Detecting & Preventing Fraud in Nonprofits

Presented By: W. Andrew Powell, CPAPrincipal Halt, Buzas & Powell, Ltd.

Detecting and Preventing Fraud in Nonprofits

Increase understanding of the types of fraud an organization may be most susceptible to

Improve awareness of the importance and application of an organization wide approach to protecting against fraud and abuse

What things your organization can implement to protect against fraud and abuse

Our Objectives for Today

Webster’s dictionary

The Association of Internal Auditors

Definition

Occupational◦ Definition – use of one’s occupation for personal enrichment

through the deliberate misuse or misapplication of the employing organization’s resources or assets

◦ Categories of occupational fraud Asset misappropriations Corruption Fraudulent statements

Type of Fraud

Association of Certified Fraud Examiners (ACFE)

Every two years issues a “Report to the Nation” dealing with Occupational Fraud

The 2006 results are from a study of data from 1,134 cases of fraud

ACFE

147 Cases involving NFPs, schemes included:

2006 ACFE “Report to the Nation”

Scheme Cases Percentage

Corruption 43 29.3%

Billing 42 28.6%

Expense reimbursements 42 28.6%

Check tampering 36 24.5%

Skimming 33 22.4%

Cash larceny 26 17.7%

Non-cash 21 14.3%

Payroll 19 12.9%

Fraud statement 8 5.4%

Wire transfers 8 5.4%

Register disbursements 1 0.7%

How fraud was detected

2006 ACFE “Report to the Nation”

What type of anti-fraud measures existed in the organizations

2006 ACFE “Report to the Nation”

Of all the 1,134 cases in the 2006 study:

23.4% resulted in 25% or less in recovery amount

18.1% resulted in 26% to 75% of recovery amount

16.4% resulted in 100% of recovery amount

42.1% resulted in no recovery

2006 ACFE “Report to the Nation”

Opportunity IntentMotiveConcealmentRationalization

Factors Present in All Frauds

Financial condition of the organization Pressure to present results for funders and

general public Internal accounting controls Integrity level of corporate leaders and

employees Commitment to organizations value system Reward systems for ethical behavior

Why is an Organization Susceptible to Fraud

Personal traits and characteristics of executives and employees

Organizational culture and dynamicsPeer pressurePerception of detectionSwiftness, certainty, and severity of

punishment

Why is an Organization Susceptible to Fraud (cont’d)

Types:◦ Investment scams◦ Vendor ◦ Customer

Forms:◦ Theft of intellectual property◦ Check and credit card fraud◦ Money laundering◦ Computer and internet◦ Contract and procurement◦ Identity theft

Other Types/Forms of Fraud

Environment of trust Excessive control by founder, exec director, major

contributor Board of Directors lacking financial expertise Existence of nonreciprocal transactions Lack of resources for financial management Job security linked to program and financial reporting

(especially an org with gov’t grants)

Characteristics that Open up a NFP to Fraud

Ghost employees Sub recipient fraud Expense reimbursements Skimming of charitable contributions Financial assistance Founder/leader syndrome Fundraising

Types of Fraud in NFPs

Reputation impact◦ Program management◦ Personnel recruitment◦ Fundraising◦ Overall image

Employee morale Actual loss of assets or resources Insurance coverage Investigative and prosecution costs Corrective action

Cost of Fraud to NFP

Acknowledge that fraud and abuse is an organization issue

Establish a practice of periodic risk management as it relates to fraud and abuse

Develop an organizational model for controlling fraud and abuse

How does a NFP Cope

Organizational facts:

◦ Everyone in the organization has a role in detection and prevention

◦ Traditional internal accounting controls play a role◦ Primary reliance on the external audit is not enough

How does a NFP Cope

Organizational facts (cont.):

◦ People and circumstance change over time, which may increase the risk

◦ The real cost, once discovered, can not be measured in terms of dollars

◦A probability exists that some level of fraud or abuse may already exist or could happen in the near future

How does a NFP Cope

Risk management activities:

◦Assessment

◦Reduction

◦ Transfer

◦Acceptance

How does a NFP Cope

Organizational model for controlling fraud◦ Establish appropriate financial controls as related to

opportunities to commit fraud◦ Establish non-financial systems to deal with fraud risk

factors◦ Establish a tone at the top relating to fraud

How does a NFP Cope

Experiences to share

Additional comments

Other

Questions

W. Andrew Powell, CPA Principal

Halt, Buzas & Powell, Ltd.(703) 836-1350

apowell@cpas4you.com