Audit: DPI sent $165,000 in federal funds to a fraudulent bank account

N.C. Superintendent of Public Instruction Catherine Truitt speaking at Council of State meeting, Tuesday, August 2.

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  • DPI recovered $164,317 of the $165,431 that was sent to the individual, alleging to be the head of the school.

The North Carolina Department of Public Instruction (DPI) sent more than $165,000 of federal pandemic funds to a fraudulent bank account in 2021 after failing to follow verification procedures. That’s according to an audit from State Auditor Beth Wood’s office.

The Auditor’s office initiated an investigative audit after receiving a tip on their Hotline about that allegation and that DPI disbursed over $16,000 more than requested in educational funding.

The Emergency Assistance to Non-Public Schools (EANS) funds were supposed to go to Liberty Christian Academy in the Onslow County town of Richlands. The U.S. Department of Education implemented the EANS Program, which addresses the impact and educational disruptions COVID-19 made on non-public school students and teachers in each state.

The EANS Program provided $5.5 billion of federal funding, including $167.7 million for the State of North Carolina.

The program is administered through the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA) and the American Rescue Plan Act (ARP).

Each of these acts provides $2.75 billion ($5.5 billion in total) of federal funding. In North Carolina, about $84.8 million was awarded under CRRSA and about $82.9 million under ARP.

The Academy applied for CRRSA funds on April 16, 2021.

In August 2021, DPI received a letter on the school’s letterhead via email from an individual alleging to be the head of the school requesting to change the school’s bank account information. The individual created email addresses that mirrored school personnel to communicate with DPI personnel. The only difference was that the fake email addresses did not contain an “s” at the end of the email domain.

Auditors found that DPI’s finance manager changed the banking information for the school without going through proper procedures, including obtaining a completed vendor electronic payment form along with a copy of a voided check, a bank statement, or a bank authorization letter.

As a result, $165,431 was distributed to the fraudulent account on September 13, 2021.

The school contacted DPI on September 25, 2021, which led to DPI discovering that the request to change the school’s bank account was not legitimate and the September 13 disbursement had not been sent to the school.

DPI contacted the U.S. Department of Education to notify them of the fraudulent activity and began working with the Federal Bureau of Investigation (FBI) and Bank of America to recover the EANS program funds.

On December 20, 2021, DPI recovered $164,317 of the $165,431 that was sent to the individual, alleging to be the head of the school, leaving the individual with $1,114. NC Superintendent of Public Instruction Catherine Truitt would later say in her response to the findings that DPI repaid the $1,114 with state funds in December 2021 through a journal entry.

If the majority of the EANS program funds were not recovered, the state would have been liable for covering the total loss using state funds.

The DPI finance manager told auditors she should have waited for the vendor electronic payment form and took full responsibility for failing to obtain it and documentation as required, saying, “It was clearly a mistake on my part.”

The auditors recommended that DPI management ensure all employees follow policy, especially regarding changing vendor banking information.

Auditors also found that DPI disbursed $16,569 more in EANS program funds than the school requested.

Investigators reviewed all requests from and payments to the school from July through December 2021. During that time, the school submitted four reimbursement requests totaling $532,205. However, DPI disbursed $548,774 due to errors made while processing reimbursements to the school.

DPI erroneously issued a duplicate payment in response to a reimbursement request from the school. After these funds were disbursed, the school would not repay the duplicate payment, so DPI elected to offset it against future requests made by the school.

Auditors say the funds were disbursed without being requested because there wasn’t an adequate process to prevent duplicate payments and no process to detect differences between the amounts requested and those disbursed.

The guidance provided by DPI required the staff processing EANS disbursements to obtain reimbursement requests and supporting documentation before DPI could disburse funds. Additionally, federal regulations required DPI to establish and maintain effective internal controls over federal funds.

Wood’s office recommendations for DPI include seeking repayment for the EANS program funds that were disbursed in excess of what was requested. They should also establish and enhance existing processes to ensure that duplicate payments or overpayments are not disbursed. Procedures should include reviewing supporting documentation before disbursements are made to ensure that all disbursements are supported by a reimbursement request and performing reconciliations that detect when disbursements exceed reimbursement request amounts.

They also say DPI should review all other EANS program disbursements to ensure they didn’t exceed the amounts requested by the non-public schools under this program.

Truitt accepted the findings, noting that the EANS program “was an unprecedented program for DPI to administer and was outside of the normal course of business for DPI.” She said the program began with direct reimbursement to non-public schools and then transitioned to direct vendor payments.

She said after they realized their mistake, they took action to require the vendor electronic payment form for any change in a bank account and also put into place a requirement that staff verifies any requests to change a bank account by telephone.

Regarding the second finding of the overpayment to the school, Truitt said they received the repayment of $15,455 from the school and that DPI has strengthened its review process to ensure any errors within these requests will be identified prior to payment.

DPI is also reviewing all reimbursements to non-public schools from prior years to ensure that payments agree to requests and supporting documentation.