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Anatomy of Nonprofit Fraud
Nathan Salsbery, Partner4.14.16
Nearly 40 percent of financial management teams lack annual fraud prevention procedures, checklists, and similar reviews, according to results of the Nonprofit Financial Management Survey from the Evangelical Council for Financial Accountability (ECFA).
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Corruption
Bribery
Invoice Kickbacks
Theft of Cash Receipts
Timing Difference
False Voids
Ghost Employee
Improper Disclosures
Overstated Expense
Cash LarcenyFalse Sales and
Shipping
Asset Misappropriation
Financial Statement
Fraud
Asset/Revenue Overstatements
Illegal Gratuities
Conflict of Interest
Economic Extortion
Sales Schemes
Bid Rigging
Asset/Revenue Understatements
Expense Reimbursement
Schemes
SalesTheft of Cash on Hand
MisuseInventory and All other Assets
Fraudulent Disbursements
Improper Asset Valuations
Overstated Liabilities and Expenses
Fictitious Revenues
Concealed Liabilities and Expenses
Multiple Reimbursements
Understated Revenues
Purchasing Schemes
Commission Schemes
False Sales and Shipping
Check Tampering
Skimming
Shell Company
Larceny
Falsified Wages
Purchasing and Receiving
Register DisbursementsForged Maker
Non-Accomplice Vendor
Unconcealed Larceny
Altered Payee
Cash
Asset Requisitions and Transfers
False Refunds
Forged Endorsement
Authorized Maker
Write-Off Schemes
Mischaracterized Expenses
Fictitious Expenses
Payroll Schemes
Lapping Schemes
Billing Schemes
Personal Purchases
Unconcealed
Refunds and Other
Receivables
Unrecorded
Understated
Anatomy of Nonprofit Fraud
• Cost?
• Schemes?
• Who? Why?
• How can you protect your organization?
• Case studies and examples
• Conclusions and recommendations
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The Cost of Fraud
Organization Type – Frequency
• Not-For-Profit makes up 10% of all fraud reported
• 30% within organizations of 100 or fewer employees
• 2.4% of fraud cases come from Religious, Charitable or Social Services (RCSS)1
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
PrivateCompany
PublicCompany
Government Not-For-Profit
2016 2014 2012 2010
2016 Report to the Nations -ACFE
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Median Loss Due to Fraud
• $100,000 in NFP
• $109,000 in Government
• $180,000 in Private Companies
• $178,000 in Public Companies
• As a percentage of total cash reserves, NFP losses are much higher and damaging than that of Public Companies1
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
NFP Gov PrivateCo.
PublicCo.
2016
2016 Report to the Nations - ACFE
How Fraud is Committed
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Types of Fraud Committed
Religious, Charitable or Social Services 52 Cases
Scheme Percent of Cases
Corruption 28.8%
Billing 25%
Expense Reimbursements 25%
Check Tampering 25%
Skimming 19.2%
Payroll 13.5%
Non-Cash 13.5%
2016 Report to the Nations – ACFE
Primary Internal Control Weaknesses
2.0%
4.2%
6.4%
10.4%
19.4%
20.3%
29.3%
0.0% 10.0% 20.0% 30.0% 40.0%
Lack of fraud education
Lack of indep.check/audit
Incompetence inoversight
Poor tone at the top
Lack of mgmt review
Override of controls
Lack of internal controls
2016
2016 Report to the Nations – ACFE
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Profile of a Fraudster
Perpetrator Profiles
• 69% of fraudsters were male
• 55% 31 – 45 years old
• No criminal record
• University degree
• With organization 1 - 5 years
• Median losses were $100,000
• Male, age 60+
• Executives
• With organizationmore than 10 years
• Median losses created were $630,000
Most Common Most Costly
2016 Report to the Nations – ACFE
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Employment Level of Perpetrator
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Other
Executive
Manager
Employee
2016
Median Loss Frequency
2016 Report to the Nations – ACFE
Most Common Positions for Fraud
4.5%
7.7%9.0%
10.9%12.4%
14.9%16.6%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2016 2016 Report to the Nations – ACFE
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Behavioral Red Flags Displayed by Perpetrators
5.9%6.8%7.0%7.8%8.8%9.0%10.0%
12.3%13.4%
15.3%15.3%
20.1%30.0%
45.8%
0.0% 20.0% 40.0% 60.0%
Social isolationPast employment problems
Pressure within organizationRefusal to take vacations
No behavioral red flagsComplained about pay
Addiction problemsIrritability, defensivenessDivorce/family problems
Control freakWheeler-dealer attitude
Close association with vendorFinancial difficulties
Living beyond means
2016 Report to the Nations – ACFE
Fraud Prevention
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Percent of Cases Detected by Method
1.3%
1.3%
1.9%
2.4%
3.8%
3.8%
5.5%
5.5%
5.6%
13.4%
16.5%
39.1%
0.0% 20.0% 40.0% 60.0%
Confession
IT Controls
Surveillance/Monitoring
Notified by Police
External Audit
Document Examination
Other
Account Reconciliation
By Accident
Management Review
Internal Audit
Tip
2016
2016 Report to the Nations – ACFE
Frequency of Anti-Fraud Controls
19.4%
36.7%
37.8%
39.3%
49.6%
51.3%
51.6%
56.1%
60.1%
62.5%
64.7%
67.6%
71.9%
73.7%
81.1%
81.7%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
Job Rotation/Mandatory Vacation
Proactive Data Monitoring
Surprise Audits
Formal Fraud Risk Assessments
Anti-Fraud Policy
Fraud Training for Managers
Fraud Training for Employees
Employee Support Programs
Hotline
Independent Audit Committee
Management Review
External Audit of Internal Controls
Management Certification of F/S
Internal Audit Department
Code of Conduct
External Audit of F/S
2016
2016 Report to the Nations – ACFE
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FRAUD RISK
Incentive/Pressure
Opportunity Attitude/Rationalization
Case Studies – The Fraud Triangle
Case Study – An Executive Pastor
• Incentive = Gambling addiction
• Opportunity = • Skimming cash –
• preschool tuition, wedding deposits, etc.
• Unauthorized credit card charges
• False mileage reimbursements
• Checks payable to himself or cash
• Direct deposits from HRA to personal account
• Rationalization = Will pay back the money?
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Case Study – An Executive Director
• Incentive = Personal benefit
• Opportunity = • Inadequate board monitoring
• Management override
• Methods:• Unauthorized credit card charges
• Unauthorized use of apartment unit
• Expense reimbursements with no business purpose documentation
• Rationalization = Apartment had been vacant
Case Study – A Senior/Founding Pastor
• Incentive = Lifestyle & health issues
• Opportunity = • Rubber stamp elder board
• Management override
• Methods:• Unsubstantiated credit card charges
• Reimbursements for a lake house
• Unilateral & questionable pay raises
• Rationalization = “Blessed to be a blessing”
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Other Case Studies & Examples
• International mission organization• Sale/leaseback of office building by national worker
• Voluntary health and welfare organization• Ghost employees
• Insurance premium payments to personal account
• Related party vendors
• University• Skimming and unauthorized charges by outsourced
dining vendor
Fraud Happened. Now What?
Link below to article on key steps to take and key questions to ask if your organization is victimized by fraud…
capincrouse.com/fraud-happened-now
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Fraud Risk and Prevention Questionnaire
• Designed to provide a simple yet powerful test of your organization’s fraud health. It is adapted from the ACFE Fraud Prevention Check-up from the Association of Certified Fraud Examiners (ACFE).
capincrouse.com/fraud-questionnaire
CapinCrouse Fraud Checkup
• Provides a comprehensive, customizable analysis of your organization’s fraud risk and meaningful recommendations to reduce it.
• 10% discount on our Fraud Checkup for those who respond to the special offer provided at this event
capincrouse.com/fraud-checkup
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Conclusions and Recommendations
• DO implement an anonymous tip line
• DO review credit card statements & cancelled checks
• DO implement fraud training
• DO increase the perception of detection
• DON’T rely upon your external audit
• DO assess your organization’s vulnerability to fraud• capincrouse.com/fraud-questionnaire
• DO understand your fiduciary responsibility• perlmanandperlman.com/blog/index.php/embezzlement-board-
liability/
References
1 “Report to the Nations on Occupational Fraud and Abuse,” ACFE, 2016.
2 Greenlee, Fischer, Gordon, and Keating, An Investigation of Fraud in Nonprofit Organizations, The Hauser Center, 2006.
