Filed under: Fraud, Not-for-Profits

December 19, 2016

One requirement in the auditing standards is to ask our clients, point blank, if they are aware of any fraud within the company. This requirement is for all entities undergoing a financial statement audit, whether they are a large publicly traded corporation, a small family-owned business, or even a not-for-profit (NFP) organization.

To me, the worst answer is not so much getting a response of “yes,” because let’s face it, we don’t get that response very often. What’s most disappointing is a shocked reply of, “Fraud could never happen here, we’re a charity!”

Unfortunately, history has proven time after time that NFPs are vulnerable to fraud.

Past Clark Nuber Focus on Fraud blog posts have touched on the importance of oversight and separation of duties; having all of your eggs in one basket from the perspective of financial transactions puts you at risk of that trusted employee embezzling funds right under your nose.

Employees with longevity gain trust and take on more responsibilities, giving them greater access. One need only look at this example of a trusted employee stealing from her organization. Over her five years working at the National Veteran Services Fund Cynthia Tanner stole more than $800,000 from the organization.  Using the funds to write checks to herself, her family, or to pay bills, she then changed the accounting records to make it look like the payments were for legitimate business or charitable purposes. You can read more on that case here.

You may hope your client’s staff and volunteers have only the best interests of the organization and its mission at heart. But fraudsters can work and volunteer at any organization.

Data on Frauds at NFP Organizations

The 2016 ACFE Fraud Report to the Nations on Occupational Fraud and Abuse  is the result of a biannual survey of Certified Fraud Examiners around the globe on cases they worked on. The data is summarized and analyzed for trends. For NFPs, the statistics are troubling.

Religious, charitable, and social service agencies report a disproportionate share of expense reimbursement fraud, check tampering, and skimming, as compared with other industry sectors. This may be in part because other common fraud schemes like financial statement fraud are much more popular in the public company arena, where CEOs are trying to meet projections or drive up stock prices. It may also be because employees handling cash transactions at some NFPs are trusted to do the right thing and are given too much access and not enough oversight.

Want another example of too much access/not enough oversight? In Beaumont, Texas, a director at a health care clinic specializing in treating AIDS patients, was indicted for embezzling more than $342,000, through writing checks and paying her daughter, who was not an employee. She is serving a prison sentence.

How Internal Controls Can Help

Ensuring there are enough checks and balances in each step of the cash and check handling process can greatly reduce the risk of fraud in these common areas. Staff who generate checks should not have access to change the accounting records afterwards. A high-level employee who does not have a role in the check-writing or approving cycle should review the cancelled checks to ensure they appear to be reasonable business expenses, and should not rely solely on the accounting records.

For the cash receipts cycle, two people opening envelopes together is a much stronger control than having one person, especially if that one person is also making the bank deposit and recording it in the accounting system.

Implementing appropriate internal control procedures can also protect the employees doing those jobs. Initially, they may feel that they’re being singled out for scrutiny and review; in fact, they’re being protected from suspicion. If an organization has strong controls in place that are consistently followed, no one can accuse an individual staff person of wrongdoing.

Fraud is not solely in the realm of public companies and privately held businesses. Nonprofits should review their internal controls and ensure their trusted employees are not just trusted, but verified.

© Clark Nuber PS and Focus on Fraud, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.