Fraud Facts and Prevention

Gregory B. Capin, CPA 
This article provided by the Engstrom Institute

Fraud, even within Christian organizations, occurs. Consider these eight important facts.

1. There is a high probability that some level of fraud or abuse already exists in your organization.
2. The real cost to an organization of a reported instance of fraud or abuse cannot be measured in terms of the dollars lost.
3. People and circumstances change over time and those changes can increase the risk of internal fraud and abuse.
4. While internal controls play a part in deterring fraud and abuse, they represent but one facet of fraud prevention and detection.
5. Reliance on the external audit as the primary method of detecting fraud is not enough.
6. Everyone in an organization has a role in the prevention and detection of fraud and abuse.
7. Minor fraud occurs in lower levels of an organization. Major fraud happens at the top of an organization.
8. Fraud occurs when all three of the following conditions are present:
   
   

Examples of Fraud Prevention Steps

There a number of strategies organizations can employ to reduce risk in this area. Examples of these steps include the following:

Banking and Checking Accounts

• Keep blank checks locked in a secure location with restricted access.
• Senior staff outside the disbursement initiation, approval and check signing functions should obtain bank statements unopened and review cancelled checks and statements monthly.
• Have an independent review of monthly bank reconciliations and related journal entries.
• All new accounts and closed accounts should be minuted carefully in finance committee minutes.

Revenue/Receipting

• Have dual control (more than one person) receiving and counting receipts, including contribution of cash and checks.
• Consider bank lockbox services.
• Require all grant notifications to be reported to the finance department.
• Reconcile earned revenue with statistics outside the finance department such as student enrollment or tickets sold.

Disbursements

• Periodically compare vendor addresses and employee addresses.
• Perform independent price checks to find kickback schemes.
• Perform independent check of payroll taxes withheld with amounts actually paid.
• Require two live signatures on checks for significant dollar amounts.

Board Issues

• Institute a code of conduct and ethics policy.
• Institute a conflict of interest policy and require all board members and senior staff to sign an annual conflict of interest disclosure statement.
• Require background checks for all new staff and possibly certain existing personnel such as finance office staff.
• Establish a formal audit committee with a charter laying out specific duties and tasks.
• Consider the use of a fraud hotline to receive anonymous reporting of suspected fraud or abuse.
• Formulate and enforce a gift acceptance policy for all non cash gifts.
• Monitor performance of internal control policies and procedures by requiring finance staff to report results of reviews of internal control processes during the year.
• Engage an independent accounting firm to evaluate controls as an agreed upon procedures or attestation engagement.

Reporting

• Require finance department review of periodic reporting on all grants.
• Require monthly balance sheet and income statement reporting.

Expense Reporting

• Formulate and strictly enforce credit card expenditure documentation.
• Have CFO and CEO expense reports reviewed by an audit committee member.

Worth Pondering

In light of the above, what steps does your organization need to take to ensure safeguards and to minimize fraud or abuse?

Gregg Capin serves as partner in charge of Marketing and Practice Development for Capin Crouse LLP, a CPA firm devoted to serving not-for-profit organizations nationally and internationally. The firms regional offices include: Atlanta, Chicago, Colorado Springs, Denver, Indianapolis, Grand Rapids, and Los Angeles. For more information, visit www.capincrouse.com