Fight Back Against Internal Fraud

Diane Glover

Oct 27, 2017

Internal fraud drains more than $3.7 trillion annually from global businesses, according to recent estimates, and not-for-profit organizations are not exempt.

The median loss suffered by a not-for-profit group victimized by fraud was $100,000, according to the 2016 Report to the Nations by the Association of Certified Fraud Examiners (ACFE).

Organizations can experience pilferage from volunteers, vendors and other sources, but employees account for the highest losses. Employee offenses include fraudulent insurance claims, unauthorized time off and theft of proprietary information. Crimes can be as simple as stealing supplies or as complex as sophisticated financial statement fraud.
More specifically, fraud by managers and key executives generates the highest dollar losses because these employees are in a good position to falsify financial, credential, work-related or test-related documents for personal gain.

What can your organization do to prevent theft? The report by the ACFE found these measures are effective:

Improve internal controls. For example, do not allow the same employee to keep books, collect funds, write checks and reconcile bank accounts. Arrange for monthly bank statements to be delivered unopened to the head of your organization, who should review them for unusual transactions, such as declining deposits and checks to unfamiliar parties.

Conduct background checks on new employees.

Arrange for internal fraud audits by the organization’s outside accountants. CPAs can conduct regular independent reviews of cash accounts, bank statements and other items to detect criminal activity. Surprise audits are often an effective, yet underutilized tool in the fight against fraud.

Be willing to prosecute perpetrators. Most not-for-profit and for-profit organizations that are victimized by fraud report the cases to law enforcement. The main reasons some people took no legal action: They were afraid of bad publicity; reached a private settlement; wanted closure; or considered internal punishment sufficient.

Provide ethics training for employees. Educate staff members about the possible sources of fraud and consequences, such as the loss of jobs, raises and profits.

Institute anonymous fraud reporting mechanisms, such as hotlines. Fraud is commonly discovered through tips from employees, vendors, members or other sources. These people are frequently in a position to see violations of an organization’s standards or excessive personal spending by a colleague.

Install workplace surveillance devices. For example, a video camera monitoring a place in your building where theft is suspected.

Look for behavioral red flags including the perpetrator living beyond his or her means and having financial difficulties. They can also involve an unwillingness to share duties, a “wheeler-dealer” attitude, divorce or family issues, addiction problems, refusal to take vacations and an unusually close association with vendors or customers.

Take a zero tolerance stand on theft. With a few basic procedures in place, internal fraud can be significantly reduced — or even eliminated — so your organization can flourish.

If you are concerned about the internal fraud at your organization, contact Janis Bergeron at 513-858-6040. Kirsch CPA Group can review your structure and help you develop a set of internal checks and balances that protect your not-for profit or business