Preventing Fraud in Nonprofit
How It Happens and How You Can Prevent It
||Ed McMillan, CPA, is
a member of the Society of Certified Fraud Examiners and has uncovered
hundreds of embezzlements. This practical guide to fraud avoidance is a
must-have book for the organization that is serious about protecting its
assets against employee dishonesty.
Written in easy-to-understand language, this valuable resource not only
includes guidance on implementing effective internal control policies to
avoid fraud, it also explains, through fascinating stories based on actual
scams Ed has uncovered, profiles of embezzlers, warning signs to look for,
valuable check lists and tips, and what could happen if the controls
included in the book are not implemented.
THE POINT IS SIMPLE -
You only think your employees are honest
Table of Contents
- About the Author
- Chapter One - Embezzlers, When They Embezzle, and Who They Are (Excerpt)
- Chapter Two - Bank Statements
- Chapter Three - Bank Account Reconciliation's
- Chapter Four - Organization Credit Cards
- Chapter Five - CPA Management Letters
- Chapter Six - The "Window of Opportunity for Embezzlement
- Chapter Seven - Internal Control Evaluations by CPA Firms
- Chapter Eight - Payroll Tax Deposits
- Chapter Nine - Hand Written and Typed Check Protection
- Chapter Ten - Check Stock
- Chapter Eleven - Cash Transactions
- Chapter Twelve - Signers on Bank Accounts
- Chapter Thirteen - Check and Wire Transfer Signatures
- Chapter Fourteen - Vacations and Mandatory Time Off
- Chapter Fifteen - Lock Boxes
- Chapter Sixteen - Pre-Approved Loans and Credit Cards
- Chapter Seventeen - Deposit Security and Endorsements
- Chapter Eighteen - Bonding Issues
- Chapter Nineteen - Numbered Check Request Forms
- Chapter Twenty - Two Signatures on Checks
- Chapter Forty Five - Questionnaire
- Chapter Twenty One - Positive Pay
- Chapter Twenty Two - Computer File Back-Ups
- Chapter Twenty Three - The Danger With Acronyms
- Chapter Twenty Four - Wire Transfers
- Chapter Twenty Five - Background Checks
- Chapter Twenty Six - Nepotism
- Chapter Twenty Seven - Insurance Committee
- Chapter Twenty Eight - Internal Audit
- Chapter Twenty Nine - Bad Debts
- Chapter Thirty - Exit Interviews
- Chapter Thirty One - Lines of Credit
- Chapter Thirty Two - Non-Compete Agreements
- Chapter Thirty Three - Confidentiality of Information
- Chapter Thirty Four - Conflicts of Interest
- Chapter Thirty Five - Expense Accounts
- Chapter Thirty Six - Whistle Blowers
- Chapter Thirty Seven - Audit of Receipts
- Chapter Thirty Eight - Kiting
- Chapter Thirty Nine - Inventory Issues
- Chapter Forty - The Post Office
- Chapter Forty One - Ghost Vendors and Endorsement Comparisons
- Chapter Forty Two - Random Disbursement Checks
- Chapter Forty Three - What to Do if You Find Yourself the Victim
- Chapter Forty Four - Personal Exposure Protection
Chapter One - Embezzlers, When They Embezzle, and Who They Are
After investigating hundreds of fraud scenarios, I
realized they all had one thing in common:
The embezzler was ALWAYS the person the organization would LEAST expect
to be a thief!
That's right, the perpetrators were trusted employees and above suspicion.
They were always the nice young man with the pretty girlfriend and they
sang in the choir together! Or it was the woman who had been around for
years and she was the one who could be counted on to bring in the
birthday cakes and cookies!
And this is not tongue-in-cheek, I'm serious.
After all, what is the alternative?
Consider the following - you advertise for a new Chief Financial Officer,
and you interview someone with just the right education and experience.
Fact #1: You can't get an honest reference! Forget it, about all
you will get is a statement on position title and longevity. In our
litigious society, you don't know who you are hiring. (Note: See the
BACKGROUND CHECKS chapter of this manual)
So, you hire the person and everything is fine until you find out that he
lied about his education and fabricated his work experience.
Additionally, several pieces of expensive office equipment are found to
be missing and people have seen him putting suspicious packages in the
trunk of his car at unusual hours.
You have a real sleaze on your hands, so what are you going to do with him
around your organization, keep him in charge of your money? I don't
think so! In every organization I've consulted with the individuals
handling the money at least had the appearance of honesty - anything
else of course would be foolish.
Fact #2: You don't know what is going on in a person's private
life, and they will hide it from you.
Chapter Six - The
"Window of Opportunity for Embezzlement
THE "WINDOW OF OPPORTUNITY" FOR EMBEZZLEMENT
Do you arrange for the independent CPA firm to test the system of
internal controls during the "Window of Opportunity" for embezzlement?
Yes ( ) No ( )
When I am involved in uncovering fraud, I always take
notes and compare the details of the current situation with past
situations to determine if there are any similarities. Two consistencies
are very important:
1. The perpetrators were always people who were trusted and above
2. Most of the situations occurred during the "Window of Opportunity" for
The issue of who embezzlers are was discussed in the first chapter of this
manual, but it is very important to discuss the other consistency of
when fraud occurs.
THE "WINDOW OF OPPORTUNITY"
The "Window of Opportunity" for an embezzlement is between
the time the independent CPA leaves the office after auditing the
current year and returns to start the audit for the subsequent year!
Obviously, an embezzler would realize it would be foolish and too risky to
perpetrate an embezzlement while the auditors are physically in the
office! The reality is, however, that an organization can typically have
this window open for as long as ten months of the year!
WHAT ACTION TO TAKE?
It is suggested that you meet with your auditing CPA to
discuss the issue. I think it is wise to arrange for the auditor to come
into the office unannounced during this window of opportunity for fraud.
In fact, a self-confident CEO should not even
Chapter Eighteen -
Does your organization have a Fidelity Bond?
Yes( ) No ( )
Is the amount of the bond adequate?
Yes ( ) No ( )
Do you know who is not covered on the bond?
Yes ( )No ( )
Do you have a predetermined plan of action steps to take in the event of
Yes ( ) No ( )
It is extremely important for all organizations to have a Fidelity
Bond, also known as Employee Dishonesty Insurance.
The purpose of bonding employees is to make the organization whole in the
event of an,
Amount of the bond
Every employee who literally touches money coming in
and/or money going out of the organization should be included on the
Fidelity Bond, including, if possible, the person who opens the mail,
accounting personnel in accounts receivable and
Call and speak to us personally!!
EDWARD J. McMillan, CPA, CAE
POST OFFICE BOX 771
Forest Hill, MD. 21050
Telephone and Fax: 410-893-2308
Copyright © 2010 Edward J. McMillan, CPA, CAE. All Rights Reserved.