Detecting and Preventing Fraud in Nonprofits

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Detecting and Preventing Fraud in Nonprofits
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• Detecting and Preventing Fraud in Nonprofits
• Presented By
• W. Andrew Powell, CPA
• Principal
• Halt, Buzas Powell, Ltd.

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Our Objectives for Today

• 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

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Definition

• Websters dictionary
• The Association of Internal Auditors

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Type of Fraud

• Occupational
• Definition use of ones occupation for personal
  enrichment through the deliberate misuse or
  misapplication of the employing organizations
  resources or assets
• Categories of occupational fraud
• Asset misappropriations
• Corruption
• Fraudulent statements

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ACFE

• 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

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2006 ACFE Report to the Nation

• 147 Cases involving NFPs, schemes included

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2006 ACFE Report to the Nation

• How fraud was detected

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2006 ACFE Report to the Nation

• What type of anti-fraud measures existed in the
  organizations

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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

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Factors Present in All Frauds

• Opportunity
• Intent
• Motive
• Concealment
• Rationalization

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Why is an Organization Susceptible to Fraud

• 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

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Why is an Organization Susceptible to Fraud
(contd)

• Personal traits and characteristics of executives
  and employees
• Organizational culture and dynamics
• Peer pressure
• Perception of detection
• Swiftness, certainty, and severity of punishment

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Other Types/Forms of Fraud

• 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

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Characteristics that Open up a NFP to 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 govt grants)

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Types of Fraud in NFPs

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

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Cost of Fraud to NFP

• 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

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How does a NFP Cope

• 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

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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

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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

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How does a NFP Cope

• Risk management activities
• Assessment
• Reduction
• Transfer
• Acceptance

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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

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Other

• Experiences to share
• Additional comments

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Questions?

• W. Andrew Powell, CPA
• Principal
• Halt, Buzas Powell, Ltd.
• [phone]
• apowell_at_cpas4you.com