By Jim Simpson, president, Financial
Technologies & Management (FTM)
Four years ago when officials
from a local cultural and arts volunteer organization discovered that more than
$380,000 had been embezzled from its account, it was shocked. Over a nine-month
period, an officer supported his gambling addiction with money from the
organization’s bank account.
But according to a 2014 Association of Certified Fraud
Examiners study, that is not all that unusual. In fact last year, The Washington Post analyzed nonprofits’ 990 filings from 2008 to 2012 and
found more than 1,000 nonprofit organizations had checked the box indicating
they had discovered diversion of assets due to theft, investment fraud or
embezzlement.
The Association of Certified Fraud Examiners (ACFE) reported
the average loss is $108,000. But along with the loss of funds there is an even
greater potential cost -- damage to an
organization’s reputation.
External audits are of little help. According to the
ACFE, they detect just over 3 percent of the fraud cases. Instead, 42 percent of cases are discovered
as a result of tips from employees, customers, vendors or anonymous
whistleblowers. Other top methods are management
reviews (16 percent) and internal audits (14 percent). Seven percent of cases
are uncovered simply by accident.
Relying on tips and happenstance to discover more
than half of existing fraud cases is not good business practice. Despite having
limited time and resources that make nonprofits vulnerable to fraud either
internally or externally, organizations must be able to discover more cases on
their own.
Nonprofits typically have many checks and cash from
numerous sources making them vulnerable to skimming and cash larceny schemes. Billing
schemes are most common, and typically involve billing an organization for
personal items or excessively marking up goods or services.
One step that all
nonprofits should take is to develop anti-fraud controls that help decrease the
cost and duration of fraud schemes.
Some anti-fraud
controls include:
- Create an independent board committee to provide management independence and professional skepticism.
- Develop a process to report suspicious behavior.
- Document when compliance at all levels occurs and when it does not.
- Develop a response plan when fraud does occur.
Keep in mind that the tone from the top is important
to promote an ethical environment throughout the organization to encourage
self-policing.
But most importantly, nonprofit organizations
need to make sure they don’t ignore fraud issues because they aren’t prepared
to deal with them openly and honestly.
Nonprofits are typically most vulnerable to the following types of fraud schemes: billing, check tampering, expense reimbursements, skimming, corruption and cash larceny.
- Skimming is when an employee accepts payment but does not record the revenue and steals the money.
- Cash larceny is when an employee steals cash and checks from daily receipts before they are deposited in the bank.
- In billing schemes, a person may set up a fake entity that bills for goods or services that the organization did not receive. Sometimes, the goods or services may be received but are marked up excessively with proceeds diverted. Another common billing scheme is to charge personal items to the organization.
- Expense reimbursement schemes generate fraudulent disbursements. The four most common types of expense reimbursement schemes are mischaracterized expenses, overstated expenses, fictitious expenses and multiple reimbursements.
- Check tampering is when a person physically prepares a fraudulent check.
- Corruption is the wrongful use of influence including bribery, kickbacks, illegal gratuities, economic extortion and collusion.
1 comment:
Fraud is a problem that no one wants in their business or organization. Particularly if it involves their employees. It can be very disappointing, and can be a source of mistrust between the employer and employee. That’s why it must be stopped before it worsens; or better yet, prevented before it even happens. And having an auditor to control all transactions is very helpful. This will not only mitigate the unethical practice, but also provide better and more accurate records for the company.
Betty Rose @ Phenix Investigations
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