Fraud in Nonprofits: Real Stories. Presented by: Mike Hablewitz, CPA, Senior Manager

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1 Fraud in Nonprofits: Real Stories Presented by: Mike Hablewitz, CPA, Senior Manager

2 Fraud Triangle 3 factors are generally present in any fraud: Pressure Rationalization Fraud Triangle! Opportunity

3 Case #1 The situation: 2 people with access to accounting system and ability to prepare checks (one person usually prepared them) Check preparers had access to signature stamp for the E.D. Check registers were given by the check preparer to the E.D. for review and signature

4 Case #1 What happened? How did she do it? Check preparer wrote fraudulent checks to herself Used the signature stamp (although she could have forged the signature) Check registers were altered to exclude these fraudulent checks

5 Case #1 What could the organization have done? Reviewed bank statements and cancelled check images Accounted for every check number Review financial statements compare budgeted versus actual expenses Easy to manipulate check registers. Signature stamps are not preferred, but real signatures (even multiple) are not really a control.

6 Case #2 The situation: Board run organization (no employees) Treasurer handles the finances Board monitored/governed the organization s finances by how much cash was in the bank

7 Case #2 What happened? How did he do it? The Board President made dozens of fraudulent cash withdrawals He also executed several fraudulent electronic payments He received the bank statements and he reported to the Board how much cash was on hand

8 Case #2 What could the organization have done? Board requirement that monthly financial statements be produced, then compare budget vs. actual results; follow-up on unexpected variances Have someone else also involved in the finances, provide oversight Review of bank statements for unusual activity

9 Case #3 The situation: The bookkeeper opened the mail, prepared the deposit log, and made the deposits There was typically no involvement of another person in the deposit process The organization received small, unsolicited contributions, including some cash

10 Case #3 What happened? How did she do it? The bookkeeper skimmed from the deposits, typically from the cash She filled out the deposit logs accordingly, or altered them afterward if need be (they were completed in pencil!) She didn t take large individual checks that likely would have been easier to notice if they were missing

11 Case #3 What could the organization have done? Have two people present when opening mail Have both people sign and date the daily deposit log, and complete it in pen or electronically (sign and date a hard copy) Note: All checks should be restrictively endorsed immediately upon opening the mail regardless of how many people are present Compare the deposit log to the deposits on the bank statements Using a lockbox is an alternative solution Having 2 people open the mail may not be necessary in some organizations.

12 Case #4 The situation: The organization had multiple employees with a company credit card (all on one account) The credit card bill was approved by the Executive Director just like all the other vendor bills

13 Case #4 What happened? How did he do it? The Executive Director made numerous fraudulent (personal) charges using his company credit card The Accountant didn t make sure that receipts were turned in for all charges on the account Only the Executive Director and Accountant saw the credit card bills Does the accountant feel okay questioning the E.D. s charges? Does the accountant know what the E.D. is up to, or what would be reasonable charges?

14 Case #4 What could the organization have done? Require all receipts be turned in to the Accountant, and make sure the receipts haven t been altered Have an upward review and approval (board member) of the Executive Director s charges/ receipts The same should be done for an Executive Director s expense reports

15 Case #5 The situation: There were multiple people who could approve invoices and sign checks The invoices were not marked paid Mail from vendors was routed to the Accountant unopened

16 Case #5 What happened? How did she do it? The Accountant would submit the same invoice/check to multiple check signers (could use a copy or just resubmit the same invoice) As a result, the vendor would be paid twice, creating a credit on the account The vendors would then send a check to pay the organization back, which was routed to the Accountant who cashed it personally Easy to cash a check personally even if its in the organization s name. Or the person could ask to address the check to their attention.

17 Case #5 What could the organization have done? Require that only original invoices will be approved for payment Cancel all invoices, commonly done with a paid stamp where the date and check number is noted on the invoice Have two people open the mail and immediately restrictively endorse incoming checks for the organization s deposit only

18 Case #6 The situation: The Accountant submitted all payroll info to the 3 rd party payroll provider The payroll reports from the 3 rd party were used by Accountant to record the transactions in the accounting system Nobody else saw the payroll reports

19 Case #6 What happened? How did she do it? The Accountant submitted info to the 3 rd party for a ghost employee (her relative) She had the necessary info to complete the paperwork, then forged a signature on a form Employees were paid via direct deposit (no individual amount and cancelled check image available for review on the bank statement)

20 Case #6 What could the organization have done? Have the 3 rd party payroll reports sent directly to someone other than the Accountant Have this person review the reports to ensure all names are legitimate employees (note: make sure the salary and wage rates are reasonable for everyone as well, especially the person submitting the info to the 3 rd party)

21 Tips and Reminders Trust your instincts if something doesn t seem right, investigate it Look for signs of pressures (fraud triangle) Do background checks Review the following: Bank statements, EFTs and check images Payroll reports Credit card statements/receipts Financial statements, including budget variances

22 Tips and Reminders Cancel all invoices Know who your employees and your vendors are Have two people open mail and handle deposits Have two people involved at special events as well, especially if cash is involved Restrictively endorse all checks immediately upon opening the mail

23 Closing Thoughts Trust, but verify; it is okay to be skeptical Document your internal controls Don t rely on outside parties employees are the best source for tipping off a fraud. Fraud happens, and it happens way more than we d like to think; nonprofits are certainly not immune Perpetrators are often the last person we would suspect Don t be on the front page of the newspaper! Use positions when documenting controls, not names of people. Trusted, long-time employees w/ no previous convictions, etc. are often the perpetrator.

24 Thank you!! Mike Hablewitz, CPA, Senior Manager! Wegner CPAs 2110 Luann Lane Madison, WI wegnercpas.com/blog facebook.com/wegnercpas linkedin.com/company/wegnercpas twitter.com/wegnercpas google.com/+wegnercpas