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Liars, Cheats, & Thieves: Practical Internal Control Solutions for Nonprofits

Susan C Hammond

June 13, 2012

Sponsored by: A Service Of:

Advising nonprofits in: •  Strategy •  Planning •  Organizational Development

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Susan C Hammond Principal

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Liars, Cheats, & Thieves:, ,Practical Internal Control Solutions 

for Nonprofitsfor Nonprofits

Nonprofit WebinarsNonprofit WebinarsJune 13, 2012

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WelcomeWelcome

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What We Will Cover

•What is fraud?•What is fraud?

• How & Why Fraud Occurs

• Case Studies

Ti & P d t P t F d• Tips & Procedures to Prevent Fraud

• Signs You Need to Investigate

• If Your Organization is a Victim…

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What is Fraud?What is Fraud?

The misappropriation of organizational assets funds and/or information for theassets, funds and/or information for the purpose of obtaining personal gain.

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How & Why Fraud Occurs

Opportunity DesperationRationalization‐“I’ll just borrow theOpportunity Desperation just borrow the 

____ temporarily”

Lack of attention  Poor division of responsibilities Misplaced trust

O liOver reliance on one individual Ignorance

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More Reasons How & Why F d OFraud Occurs

Low financial intelligence‐ Insufficient 

executive director Unqualified executive director 

& board

executive director  & board oversight treasurer

Unqualified bookkeeper

Poor communications Uneducated boardp

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Case Study OneThe Johnstown Museum maintains a petty cash fund of $500.

Case Study One

Historically the fund is replenished every 2‐3 months. Becauseof this the petty cash fund is only reconciled 2‐3 times a year.Over the last 4 months the fund has been replenishedOver the last 4 months the fund has been replenishedmonthly. The bookkeeper is the custodian and the executivedirector has been too busy to review what it is the fund isbeing used forbeing used for.

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Poll Question #1

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Case Study TwoThe former CEO of Professional Ed, a nonprofit that providesprofessional development for teachers, really didn’t like to bebothered with the “business side” of the organization and

Case Study Two

bothered with the business side of the organization anddelegated all operational business matters to the businessmanager. The organization’s business manager was a self‐trainedbookkeeper who had taken it upon himself to order a signaturebookkeeper who had taken it upon himself to order a signaturestamp so as not to bother the CEO. In addition he prepared all themonthly board financial reports including the annual budget andpresented them to the board as over the last year the treasurerh d b l bl d h b d ddhad been unavailable to attend the board meetings. In additionthe treasure had minimal interaction with the business manager.The business manager had also terminated the services of theoutside CPA resulting in the organization not filing its Form 990 foroutside CPA resulting in the organization not filing its Form 990 forthe last two years.

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Poll Question #2

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Case Study ThreeSt Joseph’s Academy is a Catholic elementary school that serves1,000 children on an operating budget of $500,000. The Executive

Case Study Three

Director has been with the organization for 3 years while thebookkeeper has been with the organization for 20 years. In fact,the ED doesn’t know what she would do without George thebookkeeper. He seems to have an answer to all the questionspertaining to past events and good suggestions when a newsituation develops. The executive director doesn’t review thebank statements and often signs checks without reviewing thesupporting documents. St. Joe’s bank statement is received andopened by George. George maintains his own personal accountsat the same bank as St. Joe’s. George issues several credit memoseach month for adjusting customer accounts.

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Poll Question #3

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Case Study FourRoger has been the maintenance manager for 10 years at Camp Wildwood.  He and the bookkeeper are on the same bowling 

Case Study Four

p gteam.  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 beentenure.  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 

h h i h i h b l d b ildi jpurchases that might or might not be related to a building project for Camp Wildwood and Roger has requested several salary advances in the last 6 months which have not been paid back.  p

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Poll Question #4

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Questions Answers

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Tips & Procedures to Prevent FraudTips & Procedures to Prevent Fraud

Know who you are hiring.

Document policies & procedures in p pwriting.

Separate the functions of cash receiptsSeparate the functions of cash receipts & cash disbursements.

Enforce bank & credit card statement review procedures.

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Tips & Procedures to Prevent FraudTips & Procedures to Prevent FraudEnforce cash receipts & disbursement proceduresprocedures.

Require mandatory vacation for all staff involved q ywith accounting.

A i d h ld b k i l k d filAccounting records should be kept in locked files when no one is present.

Time cards/sheets should be approved & verified before payroll is processed.

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Tips & Procedures to Prevent FraudTips & Procedures to Prevent FraudBond all employees with access to cash & accounting recordsaccounting records.  

Replenish petty cash once a month & review the p p ytype of expenditures reimbursed.

Do not use an organization‐wide credit card.  

Secure valuable fixed assets.

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Tips & Procedures to Prevent FraudTips & Procedures to Prevent FraudThe Treasurer should have the appropriate backgroundbackground.

Treasurer should engage with the accounting g g gstaff.

T Fi C i Ch i h ldTreasurer or Finance Committee Chair should present the board financial reports.

Finance Committee or Board should meet annually with the outside accounting firm without staff present.

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Cash Receipts ProceduresCash Receipts Procedures• At a fundraiser have two people assigned to cover the cash coming incoming 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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Cash Disbursement ProceduresCash Disbursement Procedures

• All purchases should be authorized in advanceAll 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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Cash Disbursement ProceduresCash Disbursement Procedures• Require all entries on expense reports be supported by receiptsreceipts. 

• Periodic review of vendor lists. Approve all new vendor iservices.

• 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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Bank/Credit Card Statement dProcedures

Bookkeeper should not be an authorized i h k ( dit d)signer on checks (or credit card).

Bank & credit card statements should be opened & reviewed by someone not p yresponsible for cash receipts and 

disbursements.

Reconcile statements monthly.

Treasurer receives duplicate bank & creditTreasurer receives duplicate bank & credit card statement. 

Restrict who can conduct which on‐line 

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bank activities. 

Questions Answers

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Signs You Need to InvestigateSigns You Need to InvestigateEmployee seems to be living beyond Unexplained  Unwillingness to to be living beyond 

their means. absences take vacation

Unwillingness delegate tasks related to cash

Contributions/Grants are strong but 

cashflow is tighter than it should be.

Vendors are complaining 

payments are late.

Aged receivables show many over 90  Monthly financial 

statements areMonthly financial 

t l kydays, same for aged accounts payable.

statements are prepared late.

reports look “funny.”

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If Your Organization is a Victim…If Your Organization is a Victim…• Act normal• Keep the matter confidentialKeep 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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Questions Answers

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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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Schedule a free 30 minute consulting call

Schedule a Call

Schedule a free 30 minute consulting call. 

Contact Susan at susan@schammond comContact Susan at susan@schammond.comOr 781‐837‐1999

Use the code NPW612

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Thank you!Thank you!

susan@schammond.com781 837 1999781‐837‐1999

www.schammond.com

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