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Keep Your Not-for-Profit Off the Front Page

Fraud prevention

By Nicole Riley, CPA, CFE

Wells Fargo, Fannie Mae and Enron. while these names could sound like the latest contenders for the next celebrity baby, they actually hold a more special place in our minds: ill-famed for their duplicitous reputation.

Wells Fargo had more-than-reasonable sales goals that led to employees opening fake accounts to meet them. Fannie Mae’s financial statements were as “clear as mud” to investors. Enron practically rewrote the book on creative accounting, even managing to inspire the conception of the 2002 Sarbanes-Oxley Act.

With millions of dollars in payouts and some prison time for executives, these big names faced big consequences for their actions. However, such deceptive schemes are not reserved only for the Fortune 500. Some argue that not-for-profits are much more susceptible to fraud than the corporate giants and the consequences are just as immense. To help avoid your organization from being the next front-page news story, it is important to review your controls to ensure you are designed appropriately to detect, prevent and deter fraud.

Ghost employees and fake vendor billings are some of the more common and simple ways fraudsters hatch their schemes. Resources are often limited in not-for-profit organizations, resulting in segregation of duties as one of the most common deficiencies.

When there is limited accounting staff, or sometimes only one accounting staff person, it is difficult to separate the bank reconciliation process from the person who writes the checks or the posting of receipts from the person who handles the customer billings. In such cases, implementing detective controls can be a powerful investigative tool.

Although these types of controls will not prevent fraud from occurring, they will assist in identifying the theft in a timely manner and may even help deter employees from having sticky fingers in the first place. When employees are aware that there is someone looking over their shoulder and paying attention to the details, they are less likely to commit a fraudulent act.

One effective control would be to have the organization’s executive director receive the payroll report directly from the payroll provider and review the details. The employee names, gross pay amount and withholdings should be inspected and compared to approved amounts.

Another effective control is to have the bank statement sent directly to the executive director and reviewed to ensure that payments made, and funds coming in — agree with expectations — approved invoices and checks that were signed. It’s important these reviews be diligent and thorough.

For certain areas, preventative controls are essential because there are few other options to ensure the organization receives all of its funds. For organizations that receive unsolicited funds, instituting a system that requires two people to process the mail and make the daily deposit is one such case. If this is not possible, using a lock box can also prove beneficial. When funds that are unknown are coming in the door of the organization, it is difficult to detect theft, so prevention is very important.

These are just a few controls that not-for-profits can consider to keep their funds safe. While prevention and detection measures are never a guarantee to stop fraud, they can work as a deterrent and help better protect the organization’s assets and accomplish its mission.

Nicole Riley, CPA, CFE, is an audit senior manager with PKF Texas. Contact her at nriley@pkftexas.com.