Reducing the Risk of Fraud in Your Non Profit Organization

Advice from:

• 58% of organizations who experienced fraud did not recover ANY of their losses

• Only 14% made a full recovery

2014 Global Fraud Study

by the Association of Certified Fraud Examiners (ACFE)

Intangible Losses > Tangible Losses • Loss of Reputation • Current donors • New donors • Employees • Officers and directors • Other key stakeholders

and regulatory bodies

• Assets • Funds • Property • Donations

NPO’s Are Susceptible to Fraud

• Tight budgets & limited resources

• Higher level of trust in colleagues

• Volunteer Boards / High Turnover (with additional full time career)

• Emergency relief agencies desire speedy delivery of funds to beneficiaries. Thus normal procedures bypassed for expediency.

So what’s a Not-for-Profit to do?

+ Motivation

+ Rationalization

+ Opportunity

= FRAUD

Motivation (the cause)

• Credit card debt

• Gambling addiction

• Drug addiction

• Family issues (divorce, illness etc.)

• Desire for material goods

… And hidden by the perpetrator

Motivation (the cause)

• Credit card debt

• Gambling addiction

• Drug addiction

• Family issues (divorce, illness etc.)

• Desire for material goods

… And hidden by the perpetrator

Rationalization

• I’m underpaid

• I should have received a bonus

• I’m just borrowing the money. I’ll pay it back.

• The organization has lots of money. It won’t miss what I’m taking.

• The organization deserves it because of the way it treats its employees.

Rationalization

• I’m underpaid

• I should have received a bonus

• I’m just borrowing the money. I’ll pay it back.

• The organization has lots of money. It won’t miss what I’m taking.

• The organization deserves it because of the way it treats its employees.

Opportunity

• The ability to commit fraud

• Belief that

fraudulent activities will NOT be detected

CLOSE the DOOR

With INTERNAL CONTROLS

What’s a Control ?

Controls are rules and procedures that:

• decrease risk to an organization

• help detect and prevent accounting errors and fraud

Benefits of Internal Controls

Increase the effectiveness and efficiency of operating procedures

Enhance the reliability of financial reporting

Reduce cost of audits

Ensure compliance with laws and regulations

Maintains the good reputation of the organization

Internal Controls

Internal Control Examples

• Cross-train employees to reduce reliance on one individual

• Perform background checks before hiring employees

• Enforce vacation policy

• Institute a whistle blower system

• Maintain accurate and complete accounting records

• Limit access to accounting and bank systems

• Use electronic payments

Controls Over Cash

– Know the procurement process and the list of vendors

– Pay only from invoices; mark invoices “paid” to avoid duplicate payment

– Control the cheques

• Pre-numbered

• Unused cheques in locked cabinet

• Require two signatures

• Limit number of authorized signatures to 4 at most

Controls Over Cash

– Pay a vendor without a valid invoice

– Sign a cheque without first seeing the documentation

– Sign a cheque that is not completely filled out

Controls Over Cash

Involve as many people as practical:

• Someone other than the person writing and mailing the cheques should receive the unopened bank statement and review the contents before it is reconciled.

• Bank accounts should be reconciled every month, preferably by an individual other than the person writing cheques and making deposits. Reconciliations should be reviewed by the Treasurer.

Petty Cash Controls

–Always use an impressed system.

Keep the amount impressed low.

–Only one person should have access to the fund.

–Cash should be in a locked box and kept in a locked drawer or filing cabinet.

–Vouchers should be completed in ink and supported by receipts.

Bank Reconciliations

• Ensure that bank reconciliations are prepared monthly by the 15th of the following month

• Check the reconciliations

– Watch for unusual reconciling items and outstanding deposits

Investments

• Ensure the signing authorities are kept up to date with your investment advisor (whenever there is turnover on the Board).

• Withdrawals from portfolio accounts should require either Board approval or a minimum of two signing authorities.

Accounting Records

• Have a full set of financial statements prepared every month – both statements of revenue and expenses and a balance sheet.

• Review statements on a monthly/quarterly basis.

• Watch for unusual increases in expense accounts; peruse items charged to frequently used accounts such as office and general.

Accounting Records cont.

• Request aged subledger listings for accounts payable and accounts receivable.

• Ensure that clearing accounts are clearing properly each month e.g. payroll clearing, employee tax deductions, HST payable.

• Review HST returns.

• Review payroll accounts for unusual entries and fictitious employees.

Journal Entries

• The easiest way to manipulate the accounting records is by way of general journal entries.

• All general journal entries must have a description of the entry and the approval of management.

• If you don’t understand why an entry is being made, ask for an explanation.

Finally…

Set the Tone at the Top The behaviour of your organization’s

leadership will be adopted by staff who are looking to leadership for cues.

Leaders who create high codes of conduct and live up to them

Set the right tone at the top!

The tone at the top must be

1. Documented 2. Communicated 3. Kept Up to Date 4. Monitored to ensure Compliance

Our Services for NFP Orgs, Charities, Associations & Unions

• Assurance Services (Audit, Review, Notice to Reader)

• Tax Compliance & CRA Submissions

• GST/HST and Payroll Consulting

• Annual Returns

• Forecasting / Projections

• Financial Reporting

• Internal Control Evaluation & Implementation (outside of an audit)

• Bookkeeping / Quickbooks

• Day to Day Questions

Our Services for Individuals & Businesses

• Tax Services

• Succession & Estate Planning

• Accounting

• Business Advisory

• Valuation & Litigation Support

• Audit & Assurance

“Stern Cohen gets large refunds for their clients” The Toronto Star

February and May, 2014