One of the best ways to protect an organization from fraud is by staying proactive when determining risk areas and properly addressing these areas to limit opportunities for fraud. The fraud triangle suggests that 3 key elements are required for an individual to commit fraud: opportunity, pressure, and rationalization. As a member of an organization, one can help limit a potential fraud opportunity by implementing strong internal controls.

Start at the beginning: Begin in the hiring process. Include background checks and be thorough in discussions with references. Recruit strategically for the board as well by seeking board members who have backgrounds in finance or accounting. Board members with this expertise can offer advice and identify areas vulnerable to fraud.

Set the tone:

Employees and volunteers look to management and the board for an example of proper conduct. Set high expectations for both employees and board members regarding ethical behavior and communicate those standards clearly and regularly. Then, to ensure success in setting the tone, behave according to the standards that have been implemented.

Identify risk areas:

Evaluate which areas may be susceptible to fraud in the organization. Include individuals from multiple departments in a brainstorming session to identify the vulnerable areas.

Some high-risk areas to consider:Fraud Prevention

– Bank deposits
– Expenditures
– Credit card usage
– Special events – who is handling the money and what controls are in place?
– Payroll
– Reimbursements

Implement control activities:

Set controls based on identified risks. These should include well-organized and documented financial procedures, segregation of duties, timely month-end closing and review of your accounting records.

The following should be considered in creating controls:
– Who has access to various technology and accounts?
– What review processes are in place?
– How are authorization, preparation, reconciliation, and review of various transactions segregated to limit fraud risk?

Monitor activities:

Ensure that the controls set in place are being followed. Look for appropriate authorizations, evidence of review, and review for unusual transactions and reporting.

Stay alert:

Fraud can take place in various forms. Look for the following items that could indicate fraud:

– Abnormal changes to account balances
– Unusual transactions
– Complaints from members or donors regarding their accounts
– Infrequent or late financial reporting
– Unexplained variances in budgets and actual amounts

Fraud is a serious risk that can happen to any organization if the opportunity, pressure and rationalization are present. The best defense against fraud is vigilance in ensuring appropriate controls are in place and that financial matters are being appropriately reviewed. Be sure to follow the steps described above to mitigate the organization’s risk of falling victim to fraud.

Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.