Best Practices for the Safe Custody of School Funds

Every school depends on money to function – from paying teacher salaries and maintaining buildings to buying textbooks and running extracurricular programs. But what happens when those funds are not stored, managed, or tracked properly? The consequences can range from minor operational hiccups to full-blown financial scandals. That is why understanding the rules regarding custody of school funds is essential for anyone involved in school governance, whether you are a principal, a school board member, or a concerned parent.

Why financial security in schools matters 🔗

Schools are entrusted with public money. In many countries, education budgets represent a significant share of government spending. According to UNESCO, the international community has committed to allocating 4-6% of GDP or 15-20% of public expenditure to education. With such large sums flowing into schools, protecting those resources is not optional – it is a fundamental governance responsibility.

When school funds are poorly managed, the effects are felt directly by students. Classrooms go without supplies, buildings fall into disrepair, and teachers may not be paid on time. Poor financial security also erodes trust among parents, staff, and the wider community. As UNESCO’s International Institute for Educational Planning (IIEP) notes, good governance, transparency, and accountability in education help protect the sector from corruption and ensure equitable financing.

Financial mismanagement doesn’t just affect individual schools – it can undermine an entire education system. When public funds meant for students are diverted or wasted, it deepens inequality, especially in communities that are already under-resourced.

Who controls school funds? 🔗

The custody and control of school funds is never the responsibility of a single person. It involves multiple layers of authority and accountability, designed to prevent any one individual from having unchecked access to money.

The role of school heads and principals 🔗

School principals typically serve as the primary managers of day-to-day finances. They oversee how budgets are spent, approve routine purchases, and ensure funds are being used in line with approved plans. Research published in the International Journal of Research and Innovation in Social Science (IJRISS) highlights that a principal’s financial management skills have a direct impact on the quality of education a school can provide. Schools led by financially competent principals tend to have better learning environments and more efficient use of resources.

However, a principal should never be the sole custodian of funds without oversight. Their financial authority must be balanced by checks from governing bodies and finance committees.

Governing bodies and school boards 🔗

School governing bodies – often called school boards or boards of trustees – hold the ultimate responsibility for the financial health of a school. They approve annual budgets, set financial policies, and authorise major expenditures. In the United States, for instance, state laws like Oregon’s ORS 328.441 explicitly require school district boards to designate custodians of school funds and select approved bank depositories.

Governing bodies also play a critical oversight role. They review financial reports, authorise audits, and ensure that spending aligns with the school’s educational goals. Without active involvement from the governing body, the risk of financial irregularity increases significantly.

Financial committees and treasurers 🔗

Many schools establish dedicated finance committees or appoint treasurers to handle detailed financial operations. The treasurer’s role typically includes maintaining accurate records, managing bank accounts, and ensuring that disbursements follow proper authorisation procedures. According to guidelines from Illinois school law (Section 5/8-7), the township or school treasurer is the only lawful custodian of all school funds and must safely keep all bonds, moneys, and financial records belonging to the district.

This separation of duties – where different people handle approval, custody, and record-keeping – is a core principle of sound financial management.

Methods of fund custody 🔗

How schools physically store and access their money is just as important as who manages it. There are several standard methods of fund custody that schools use to protect their financial resources.

Bank accounts 🔗

The most secure and widely recommended method is keeping school funds in designated bank accounts. Schools typically maintain a current account for daily transactions and may also use savings accounts for funds not needed immediately. Banking provides built-in security features such as encryption, fraud prevention systems, and a clear audit trail of every transaction.

Laws in many jurisdictions require schools to deposit funds only in approved financial institutions. For example, school districts in Illinois must designate banks or savings and loan associations within the state as official depositories, and these institutions must comply with the Public Funds Investment Act before receiving public funds. Similarly, some school district policies require that institutions holding school funds be FDIC-insured and provide collateral for deposits exceeding insurable limits.

Cash handling rules 🔗

While most transactions should go through bank accounts, schools occasionally need to handle cash – for example, when collecting event fees or managing petty cash. Strict protocols must be followed in these situations. Cash should be counted in the presence of at least two authorised individuals, documented immediately, and deposited into the school’s bank account as quickly as possible. Receipts should be issued for every cash transaction, no matter how small.

Schools should maintain a petty cash system with a fixed float amount, and all withdrawals from petty cash must be supported by vouchers and receipts. This prevents untracked spending and reduces the risk of theft.

Authorised custodians 🔗

Schools must designate specific individuals – such as a finance officer, accountant, or bursar – as authorised custodians of funds. These custodians are responsible for the safekeeping of money and financial documents. Their duties, access levels, and accountability must be clearly defined in writing. Regular audits should verify that custodians are following established procedures and that all funds are accounted for.

Preventing misuse and fraud 🔗

Even with good systems in place, school funds remain vulnerable to misuse. Preventing fraud requires a combination of clear policies, active oversight, and a culture of transparency.

Establish clear financial policies 🔗

Every school should have documented financial policies covering how funds are raised, allocated, spent, and reported. These policies should be accessible to all staff and stakeholders so that everyone understands the rules. When expectations are clear, there is less room for misinterpretation or intentional manipulation.

Separation of duties 🔗

One of the most effective anti-fraud measures is ensuring that no single person controls all aspects of a financial transaction. The individual who approves a payment should not be the same person who processes it. Similarly, the person who reconciles bank statements should be different from the person making deposits. This principle of separation significantly reduces the opportunity for fraud.

Regular audits 🔗

Both internal and external audits are essential. Internal audits can be conducted periodically by the school’s finance committee, while external audits should be carried out by independent auditors at least once a year. Research from the International Journal of Sustainability in Education and Innovation emphasises that implementing robust financial management systems with regular audits is essential for ensuring transparency and reducing the likelihood of fund misappropriation in schools.

Transparent financial reporting 🔗

Schools should regularly publish financial reports for stakeholders – including the governing body, staff, parents, and community members. Transparency acts as a powerful deterrent to fraud. When people know that financial information is being shared openly, they are far less likely to attempt anything dishonest.

Whistleblower mechanisms 🔗

Schools should create safe, confidential channels for staff, parents, or community members to report suspected financial irregularities. The U.S. Department of Education’s Office of Inspector General (OIG) operates a hotline specifically for reporting fraud, waste, or abuse involving education funds. Similar mechanisms at the school level encourage accountability and help catch problems early.

Case study: school fund misappropriation in practice 🔗

Real-world examples of school fund fraud illustrate why strong custody rules are essential. Here are two well-documented cases that reveal how financial controls can fail – and the damage that results.

The A3 Education charter school fraud 🔗

One of the most significant school fraud cases in recent U.S. history involved A3 Education, a charter school network operating across multiple counties in California. According to reporting by KPBS, two executives – Sean McManus and Jason Schrock – pleaded guilty to criminal charges related to their operation of A3 charter schools. The scheme involved falsely claiming state funding for students who were not actually attending or receiving educational services. The schools collected thousands of dollars per student despite not providing full educational programmes, and the executives funnelled millions into private companies they owned.

As reported by the California School Boards Association, A3 deliberately targeted smaller school districts that had limited capacity for oversight, making it easier to operate the fraudulent scheme without detection. Eleven people were eventually sentenced, and over $280 million in stolen funds were recovered.

This case highlights several failures: inadequate oversight by authorising school districts, lack of independent verification of student enrolment data, and the concentration of financial control in too few hands.

The Celerity Education Group case 🔗

In another notable case, the founder and former CEO of Celerity Education Group, a nonprofit operating charter schools, was sentenced to 30 months in prison. According to the U.S. Department of Education’s Office of Inspector General, the founder misappropriated approximately $3.2 million in public education funds for personal expenses, including luxury travel, fine dining, and high-end shopping.

What made this case particularly damaging was the betrayal of trust. The organisation existed to serve students, yet its leader used school funds as a personal bank account. The case underscores the importance of financial oversight at every level – from the board of directors down to day-to-day account management.

Lessons from these cases 🔗

Both cases share common themes: a lack of independent oversight, insufficient separation of financial duties, and governing bodies that either failed to scrutinise financial activity or were complicit in the fraud. The key takeaways are clear:

Independent audits are non-negotiable. Schools must have their finances reviewed by parties with no vested interest in the outcome. Without this, irregularities can go undetected for years.

Governing bodies must actively engage with finances. Rubber-stamping budgets or relying entirely on a school head’s word is a recipe for disaster. Board members need the training and tools to understand financial reports and ask the right questions.

Whistleblower protections matter. In many fraud cases, staff or community members suspected something was wrong but were afraid to speak up. Schools that create safe reporting channels are far better positioned to catch fraud early.

Building a culture of financial accountability 🔗

Rules and procedures are only as effective as the culture in which they operate. A school can have the best financial policies on paper, but if there is no genuine commitment to transparency and accountability, those policies become meaningless.

Financial accountability starts with leadership. When school heads and governing bodies model ethical financial behaviour, it sets the tone for the entire institution. Training is equally important – not just for finance staff, but for all stakeholders involved in managing or overseeing school funds. As IIEP-UNESCO emphasises, accountability and transparency throughout educational planning and service delivery are critical for preventing corruption in the education sector.

Community engagement also plays a vital role. When parents and community members are involved in financial decision-making – through budget consultations, public reporting, and participatory oversight – the likelihood of mismanagement decreases significantly. Schools that operate in isolation, without external scrutiny, are inherently more vulnerable to fraud.

What do you think? Does your school or district have clear, accessible financial policies that parents and staff can review? How can schools better balance the need for operational efficiency with the need for strict financial oversight?

References

1. https://www.unesco.org/en/education-financing/need-know
2. https://www.iiep.unesco.org/en/priority-transparency
3. https://rsisinternational.org/journals/ijriss/Digital-Library/volume-9-issue-3s/5050-5065.pdf
4. https://oregon.public.law/statutes/ors_328.441
5. https://codes.findlaw.com/il/chapter-105-schools/il-st-sect-105-5-8-7/
6. https://journals.aseiacademic.org/index.php/ijsei/article/download/485/370
7. https://oig.ed.gov/oig-hotline
8. https://www.kpbs.org/news/education/2026/02/02/25m-recovered-from-charter-school-fraud-case-to-support-local-k-12-students
9. https://publications.csba.org/california-school-news/june-2021/charter-school-networks-criminal-misuse-of-funds-addressed-in-new-legislation/
10. https://oig.ed.gov/eye-ed-protecting-federal-k-12-funds-fraud