This document summarizes a webinar on practical internal control solutions to prevent fraud in nonprofits. The webinar discusses what fraud is, how and why it occurs through case studies, and tips and procedures to prevent it such as separating financial duties and enforcing bank statement review procedures. It also outlines signs that an organization needs to investigate potential fraud and steps to take if an organization becomes a victim, such as contacting attorneys and checking insurance coverage.

1. Liars, Cheats, & Thieves: Practical Internal Control
Solutions for Nonprofits
Susan C Hammond
June 13, 2012
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4. Today’s Speaker
Susan C Hammond
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5. Liars, Cheats, & Thieves:
, ,
Practical Internal Control Solutions
for Nonprofits
for Nonprofits
Nonprofit Webinars
Nonprofit Webinars
June 13, 2012
©2012 SCHammond 1

6. Welcome
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7. What We Will Cover
• What is fraud?
What is fraud?
• How & Why Fraud Occurs
• Case Studies
• Ti & P
Tips & Procedures to Prevent Fraud
d t P tF d
• Signs You Need to Investigate
• If Your Organization is a Victim…
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8. What is Fraud?
What is Fraud?
The misappropriation of organizational
assets, funds and/or information for the
assets funds and/or information for the
purpose of obtaining personal gain.
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9. How & Why Fraud Occurs
Rationalization‐“I’ll
Opportunity Desperation just borrow the
just borrow the
____ temporarily”
Poor division of
Lack of attention Misplaced trust
responsibilities
Over reliance on
O li
Ignorance
one individual
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10. More Reasons How & Why
Fraud Occurs
F dO
Low financial
Insufficient
intelligence‐ Unqualified
executive director
executive director
executive director treasurer
& board oversight
& board
Unqualified Poor
Uneducated board
bookkeeper
p communications
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11. Case Study One
Case Study One
The Johnstown Museum maintains a petty cash fund of $500.
Historically the fund is replenished every 2‐3 months. Because
of this the petty cash fund is only reconciled 2‐3 times a year.
Over the last 4 months the fund has been replenished
monthly. The bookkeeper is the custodian and the executive
director has been too busy to review what it is the fund is
being used for
for.
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12. Poll Question #1
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13. Case Study Two
Case Study Two
The former CEO of Professional Ed, a nonprofit that provides
professional development for teachers, really didn’t like to be
bothered with the “business side” of the organization and
business side
delegated all operational business matters to the business
manager. The organization’s business manager was a self‐trained
bookkeeper who had taken it upon himself to order a signature
stamp so as not to bother the CEO. In addition he prepared all the
monthly board financial reports including the annual budget and
presented them to the board as over the last year the treasurer
had been unavailable to attend the b d meetings. In addition
h db l bl d h board dd
the treasure had minimal interaction with the business manager.
The business manager had also terminated the services of the
outside CPA resulting in the organization not filing its Form 990 for
the last two years.
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14. Poll Question #2
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15. Case Study Three
Case Study Three
St Joseph’s Academy is a Catholic elementary school that serves
1,000 children on an operating budget of $500,000. The Executive
Director has been with the organization for 3 years while the
bookkeeper has been with the organization for 20 years. In fact,
the ED doesn’t know what she would do without George the
bookkeeper. He seems to have an answer to all the questions
pertaining to past events and good suggestions when a new
situation develops. The executive director doesn’t review the
bank statements and often signs checks without reviewing the
supporting documents. St. Joe’s bank statement is received and
opened by George. George maintains his own personal accounts
at the same bank as St. Joe’s. George issues several credit memos
each month for adjusting customer accounts.
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16. Poll Question #3
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17. Case Study Four
Case Study Four
Roger has been the maintenance manager for 10 years at Camp
Wildwood. He and the bookkeeper are on the same bowling
p g
team. That’s how Roger came to be hired. There are 20
counselors and 3 administrative staff of varying degrees of
tenure. While cashflow is sometimes tight, it s never been
tenure While cashflow is sometimes tight it’s never been
impossible to make payroll or pay vendors normally. Lately the
Camp Director has noticed on the credit card statement small
purchases that might or might not be related to a building project
h h i h i h b l d b ildi j
for Camp Wildwood and Roger has requested several salary
p
advances in the last 6 months which have not been paid back.
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18. Poll Question #4
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19. Questions Answers
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20. Tips & Procedures to Prevent Fraud
Tips & Procedures to Prevent Fraud
Know who you are hiring.
Document policies & procedures in
p p
writing.
Separate the functions of cash receipts
Separate the functions of cash receipts
& cash disbursements.
Enforce bank & credit card statement
review procedures.
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21. Tips & Procedures to Prevent Fraud
Tips & Procedures to Prevent Fraud
Enforce cash receipts & disbursement
procedures.
procedures
Require mandatory vacation for all staff involved
q y
with accounting.
Accounting records should be kept in locked files
A i d h ld b k i l k d fil
when no one is present.
Time cards/sheets should be approved & verified
before payroll is processed.
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22. Tips & Procedures to Prevent Fraud
Tips & Procedures to Prevent Fraud
Bond all employees with access to cash &
accounting records.
accounting records
Replenish petty cash once a month & review the
p p y
type of expenditures reimbursed.
Do not use an organization‐wide credit card.
Secure valuable fixed assets.
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23. Tips & Procedures to Prevent Fraud
Tips & Procedures to Prevent Fraud
The Treasurer should have the appropriate
background.
background
Treasurer should engage with the accounting
g g g
staff.
Treasurer or Finance Committee Chair should
T Fi C i Ch i h ld
present the board financial reports.
Finance Committee or Board should meet
annually with the outside accounting firm
without staff present.
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24. Cash Receipts Procedures
Cash Receipts Procedures
• At a fundraiser have two people assigned to cover the cash
coming in.
coming in
• Have checks deposited by someone who does not mail the
customer invoices.
• Periodically review the back side of checks deposited to
make sure the account information is correct.
• Periodic review of customer lists. Approve all new
customers.
• ED approval of all customer credit memos.
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25. Cash Disbursement Procedures
Cash Disbursement Procedures
• All purchases should be authorized in advance
All purchases should be authorized in advance.
• Check signer verifies the check matches the invoice it is
paying.
• Manually sign all checks.
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26. Cash Disbursement Procedures
Cash Disbursement Procedures
• Require all entries on expense reports be supported by
receipts.
receipts
• Periodic review of vendor lists. Approve all new vendor
services.
i
• ED approval of all vendor debit memos.
ED approval of all vendor debit memos
• Lock up checks at all times Check numerical sequence
Lock‐up checks at all times. Check numerical sequence
remains intact.
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27. Bank/Credit Card Statement
Procedures
d
Bookkeeper should not be an authorized
signer on checks (or credit card).
i h k ( dit d)
Bank & credit card statements should be
p y
opened & reviewed by someone not
responsible for cash receipts and
disbursements.
Reconcile statements monthly.
Treasurer receives duplicate bank & credit
Treasurer receives duplicate bank & credit
card statement.
Restrict who can conduct which on‐line
bank activities.
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28. Questions Answers
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29. Signs You Need to Investigate
Signs You Need to Investigate
Employee seems
Unexplained Unwillingness to
to be living beyond
to be living beyond
absences take vacation
their means.
Unwillingness Contributions/Grants Vendors are
are strong but
delegate tasks cashflow is tighter
complaining
related to cash than it should be. payments are late.
Aged receivables
Monthly financial Monthly financial
y
show many over 90
statements are
statements are reports look
t l k
days, same for aged
prepared late. “funny.”
accounts payable.
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30. If Your Organization is a Victim…
If Your Organization is a Victim…
• Act normal
• Keep the matter confidential
Keep the matter confidential
• Put staff person on paid leave
• Contact your attorney & accountant
• Consider hiring a fraud investigator
• Locate corroborating information
• Prepare to fire staff person, press charges & notify
authorities
• Check insurance coverage/notify insurance company
• Weigh costs to investigate & press charges
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31. Questions Answers
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32. Resources
•Preventing and Detecting Employee Fraud and Embezzlement, Stephen Pedneault
•Streetsmart Financial Basics for Nonprofit Managers‐Chapter 18, Thomas A.
McLaughlin
l f f l l lf l
•Streetsmart Financial Basics for Nonprofit Managers‐Internal Control Self‐Evaluation,
see attached.
•Nonprofit Financial Management, Charles K. Coe
•Association of Certified Fraud Examiners www acfe com
•Association of Certified Fraud Examiners, www.acfe.com
•What is your Fraud IQ?, Stu Lipkin‐B2B CFO, August 9, 2011,
http://www.stuartlipkincfo.com/category/articles‐and‐white‐papers/
•Steps Nonprofits Can Take to Minimize the Risk of Fraud www larsonallen com
•Steps Nonprofits Can Take to Minimize the Risk of Fraud, www.larsonallen.com
•Is Your Bookkeeper Stealing From You? Calvin Wilder, SmartBooks,
http://www.smartbookscorp.com/resource_center.php?t=pdf&id=13
•Preventing & Responding to Fraud & Misuse of Assets in a Nonprofit Organization,
Preventing & Responding to Fraud & Misuse of Assets in a Nonprofit Organization,
Melanie Herman,
http://www.nonprofitrisk.org/library/articles/internalcontrol05062001.shtml
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33. Schedule a Call
Schedule a Call
Schedule a free 30 minute consulting call.
Schedule a free 30 minute consulting call
Contact Susan at susan@schammond.com
Contact Susan at susan@schammond com
Or 781‐837‐1999
Use the code NPW612
©2012 SCHammond 29

34. Thank you!
Thank you!
susan@schammond.com
781‐837‐1999
781 837 1999
www.schammond.com
©2012 SCHammond 30

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