How to protect your organization from Fraud?
By Jim Simpson, CPA and president of Financial Technologies & Management
According to the most recent Fraud study conducted by the Association of Certified Fraud Examiners, nonprofits reported a median loss of $100,000 along with an even greater potential cost for reputational damage. It may be surprising, but the external audit is only likely to detect fraud just over 3% of the time. The top fraud detection methods include tips-43%; management review-15%; internal audit-14%; and accident-7%. With the lack of time for management involvement and internal audits conducted by nonprofits, it seems like we are really relying too heavily on tips and accidents to detect fraud.
Nonprofits of all sizes have limited back office resources which makes them vulnerable to employees who see an opportunity to commit fraud due to the lack of staffing and controls. Struggling agencies frequently experience high staff turnover which makes segregation of duties and training more difficult which increases likelihood of fraud.
Billing schemes are the most common fraud scheme. Typically, these billings schemes involve billing organization for personal items or marking up goods or services excessively. Nonprofits typically have large amount of checks and cash from numerous sources making them vulnerable to Skimming and Cash Larceny Schemes.
Nonprofits are typically more vulnerable to the following types of fraud schemes: Billing, Check Tempering, 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 fraudster may setup a fake entity that bills for goods or services that the organization did not receive. Sometimes, the goods or services maybe received but are marked up excessively with proceeds diverted to fraudster. 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 the fraudster physically prepares the fraudulent check. Corruption is the wrongful use of influence including bribery, kickbacks, illegal gratuities, economic extortion, and collusion.
Nonprofits should develop anti-fraud policies that include the following important policies: Independent board committee, establish and enforce anti-fraud controls, ethical tone from the top, process to report suspicious behavior, document compliance at all levels, develop response plan for various types of fraud, and don’t avoid fraud issues.
Nonprofit organizations anti-fraud policies include independent board committee so that there is management independence. Committee members should have professional skepticism. The anti-fraud program controls helps to decrease the cost and duration of fraud schemes. The ethical tone from the top is important to promote an ethical environment throughout the organization to encourage self-policing. A process to report suspicious behavior is important as the best way to catch fraud is from tips. It is important to document when compliance occurs and when it does not. Most nonprofits don’t have a response plan when fraud does occur. Nonprofit organizations need to make sure that they don’t avoid fraud issues as they aren’t typically prepared to deal with fraud openly and honestly.
You want to trust your finance and accounting staff, but do you have expertise to verify that fraud is not occurring. We can help you to ask the right questions and determine the red flags for fraud. Contact us to develop a fraud risk assessment as a part of your organization’s fraud risk management program. Without a fraud risk management program, your organization is at a much higher risk and external auditor’s may consider this an audit deficiency or finding.
Since 1999, Financial Technologies & Management (FTM) has provided accounting and financial solutions exclusively to the nonprofit communities. We are pleased to announce fraud prevention and forensic accounting services to our comprehensive accounting and financial solutions. James Simpson, CPA recently obtained his Certified Fraud Examiner or CFE designation to provide fraud prevention and forensic accounting services to nonprofits.
Jim Simpson, CPA and president of Financial Technologies & Management, is a financial leader and trainer, CFO advisor, and forensic accountant to nonprofit organizations since 1999, serving over 350 nonprofit clients. He has worked as a CFO, controller and software advisor for over 25 years.
Contact Financial Technologies & Management to see how we can help your nonprofit become a financially healthier nonprofit.