Auditors cite diverted payrolls, unauthorized withdrawals at multiple districts; committee hears call for "positive-pay" protections

Legislative audit staff told the committee that recent audits identified a string of fraud and unauthorized withdrawals at multiple Arkansas school districts, and members discussed stronger bank controls such as positive-pay enrollment and vendor matching to reduce losses.

Auditors summarized several individual cases: Clarendon School District reported an employees direct deposit of $3,100 diverted to another account after a fraudulent email change request; Gentry School District reported a $1,600 diverted payroll deposit and $3,000 in unauthorized credit-card charges later reimbursed by the card company; Harrisburg School District reported a check alteration and a $15,268 loss; and Pulaski County Special School District reported an unauthorized withdrawal of $2,500 that was recovered and an erroneous payroll distribution that resulted in $4,600 paid to former employees and not recovered. Audit staff also said Pulaski had $80,750 in Emergency Connectivity Fund reimbursements that duplicated other reimbursements.

Why it matters: Auditors told the committee that incidents of diverted payroll and altered payees have increased since the pandemic and that the risk affects education institutions, state agencies and local governments. Committee members said the number of incidents and cumulative losses warrant a broader, coordinated response beyond individual audits.

What members discussed: Committee members asked audit staff to compile an aggregate report of taxpayer funds lost to fraud across education institutions for the audit cycle just completed and to mark which findings occurred after any Arkansas Department of Education (ADE) commissioners memo recommending stronger controls. Senator Urban and others urged the committee to consider a formal recommendation or rule requiring districts to enroll in bank positive-pay services and to implement vendor matching.

Audit staffs position and recommendations: Mister Fink said the audit office has emphasized controls to districts before, and that ADE previously issued guidance to require stronger verification when employees request changes to direct deposit information. Staff recommended entities implement in-person verification for deposit changes when possible and consider positive-pay and vendor-matching bank services to limit check fraud and unauthorized disbursements.

Committee actions and follow-up: The committee deferred the Pombla School District report to the September meeting at the districts request so a superintendent could attend. The committee filed reports for Clarendon, Gentry, Harrisburg, Highland, Pulaski County Special School District and dozens of other audits either by motion or without objection. Members directed audit staff to prepare a report quantifying taxpayer losses for the audit cycle and to include dates of ADE guidance so the committee could assess adherence.

What remains unclear: Staff said they could pull totals for education institutions and present them to the committee, but a comprehensive statewide tally across all agencies was discussed as a possible next step. Members also asked staff to list the date of the ADE commissioners memo and to flag findings that occurred after that date.

Next steps: Audit staff committed to compiling the requested loss figures for education institutions for the completed audit cycle and to return with cost and feasibility information about positive-pay enrollment and vendor-matching options.