11/9/15. Fraud in Non-profit Organizations: What You Need to Know NOW!

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1 Fraud in Non-profit Organizations: What You Need to Know NOW! The CFE Credential The Certified Fraud Examiner (CFE) credential denotes proven expertise in fraud prevention, detection and deterrence. CFEs are trained to identify the warning signs and red flags that indicate evidence of fraud and fraud risk. CFEs around the world help protect the global economy by uncovering fraud and implementing processes to prevent fraud from occurring in the first place. CFEs have a unique set of skills that are not found in any other career field or discipline; they combine knowledge of complex financial transactions with an understanding of methods, law, and how to resolve allegations of fraud Report to the Nations on Occupational Fraud and Abuse The ACFE's 2014 Report to the Nations on Occupational Fraud and Abuse is based on data compiled from a study of 1,483 cases of occupational fraud that occurred worldwide between January 2012 and December All information was provided by the Certified Fraud Examiners (CFEs) who investigated those cases Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners, 1

2 Outline / Agenda What is fraud? Fraud Statistics Average Losses Industries Impacted Employees Most Likely to Commit Fraud Fraud in Non-Profits Types of Fraud and How They Work Controls to Prevent Them Examples / Case Studies Governance Policies and Procedures Best Practices in Fraud Prevention Is This Fraud? Replacing a $6 pack of Oreos in a hotel room with the same pack from a convenience store that only cost $2. What if the pack from the hotel room expired tomorrow, but the pack you replaced it with didn t expire for another six months? The Definition of Fraud Defined by Association of Certified Fraud Examiners: The use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets. 2

3 The Fraud Triangle The Fraud Triangle CFE s use the Fraud Triangle to explain why a person commits fraud. All points of the triangle need to exist for an ordinary person to commit fraud. There are Career fraudsters that make it their goal to go company to company and commit fraud without being caught. That portion of fraudsters is estimated to be around 6%. A gambling or drug habit Perceived Pressure Personal debt or poor credit A significant financial loss Peer or family pressure to succeed 3

4 Rationalization I was only borrowing the money and planned to repay it. The company won t even realize this amount is gone; it s not that much. My boss does it all the time. I ve been working with the company for 15 years. They owe it to me. I ll stop once I pay off my debts. I deserved this after the way the company has treated me. Lack of supervision Poor internal controls Poor record keeping Perceived Opportunity Extreme trust in a single individual Lack of disciplinary action for previous frauds Everybody s too busy to notice lack of awareness of what s going on. Types of Fraud Asset Misappropriation 4

5 Types of Fraud - Corruption Types of Fraud Financial Statement Fraud Occupational Frauds by Category - Frequency 1 5

6 Occupational Frauds by Category Median Loss 1 Fraud Losses The true loss to fraud might not be known due to the human nature to want to minimize their guilt over the theft. Fraud in Non-Profits P&L with Add l sales needed Fraud to recover fraud loss Revenues $2,000,000 $4,000,000 Expenses (1,900,000) (3,800,000) Net Income (5%) 100, ,000 Less Losses from Fraud (100,000) (100,000) Net Income After Fraud ,000 6

7 11/9/15 Type of Victim Organization - Frequency1 Type of Victim Organization Median Loss1 Frequency of Schemes Based on Industry1 7

8 Corruption Corruption Schemes in which a fraudster wrongfully uses his or her influence in a business transaction for the purpose of obtaining a benefit for himself or another person Conflicts of interest Illegal gratuities Bribery This fraud is generally more prevalent in larger organizations (companies with more than 100 employees). The person committing this type of fraud will likely have a close relationship with a vendor or contractor. Position of Perpetrator - Frequency 1 8

9 Position of Perpetrator Median Loss 1 Recovery of Fraud Losses It takes time and effort to recover the money lost to fraud At the time of the survey conducted by the ACFE to compile their report on fraud, 58% of their victim organizations had not recovered any of their losses due to fraud, and only 14% had made a full recovery. Of the examples covered in this presentation, nearly all of the fraudsters had spent their funds, leaving little to no funds left for recovery. Contingent Donations 9

10 Contingent Donations Take aways: Stay married Do your due diligence Preventative Controls: Get approval on donations over $XXXX Follow your Donation Acceptance policy Governance: Make sure you have a donation acceptance policy Board approval or at the very least board discussion should take place on significant financial transactions such as this. Fraud via the Internet The Havoc of Hackers What they steal How they make their money The Deep Dark Web Approximately 4% of Web Content (~ 8 billion pages) is available via search engines like Google. The other 96% is protected within the Deep Web by passwords. The Deep Dark Web 10

11 Online Donating Thieves target non-profit online donating sites to test the stolen credit card information. Transactions are small, generally in the $2 - $5 range. If the transactions go through undisputed, then the Thief knows the information is good and they will start to make larger purchases for inventory, and then sell the inventory on the black market. This is all done in an automated fashion processing thousands of transactions at a time. Defending Automated Transactions Increase your IT security The Captcha! (Completely Automated Public Turing test to tell Computers and Humans Apart) Introducing the no Captcha recaptcha 11

12 Check Tampering Forged Maker An employee fraudulently affixes the signature of an authorized maker Forged Endorsement An employee intercepts a signed check and endorses it in the third party s name. Altered Payee An employee intercepts a signed check and alters the intended third party payee. Authorized Maker An authorized check signor writes checks for their own benefit and signs their own name as the maker. Check Tampering Accountant and executive assistant embezzled in excess of $365,000 Executive officer (the check signing authority), signed blank checks and made them accessible to the accountant to make for more efficient processing of payables Blank checks were made payable to cash, to the accountant, or to the executive assistant Fraudulent Checks Written to Cash 12

13 Fraudulent Checks Written to Accountant Fraudulent Checks Written to Executive Assistant Preventative Controls DON T leave signed blank checks Separation of duties Throw away signature stamps Secure blank check stock Work closely with banks Positive Pay Maximum Check Amounts 13

14 Governance Fraud Policy Accounting Policy Bridge the Gaps in the Separation of Duties Treasurer can review bank reconciliations Executive members can do spot checks on disbursements Request monthly financials Review budget to actual variances Check Cards ATM Withdrawals 14

15 Check Card Fraud Check Card Fraud Deborah Leggio, former financial director for a New York Red Cross Chapter, embezzled more thant $274,000 She used the organization s debit card to make ATM cash withdrawals, sometimes as often as every couple days. Stolen funds were used to purchase some of the following: Nail treatments Weight watchers membership Children s tuition In addition to the stolen funds, Leggio also owes $22,000 in New York state taxes. Credit Cards 15

16 Preventative Controls for Credit Card Fraud Match all receipts to credit card statement / bank statement Implement a credit card use policy No personal purchases allowed Limit the number of purchasing cards available Set purchasing thresholds on the cards Board Governance Separate the duties as much as possible Review of statements should be done separately from the purchaser All receipts should be included with statement, no exceptions Be sure all proper policies are in place; fraud policy, credit card use policy, accounting policies, etc Fraud Prevention Good Practices Be skeptical and remain alert Ask questions on financial discrepancies Implement sound financial policies, and review them periodically Be aware of the red flags review the points of the fraud triangle. Perform periodical unannounced internal audits Create a perception of detection 16

17 Initial Detection of Occupational Frauds 1 Source of Tips 1 Behavioral Red Flags Displayed by Perpetrators 1 17

18 Test of Your Awareness Living Beyond Means Living Beyond Means (continued) 18

19 Creating the Perception of Detection (continued) THANK YOU! Adam J. Hennen, CPA, CFE, CITP Olsen Thielen, CPAs (main office) (direct) 19