Arming Your Organization Against Fraud

Lauren Kreutzinger, VonLehman CPA & Advisory Firm, lkreutzinger@vlcpa.com

Fraud does not discriminate. Any organization, big or small, is susceptible to fraud and the financial loss, headaches, and embarrassment that inevitably follows. Recently, a well-known fraternal organization fell victim to fraud within their organization. This is an extremely unfortunate and costly event to recover from. Could the same misfortune fall upon your own organization? Without the proper safeguards, the answer is a definite “YES!” Here are a few basic ways you can arm your organization against fraud.

Do not place too much responsibility on one or a few employees

It is common for fraternal organizations and foundations to operate with a small staff. The majority of the budget is often allocated to programming and fundraising, leaving little resources for expanding back office staff. As a result, significant control is placed in the hands of a limited number of people, like the CEO/executive director or financial managers. Trusting one individual with too much responsibility is like throwing down a welcome mat and inviting fraudulent opportunities through your front door.

The most critical element of fraud prevention is segregation of duties. Review the responsibilities of each employee involved in financial activities to identify ways they could commit fraud while performing their core responsibilities. Does one person collect the incoming checks, make the deposits, and reconcile the general ledger and bank accounts? Re-allocating these duties to two different staff members is a relatively easy and effective method to prevent an employee from intercepting the incoming checks and depositing to their own account, all while covering their tracks in the accounting system.

If your staff is small and you do not have the luxury of splitting these of duties between different employees, consider alternatives like a lockbox at your banking institution. Instead of sending donations to your headquarters, donations are mailed to a P.O. Box and bank employees retrieve the checks and make the deposit on your behalf. Upon deposit, your organization will receive scanned copies of the checks and any accompanying documentation to enter the receipts into the donor database and general ledger.

Another example of proper segregation is to assign check signing authority to someone who is not involved with account reconciliation. This prevents an employee from writing an unauthorized check, signing it, and hiding it in the general ledger where it won’t be noticed. Also keep in mind who has access to the bank accounts and what they can do with that access. Who can request wires or transfers? Is someone else monitoring this activity so that unauthorized or improper withdrawals and transfers would be noticed?

Create clear policies and monitor your employees

Make sure your policies explain that violations will result in disciplinary action, including the possibility of employment termination and criminal prosecution. And if an employee violates your policy, do exactly as you promised. To ensure that employees understand your policy, require them to acknowledge that they have read and agree to follow it.

Proper oversight of employees goes a long way in preventing fraud. Your policies state that expense reports should be accompanied by receipts showing business purpose, but you continue to approve the expense reports without proper documentation—what message does this send to your employees? They might be tempted to throw a few personal charges on their report next time without too much fear of getting caught.

When minimal staffing is an issue, enlist the help from board members. The board president or treasurer can help monitor bank activities by receiving a copy of the bank statement each month and examining for unusual wires or transfers, unusual check payments, etc. A board member can also serve as a secondary check signer for large check payments or when the main signer is out of the office or unavailable.

Watch for indicators of employee distress or changes in personal behaviors

It is not common that an employee would walk into work one day and declare to themselves, “Today is the day I commit fraud!” It is often something that has built up over months and usually stems from financial burdens or undue pressure felt by the employee that they can use to rationalize their illegal and unethical behaviors. Supervisors and board members can watch for indicators of the burdens and pressures that may ignite the desire to commit fraud.

Even with these safeguards, you cannot have absolute protection against fraud—no organization can. But you can reduce the risk of substantial fraud losses by recognizing your vulnerabilities and taking appropriate steps to mitigate them and to investigate thoroughly when fraud is suspected. Choosing to ignore fraud and hope for the best may result in suffering both financial and reputational damage.