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Volume
9, Issue 4 - July 2007 |
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"I
love your newsletter! It's refreshing, fun
and filled with helpful hints"
Toni Paglia,
Director of Development, The ARC
Syracuse, New York |
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Are You at Risk for Fraud? |
Introductory
Note:
Several years ago, I was hired as the Executive Director of a statewide
nonprofit. The organization was small and the few staff people wore many
hats. Nonprofits were not as sophisticated then as we are now and, I must
admit, I was not prepared to look for fraud. But in fact, the bookkeeper had
been embezzling from the agency for some time. I learned the hard way about
how to put the proper controls in place.
The lead articles in this newsletter are contributed by Susan Hansen,
Certified Fraud Examiner (CFE). Learn more about Susan at the end of the
second article.
What is Occupational Fraud? Occupational
fraud is “The use of one’s occupation for personal enrichment through the
deliberate misuse or misapplication of the employing organization’s
resources or assets.”
Is Occupational Fraud Occurring in Your
Organization? Nonprofit organizations are susceptible to fraud
just like any other business. Certified Fraud Examiners submitted 147 fraud
cases for inclusion in the 2006 Association of Certified Fraud Examiners
Report to the Nation (the “2006 Report”). In addition to other types of
fraud, over 25% of the cases reviewed had fraud perpetrated by corruption,
billing or expense reimbursements. The 147 cases submitted identified 279
fraud schemes. The number of schemes reported contained the following types
of frauds: corruption (43); billing (42); expense reimbursements (42); check
tampering (36); skimming (33); cash larceny (26); non-cash larceny (21);
payroll (19); fraudulent statements (8); wire transfers (8); and register
disbursements (1). While the not-for profit sector had the lowest
representation at 13.9%, the median loss suffered per organization was
approximately $100,000.
Where Does Organizational Fraud Primarily Occur?
Over 50% of the occupational frauds in the 2006 Report were committed by
employees in the accounting department or at the upper management/executive
level.
How is Fraud Detected? To prepare the
2006 Report, the ACFE reviewed the data submitted and posed the following
questions:
- Did the organization have a fraud hotline?
- Did the organization provide fraud awareness or ethics training?
- Did the organization have an internal audit or fraud examination
department?
- Did the organization perform surprise audits on a regular basis?
- Was the organization audited by external auditors?
The 2006 Report indicates the order in which all the frauds discussed were
detected: anonymous hotline (34.2%); accidental discovery (25.4%); internal
audit (20.2%); internal controls (19.2%); external audits (12.0%); and
notification by law enforcement (3.8%).
It is interesting to note that organizations having an anonymous fraud
hotline suffered a median loss of $100,000, while organizations without
hotlines had a median loss of $200,000. Though a tip line may be beneficial
in uncovering fraud, approximately 25% of the frauds were found by accident.
Nonprofits tend to use a hit or miss approach to combat fraud. Tips were the
most common means by which frauds were detected, but most organizations do
not have an anonymous reporting mechanism. Fraud training and surprise
audits are ignored by the majority of nonprofits. Of the 1,134 cases (profit
and nonprofit cases) used for the ACFE report, the most common anti-fraud
measure in place is the external audit. Yet, the report also showed that
organizations utilizing external audits had higher fraud losses with a
median length of 23 months, while those with no external audit had a length
of 18 months. External audits are valuable to organizations and with the
increased focus on fraud and the mandate of SAS 99, one would think the
numbers would change in future reports.
See the next article for “Fraud Prevention Tips”
Back to Table of
Contents
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How To Prevent Organizational Fraud
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To discourage fraud, organizations should conduct anti-fraud training to
educate their employees on recognizing and reporting illegal conduct. Such
training will impress employees that fraud is counterproductive and will not
be tolerated. Emphasis on fraud awareness should be evidenced throughout the
organization, starting at the executive levels. Open communication should be
encouraged at all levels. This ensures that questionable conduct will be
curtailed before it leads to a fraudulent scheme.
Nonprofits are in essence small or even businesses. Small businesses
continue to suffer disproportionate fraud losses. The most common
occupational frauds in a small business involve the fraudulent use of
company checks, skimming revenues and processing fraudulent invoices. One
way to avoid the issuance of fraudulent checks is to ensure that the
executive director/finance manager/treasurer of the organization (not the
same person who writes and signs checks) directly receives unopened bank
statements. The statements should include copies of the checks. This process
allows the executive director/finance manager/treasurer to review the
checks, including the amounts and the payees. It enables them to directly
question questionable transactions.
Here are ten ways nonprofits can prevent/detect
fraud:
- Hire a CPA to examine the books.
- Have a written code of ethics.
- Have reasonable expectations.
- Restrict bank account access.
- Perform regular bank reconciliations.
- Set a good example.
- Treat employees well.
- Adequately secure inventory and supplies.
- Adequately prescreen employee applicants.
- Give employees a way to report fraud.
There is currently no repository for the collection of fraud data in the US.
A large amount of cases go unreported. According to the 2006 Report, a
typical organizational loses 5% of its annual revenues to occupational
fraud, something that most nonprofit organizations cannot afford.
 |
These articles were contributed by Susan Hansen, CFE (Certified Fraud
Examiner), with REDW LLC, CPAs and
Business Advisors in Albuquerque NM.
Susan has 11 years of experience as a litigation specialist in handling
class action settlements, working with legal counsel and providing research
in consulting and expert witness engagements, including Securities and
Exchange Commission (SEC) matters. Susan specializes in financial services
litigation and financial planning engagements. Susan oversees the operations
and accounting functions of REDW Trust Company. Susan is a graduate of Texas
State University with a BBA in Accounting. She is active member in various
community organizations including a non-profit foundation, where she serves
on the Board and is the Chairman of the scholarship committee. She is also a
member of the Certified Fraud Examiners Association and is CFE certified.
Currently, she is a candidate for the Certified Trust and Financial
Advisor (TFA™) credential. You can reach her at (505) 998-3274 or . |
Back to Table of
Contents
According to an article in AFP’s Advancing Philanthropy, September-October
2006 edition, the Nonprofit Risk Management Center’s Pillars of Accountability
in the Nonprofit World is a web-based self-assessment and planning tool for CEOs
and senior managers. Especially designed for small to mid-sized nonprofits,
Pillars requires no specialized knowledge, is easy to use and is provided free
of charge.
Modules are available in the following areas, a couple of which fall in line
with this newsletter’s theme:
- Strategic Risk Management
- Ethical Fundraising
- Cultural Competence
- Fiscal Integrity
- Dynamic Programming
- Leadership Sustainability
The Nonprofit Risk Management Center in Washington DC was established in 1990 to
provide assistance and resources for community-serving nonprofit organizations.
Its mission is to help nonprofits cope with uncertainty by offering a wide range
of services on a wide range of risk management topics such as employment
practices and internal controls.
Learn more about the Center at
http://nonprofitrisk.org.
Back to Table of
Contents
It's
time to remind you of some of my favorite resources. Here they are:
The Association of Fundraising Professionals
www.afpnet.org.
Charity Channel at
www.charitychannel.com.
Social Enterprise Alliance at
www.se-alliance.org.
Fundraising Success Magazine at
www.fundraisingsuccessmag.com.
Society for Nonprofit Organizations at
www.snpo.org.
Board Source at
www.BoardSource.org.
The Independent Sector at
www.independentsector.org.
Back to Table of
Contentss
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Back to Table of
Contents
HOW CAN I HELP YOU?
TAKE THIS QUICKIE QUIZ
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Please give me a call if you want to turn any NO into a YES. I can help
with:
- turning your Board into a dynamic group of volunteers,
- facilitating a strategic planning session,
- analyzing your current fundraising and suggesting some new ideas, and
- training volunteers and staff in becoming more effective fundraisers.
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Contents
Here is what people have said about my training and facilitation:
“You certainly shifted my paradigm. After hearing you last
Friday, it is the first time in 11 years as an ED that I was excited abut
fund development. And you got my Board members to that point as well.
Kay
Hopper
RDC for Children, Richardson, TX
“Your seminar in Dallas was the best I ever attended. You
are wise and hilarious.”
Mary Jo Dorn
Catholic Charities of Dallas
"Jean conducted an extremely well
organized and productive [Board] retreat, one that I can
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ever conducted for us. Jean's follow-up report was
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support."
Eileen Cook, Executive Directorr
Casa Esperanzaa
“Your training was invaluable to me. I dreaded doing this
because I couldn’t even sell someone a candy bar in the past but I was
inspired by your advice to try. I raised about $377,000!"
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Keystone Botanical Garden, El Paso,
TXX
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were amazing! What an OPPORTUNITY for me!!
Your presentation style was EXCELLENT. By far the best
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Epilepsy
Foundation of Minnesota
"As a senior-level development officer, I have a hard time
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Visiting Nurse Association,
Dallas, TX
Jean Block
Consulting, Inc.
7915 Cliff Road NW
Albuquerque NM 87120
(505) 899-1520
Fax (505) 890-5285
Email:
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"I
love your newsletter! It's refreshing, fun
and filled with helpful hints"
Toni Paglia,
Director of Development, The ARCRC
Syracuse, New Yorkk |
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