Fraud Prevention for Nonprofits

Transcription

1 Fraud Prevention for Nonprofits January 11, 2017 Fraud Myths It hardly ever happens to nonprofits. It won t happen in our organization. Jane is the most dedicated and honest person I ve ever met. Mary is our longest tenure employee and would never commit fraud. We don t have enough staff to have financial controls. Our audit will catch any fraud. How many of you know of a nonprofit organization that has been a victim of fraud? 1

2 Is fraud really that big of a deal? According to the Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nations, it is estimated that the typical organization loses 5% of revenue in a given year as a result of fraud. ACFE 2016 Report Findings Median loss suffered by small organizations (fewer than 100 employees) was the same as that incurred by the largest organizations (more than 10,000 employees). However, this type of loss is likely to have a much greater impact on smaller organizations. Organizations of different sizes tend to have different fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll and cash larceny schemes were twice as common in small organizations as in larger organizations. ACFE 2016 Report Findings Most prominent organizational weakness that contributed to the frauds in the study was lack of internal controls, which was cited in 29.3% of cases, followed by an override of existing internal controls, which contributed to just over 20% of cases. In 40.7% of cases, the victim organizations decided not to refer their fraud cases to law enforcement, with the fear of bad publicity being the most cited reason. 2

3 Characteristics of a Fraudster Washington Post Study IRS Form 990, revised in

4 Washington Post Study October 2013 study Form 990 filings from More than 1,000 nonprofits checked the box 10 of the largest disclosures had losses totaling more than a half billion dollars Fraud Triangle Pressure/Incentive Pressure may be actual or perceived Provides a motivation to commit fraud 4

5 Examples of Pressures/Incentives A nonprofit s executive director may be told by the board to achieve a certain level of fund raising by the end of the fiscal year (real pressure). The executive director also may believe that if she does not meet the board s expectations, her employment will be terminated (perceived pressure). In an effort to obtain additional grant funds or contributions, nonprofits may have an incentive to overstate revenues or results. Conversely, nonprofits may have an incentive to understate expenses in an effort to appear more efficient or effective to potential grantors or donors. Examples of Pressures/Incentives For some higher level management, annual compensation may be based, in part, on the organization s financial, service or overall performance. Organizations operate in a competitive environment for contributions. Potential donors can readily compare an organization s Form 990 to other organizations with a similar mission. An organization feels pressure to maximize the reported program expenses and minimize the reported fund raising and management and general expenses to attract donors. Examples of Pressures/Incentives An organization incurs some significant fund raising expenses that the organization believes will result in contributions in future years. Management is concerned the reporting these fund raising expenses in the current year will appear to make the development staff appear ineffective as the contributions will not be generated until future years. An organization has had several years of healthy increases in unrestricted net assets. The Executive Director is concerned that potential donors may be less inclined to donate to the organization if they believe the organization does not need assistance. 5

6 Examples of Pressures/Incentives An organization received a conditional promise to give of one dollar for every two dollars raised from other donors prior to year end. Going into the final month of the year, the organization is far behind its matching funds for the grant. An organization is facing a likely deficit in unrestricted net assets. Over the years, the organization has received a number of temporarily restricted contributions. The organization does not foresee itself taking on such projects in the near future and the original donors do not ask about the status of the projects. Examples of Pressures/Incentives An organization receives a grant that is renewed annually. One of the terms of the grant is that any unused funds at the end of the grant year must be returned to the grantor. The current year has had less activity than normal. The organization is concerned about having to refund a portion of the grant funds and that future grants may be reduced. Opportunity A lack of personnel, or sufficiently qualified personnel Absences of controls Ineffective controls Ability of management to override controls 6

7 Examples of Opportunity A nonprofit may have a number of locations where cash is collected for payment of services. In addition, the cash may be collected by persons, such as volunteers, who lack knowledge of existing controls. A nonprofit s management may view anti fraud programs as unnecessary because they do not believe anyone would want to defraud their organization. This misperception could result from the believe that volunteers or employees are committed to the mission and would not be willing to harm the nonprofit. Examples of Opportunity An organization s Executive Director has a dynamic personality. As a result, the Executive Director has a great deal of power of the board of directors and staff. An organization s bookkeeper/office manager is responsible from everything from answering the phones to writing checks to making deposits. There is basically no oversight of the bookkeeper/office manager. Examples of Opportunity A church relies heavily on volunteers that are not subject to oversight in many financial areas (purchasing items, counting offerings, etc.). An organization receives contributions to assist those in need in the community. As part of its mission, it distributes food, clothing and gift cards to individuals to help them through difficult times. 7

8 Rationalization Being able to rationalize a fraudulent act as being consistent with their personal code of ethics. It s okay to commit fraud because or I am not really doing anything wrong because Examples of Rationalization Nonprofit employees are often paid less than their counterparts in the private sector. Some nonprofit employees rationalize the misappropriation of physical assets as compensation for their low salaries. Nonprofit employees may feel pressured to appear efficient and effective to attract donors or obtain grant funds. These circumstances, when combined with pressure to provide high levels of service, may create an environment in which employees are able to rationalize perpetrating fraud. Examples of Rationalization Lack of ownership attributes in nonprofits may result in an additional fraud risk. The existence of owners is sometimes a fraud deterrent. Employees are less prone to defraud an actual person. An organization s payroll supervisor has grown dissatisfied with her position due to lack of raises, rejections for the request of an assistant, and requests to reduce her hours due to budget constraints. 8

9 Fraud Basics No matter the size of the entity, the execution of the fraud is similar. Commits fraud receives benefits conceals fraud Internal frauds Fraudulent financial reporting Asset misappropriation Fraudulent Financial Reporting Intentional misstatements or omissions designed to deceive financial statement users Accomplished by Manipulation, falsification, or alteration of accounting records or supporting documents Misrepresentation in, or intentional omission from, the financial statements Intentional misapplication of accounting principles Fraudulent Financial Reporting Revenue Overstating revenue or delayed revenue to meet budgeted amounts Improper determination of when membership dues earnings process is complete Pressure to generate positive operating results may take an aggressive approach to recording grant revenue Failure to report receivables in the correct period Holding records open beyond the period end date to inflate revenues Misclassifying restricted donations 9

10 Fraudulent Financial Reporting Expenses Overstating expenses Understating expenses Failure to report accounts payable in the correct period Misclassifying expenses regarding the funds used for programs Improper allocation of expenses by function Improper allocation of fund raising expenses Fraudulent Financial Reporting Mgmt Override Ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to operate effectively Journal entries Accounting estimates Allowances for uncollectible receivables Estimated useful lives of capital assets Estimates of accrued compensated absences Estimated contingent liabilities for litigation or claims Circumstances that May Indicate Fraudulent Financial Reporting Significant or unusual adjustments at year end Documentation relating to cash receipts that is missing or altered Cash flow from operating activities inconsistent with actual cash flow Unusual or unexplained fluctuations from year to year or budgeted to actual Significant related party transactions or failing to report related party transactions Transactions that have been pre or post dated from the actual transaction date 10

11 Misappropriation of Assets Actual theft of an entity s assets Accomplished by: Causing an organization to pay for goods and services not received Using an organization s assets for personal use or simply stealing the organization s assets Embezzling receipts Misappropriation of Assets Skimming Theft of donated merchandise Credit card abuse Fictitious vendor schemes Ghost employees Overstatement of hours worked Fictitious expenditures Outright theft of the organization s property Personal use of the organization s assets and other resources Circumstances that May Indicate Misappropriation of Assets Missing or out of sequence blank checks Significant bank reconciling items without reasonable explanation Second payee or unusual endorsement on checks Missing cancelled checks Unusual disbursement transactions or transactions lacking sufficient supporting documentation Complaints about amounts owed to the organization (for services rendered, contribution pledges, etc.) 11

12 Circumstances that May Indicate Misappropriation of Assets Missing, unusual looking or altered time an attendance records Time and attendance records signed by someone other than the usual supervisor Unusual vendor names and addresses Copies of invoices, purchase orders or receiving documents rather than the original Orders for material or supplies already on hand in sufficient quantities or that are not consistent with the organization s mission Actual Fraud Cases Organization A Who: Treasurer How much: More than $20,000 How: Used organization s funds for personal use. Most was taken through ATM withdrawals not authorized by the organization s members. Time period: June 2011 February 2014 Charged in Allen Superior Court Actual Fraud Cases Organization B Who: Finance Manager How much: More than $130,000 How: Created false invoices from an unnamed company, recorded payments for equipment the organization had not bought in its ledgers. Money was then routed to the Finance Manager s bank account in amounts ranging from $100 to $17,890. Time period: 3 year period beginning shortly after October 2009 Arrested by the FBI after a federal grand jury handed down a 20 count criminal indictment. 12

13 Actual Fraud Cases Organization C Who: Executive Director How much: Approximately $30,000 How: Paid herself in addition to her normal pay without board approval. Time period: August 2011 August 2012 Charged in Allen Superior Court with a felony count of corrupt business influence. Actual Fraud Cases Organization D Who: Executive Director How much: Approximately $1,500 How: Used a debit card issued to the organization for personal items and to pay personal bills. Time period: July 2009 September 2010 Pled guilty to 4 counts of theft, each a class D felony. Actual Fraud Cases Organization E Who: Bookkeeper How much: More than $364,000 How: Wrote checks to her business from the organization s checking account. The checks were then deposited into her business account and subsequently transferred into personal account. The checks were listed in the organization s records as payments to a local nonprofit. When the checks were returned from the bank, the Bookkeeper altered the payee from her business name to a vendor used by the organization. Time period: June 2004 April 2009 Indicted by U.S. District Court on 10 counts, ranging from wire fraud to tax evasion. 13

14 Actual Fraud Cases Organization F Who: Director of Finance How much: More than $276,000 How: Used electronic funds transfers from the organization s accounts to pay his personal credit cars and medical bills and to buy cars and motorcycles. Time period: June 2004 July 2008 Charged with 8 counts of theft and one count of fraud. Actual Fraud Cases Organization G Who: Administrative Assistant How much: $95,000 How: Used the organization s credit cards, transferred money and wrote checks to herself. More than 140 checks had forged signatures. Time period: Over 5 years (sentenced in 2006) Sentenced to 5 months in prison and 5 months home detention and ordered to repay the $95,000 she stole. Actual Fraud Cases Organization H Who: Treasurer How much: $8,570 How: Opened an unauthorized charge card at Sam s Club and used the organization s money for personal use. Time period: August 2006 August 2007 Faced theft and fraud charges. 14

15 Fraud Warning Signs Employees that refuse to take vacation High turnover Lifestyle or behavioral changes; employees living beyond their means Check requests for reimbursement that do not contain original receipts Unusual or unexplainable variances in financial statements Misreporting functional expense classification (little or no management and general or fund raising) Financial records are disorganized Bounced checks Fraud Warning Signs Old accounts receivable balances Large amount of journal entries Journal entries to cash or with round amounts Lack of thank you letters Budget cutbacks Anonymous tips How to Prevent and Detect Fraud Tone at the top Asses fraud risks Segregation of duties* Screen employees Reconcile regularly Provide training Encourage whistle blowing Restrict access 15

16 How to Prevent Fraud Purchase bonding insurance Institute job rotation and mandatory vacations Perform ratio analysis Provide board oversight Review journal entries Proper approval of voids and credit memos Use checks in sequential order Never allow checks to be pre signed How to Prevent Fraud Provide contribution receipts for donors Communicate with donors Request multiple quotes from different vendors Proper documentation for disbursements Require two signatures Conduct a fixed asset inventory Do not rely on your external audit Segregation of Duties Separate responsibilities of Authorizing Recording Maintaining transactions transactions custody of assets 16

17 Segregation of Duties Community Foundation internal controls documentation For those organizations that do not have multiple accounting staff, non accounting personnel such as an office manager can be trained to perform less technical duties. Also board members, such as the board treasurer, can be utilized to further segregate duties. Segregation of Duties 2 person staff Executive Director Receives and lists receipts Makes bank deposits Approves invoices Signs checks Mails checks Opens and reviews bank statements Reviews bank reconciliations Approves journal entries Accounting Staff Prepares bank deposits Enters receipts into the general ledger Writes/prints checks Reconciles bank statement Records journal entries Segregation of Duties 3 person staff Executive Director Prepares bank deposits Signs checks Reviews bank reconciliations Approves journal entries Accounting Staff #1 Enters receipts into the general ledger Writes/prints checks Reconciles bank statement Records journal entries Accounting Staff #2 Receives and lists receipts Makes deposits Approves invoices Mails checks Opens and reviews bank statements 17

18 Questions? Dulin, Ward & DeWald, Inc Dupont Circle Drive West, Suite 300 Fort Wayne, Indiana minded nonprofits Carrie Minnich, CPA, MAcct Jenny Lemmon, CPA, CFE 18