Nonprofit Accounting Basics

Occupational fraud and what you can do to help prevent it

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

Jan 05, 2018

Unfortunately, we’ve become too accustomed to reading or hearing news on incidents of fraud in organizations. Hardly a week goes by that something doesn’t appear in the popular press.

According to the Association of Certified Fraud Examiners’ 2016 Report to the Nation on Occupational Fraud and Abuse, asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83.5% of cases.

Here are few tips to help prevent certain asset misappropriation schemes that frequently occur in charitable and profession service organizations.

1) Billing schemes - includes Shell Company, non-accomplice vendor, and personal purchases.

   • Maintain approved vendor list and review regularly 
   • limit access to vendor setup
   • Use competitive bid for major purchases
   • Implement control methods for duplicate invoices and purchase orders
   • Implement management approval of purchase orders and invoices
   • Match invoices and purchase orders before payment
   • Review vendor purchase of abnormal level
   • Check vendor with post office address for validity
   • Review credit card and purchasing card statements often for irregularities 

2) Expense reimbursement schemes - mischaracterization of expenses, overstated expenses, fictitious expenses, multiple reimbursements

   • Maintain travel reimbursement policy 
   • Require submission of original document with the expense reports
   • Implement formal supervisor review and approval of employees’ reports
   • Occasionally question employees about expenses they submitted
   • Limit the use of personal credit cards to monitor subsequent returns
   • Implement systems to prevent or detect duplicate submission of the same expenses

3) Payroll schemes – ghost employees, falsified wages

   • Separate duties of payroll preparation, payroll disbursement, payroll distribution, payroll bank reconciliations, and human resources functions 
   • Implement periodic independent review and analysis of payroll

4) Check tampering includes forged maker, forged endorsement, altered payee, authorized maker

   • Safeguard blank checks stock
   • Separate duties of check preparation, signing, and delivery
   • Require dual signatures for disbursements over certain amounts
   • Implement daily account monitoring and reconciliation
   • Mail printed and signed checks immediately
   • Investigate vendor and customer complaint
   • Use electronic payment services to handle large vendor and financing payments
   • Separate duties for creating, approving and releasing wires
   • Restrict banking software access to specific banking activities
   • Use positive pay banking
   • Setup ACH blocker or filter
   • Additionally, you may want to hire an outside auditor to come in and do “surprise” inspections periodically.

These are just some of the controls your organization can implement to help minimize the chances of internal theft and fraud. Not all controls listed above will be pertinent to your type of organization. Consult with your accountant for more ways to help safeguard your organization.