Managing Construction Risk in Independent Schools with Formidable Integrity Monitoring

Independent schools are continually challenged to maintain a sustainable financial model and better manage and maintain school facilities, while providing state of the art facilities that the students of today are demanding. A key financial mission of all educational institutions is to increase enrollment, maintain a solid reputation, and generate strong revenue. A prestigious reputation is built upon years of proper management and astute financial planning. However, the degree of separation between an institution’s good name and one that is tainted can be just one instance of fraud or misconduct.

After postponing capital expansion during the recent recession, independent schools are once again investing in facilities development programs. Moreover, as summer continues, construction activity traditionally increases. At the same time, the size and complexity of construction endeavors can increase the risk of fraud, waste and abuse in an industry that is already inherently vulnerable and under a tremendous degree of public scrutiny.

Cases of Construction Misconduct in Independent Schools

In 2015, Hunter Roberts Construction Group – a prominent New York construction company – admitted to deceiving PAVE Academy Charter School, among other clients, by padding hours and inflating the rates it charged.¹ In April, 2014, the founder of a private school in Michigan was convicted of federal fraud and tax evasion. Part of this case revolved around his use of half of an $800,000 loan, which was originally allocated for school construction, to pay down some of his personal debt.²

Best Practice: Implement a Construction Integrity Monitoring Program

The stakes are high. Fraud, waste and abuse of contracts can add as much as 25% to the total cost of a construction project. Perhaps even more severe are the consequences of a drop in enrollment, safety issues, and increased scrutiny by regulators, negative publicity and a tarnished image.

An integrity monitor is an independent third party retained by an organization to minimize opportunities for fraud, waste, and abuse, as well as to assure compliance with legal and regulatory requirements. A typical construction project brings together many stakeholders and large sums of money for a relatively short span of time, which creates an environment that is conducive to corruption. Further exacerbating the issue for independent schools, in many cases, their facilities, accounting and finance departments lack the internal controls and infrastructure needed to effectively monitor construction activity. An integrity monitor serves to assess the project, program or organization in real-time to determine the potential for corruption, fraud, waste, abuse, and violations of laws and regulations. Independent schools must take action to implement a formidable construction integrity monitoring program to ensure that costs are proactively controlled and that any instance of fraud is effectively preempted.

From Theory to Practice

When construction management teams of independent schools execute an integrity monitoring program correctly, the program can pay for itself. An integrity monitor first considers the current internal control environment of the subject being monitored. Based on the initial assessment, weaknesses and vulnerabilities are identified, and recommendations on how to address any shortcomings are given. Recommended solutions are then implemented and monitored. An effective integrity monitoring program should adopt a multidisciplinary and integrated approach, utilizing the specialties of various professionals including auditors, investigators, legal professionals, and loss prevention specialists.

Tailoring to the scope and objectives of the particular project, an integrity monitoring program typically consists of five major phases:

1. Gain an Understanding of the Scope and Primary Objectives

Obtain a clear understanding of the operational environment, institutional structure and culture, key objectives, communication channels, points of contact, the main and sub-contractors, and how the current internal control structure is designed to operate in order to mitigate risk. This is accomplished through meetings with key management and other necessary leadership and board members, and reviewing appropriate documentation

2. Conduct an Integrity Risk Assessment

Conduct risk assessments and workshops to develop a well-defined and integrated risk management process that provides the project team with the tools and procedures needed to manage risk. Identify and categorize potential risks, assess the likelihood of occurrence and magnitude of the impact, and prioritize and manage risks.

3. Develop a Project Work Plan for the Monitoring Activity

Develop a Project Work Plan (PWP) based on the finalized audit universe and corresponding integrity risk audit and mitigation plan. The PWP will identify each integrity risk area and an assigned risk rating, mapping of the risk to key controls, and recommended audit cycle.

4. Execute the Project Work Plan

Monitor selected areas of concern throughout the various phases of the project. Based on the initial assessment of the business under review and discussions with stakeholders, the Integrity Monitor will execute the planned monitoring activity.

5. Report on the Results of the Monitoring Activity

Deliver status reports and key documents, such as the risk assessment and PWP, to the stakeholders. Communicate any issues that arise, as well as the program’s progress, to the stakeholders through each phase of the integrity monitoring program. If requested, a report concerning such issues can be prepared. Prepare and submit a monitoring, audit, or investigative report to the stakeholders, describing the scope of the activity, background information, procedures, findings, conclusions, and recommendations.

Utilize Proven Tools to Uncover Fraud

A crucial component to any thorough integrity monitoring program is the use of data analytics tools. Forensic accountants and fraud investigators must leverage forensic and analytics tools to identify anomalies that can be tied to fraudulent dealings, unscrupulous contractors, and the misappropriation of federal funds. The ability to synthesize large volumes of information in concise dashboards, cloud-based systems and other user-friendly platforms is absolutely vital.

What Does CohnReznick Think?

To combat fraud, waste, and abuse, independent schools and other not-for-profit organizations are reducing their risk of exposure by utilizing the services of integrity monitors. These independent advisors serve as stewards of program and project funds, ensuring funds are used as originally intended and ultimately protecting the integrity of the institution. As many independent schools enter a period of capital investment in construction facilities projects, it is simply best practice to adopt an integrity monitoring program early on that will safeguard against any threat of misconduct and risk to the institution’s name.

Contact

For more information on how your educational institution can benefit from an integrity monitoring program and to discuss a strategy for implementation, please contact:

Jack Callahan, Partner and Construction Industry Leader

John Toscano, Partner, Not-for-Profit & Education Industry

Gerard Frech, Director – Government Services

^{[1] https://www.justice.gov/usao-edny/pr/hunter-roberts-construction-pay-more-7-million-penalties-and-restitution-engaging
[2] https://www.washingtonpost.com/news/answer-sheet/wp/2015/04/28/report-millions-of-dollars-in-fraud-waste-found-in-charter-school-sector/}

_{This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}