Vaccine Anti Fraud

How to prevent, yes, prevent, fraud in a nonprofit organization: HOA, Churches, Charities, etc.

It is simple, with a little vaccine called:  Internal Control System (I.C.S.).

Fraud is a contagious disease and can be spread by contact or close proximity to an infected area in any organization; and Non Profits are the Organizations most susceptible to this infection.

We had found bank reconciliations done with photocopies of the bank statements (really?), where checks were cleared despite being “VOID” in the accounting system. By the time the audit was made, it was too little too late, the fraud was huge. Believe it or not, the mastermind behind this fraud was the secretary. She was in charge of ALL administrative tasks. This idea of assigning multiple tasks to one unqualified employee is smart and dumb at the same time. While your company may be saving money on labor, it is increasing the risk of fraud.

 The cause of this disease is always the same:

• Organizations hiring one employee for all of the administrative tasks with no supervision

• Inconsistencies in the system such as “ghost” vendors, not documenting expenses and purchases that have been made on paper in the system, or documenting the value as less than the actual cost

• Bank reconciliations made late, no official budget, no financial planning, and no standard procedures to control disbursements

• Board members or executives too busy to review or control activities

We do not believe in the “Fraud Triangle”: Outside pressures, Opportunity and Rationalization. We simplify the process: Outside pressure is the motive, which without control, causes the justification of wrongful doings. For example: if an employee has to pay the mortgage and does not have enough money, without an adequate internal control system, it is easy for this employee to create a “ghost” vendor for purchases or reimbursement expenses that never occur. The justification being, “This is a loan that I will repay.” Jails are full of these guys.

The prevention is the application of an Internal Control System with standard procedures in accordance with the organization and the complexity of its accounting. This will help to stop any of these “bright ideas” or temptations.

Some procedures include:

Segregation of Duties: Segregation of duties means that solely one person must not handle financial transactions from beginning to end; the authorized signatures MAY NOT have access to the accounting registers. A small organization might consider having one person or paid staff member completing regular tasks; and assign a different person, such as an accountant or controller, in charge of the accounting tasks; review of disbursements, bank statements, and transactions on a monthly basis. This can be outsourced as well.

Reconciliation reports will be completed and reviewed no later than 15 working days after the reconciling department has received the bank statements.

Financial Statements are important, but so are managerial reports. The Institute of Management Accountants describes management accounting as “the internal business-building role of accounting and finance professionals who design, implement, and manage internal systems that support effective decisions, and support, plan, and control the organization’s value-creating operations.”1

In other words, managerial accounting reports support planning and controlling operations. Planning is the budgeting process. The controlling process occurs when managers or directors visually compare actual performance with budgeted amounts to identify any discrepancies and take the appropriate actions to handle the situation, always remaining on top of the situation.

Implementing the Internal Control System and Standard Procedures, and making the application of their rules mandatory, the disease of fraud can finally be prevented.


1 . Institute of Management Accountants, What is Management Accounting?


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