Catching “Under the Radar” Fraud with Strong Internal Controls

By Victoria Kitts, CPA | CFE

When it comes to fraud, it is true that we live in a technological age of cyber-threats, such as ransomware and account hacking.  However, one should always remember that the opportunity to commit fraud can be as simple as not having basic internal controls.

This fraud story comes to us from Brownsville, Pennsylvania and involves a treasurer for a volunteer ambulance organization who seems to have taken advantage of an internal control oversight. The treasurer was tasked with writing checks for the nonprofit and sending the financial records to the independent accounting firm.

The problem? He allegedly wrote or deposited 132 checks into his own personal account or to the account of his own business. He is also alleged to have changed the financial records to cover that up. If the accounting firm (or anyone else at the nonprofit, really) had access to the original bank statements or could see the banking activity online, this may not have gone on for four years to the tune of approximately $136,000.

The article also states that the alleged fraudster had previously been charged in the early 2000s with insurance fraud while serving as the same nonprofit’s treasurer. Though we don’t know all the circumstances and he was admitted to a rehabilitative program for the earlier fraud charge, that bit of history should have served as a signal to institute strong internal controls.

So, what are the lessons? For starters, any organization, large or small, should have overarching controls (entity-level controls and information technology controls) and transaction controls focusing on the cash disbursement cycle, the cash receipt cycle, and the month-end closing and financial reporting. For example, the transaction control of reviewing monthly statements outside of the accounting department theoretically would have immediately raised red flags. This article, written by my colleague Sarah Wine, dives into 10 easy-to-adopt controls.

While technology threats are real, it pays to have strong internal controls to catch the non-technology fraud that can fly under the radar. If you haven’t already, start instituting these controls now. If you need assistance, please contact Victoria Kitts to get started.

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