types of controls impossible or impractical. Practicality should never be a reason to forego controls but it may be a reason to reach out to someone with expertise in the field. If you are trying to manage your risk for fraud and need assistance in setting up a reasonable control environment, reach out to your local CRI advisor for help.