Internal Control: What Those Charged with Governance Should Know

Tempe, October 31, 2017; Technical Staff

This document is a part of The AACI series of anti-corruption resources made available to our CACM members . The contents of this document constitute an integral part of the CACM Review textbook that would be available in countries where the CACM will only be offered by exam. 

Those charged with governance should have proper and adequate anti-corruption intelligence to prevent and deter corruption and avoid negligence or gross negligence in performing their duties. 

The AACI defines anti-corruption intelligence as: 

" the minimum, optimum knowledge a decision maker should have to avoid fraud and corruption intelligently. Such knowledge includes the proper blend of due diligence, internal controls, anti-corruption, governance, decision making, process auditing ( from a management perspective and duties) to avoid anti-corruption and fraud. By avoidance, we emphasize the concept of deterrence and prevention.  Corruption prevention is less expensive and better than any cure."

Internal control is a pillar of anti-corruption intelligence. Regardless of her background, a decision maker should master the concept of internal control. This mastery should include, at the minimum, the executive summary of Internal Control - Integrated Framework. 

We issued "Introduction to Internal Control" in October of this year and emphasized the importance of the control environment component of internal control.  It is the foundation of other internal control components. It is unfortunate that too many decision makers and board members have misconceptions about internal control. 

Delusions of internal control include, but not limited to, the following: 

• Internal control is the policies and procedures of an organization.

• Internal control is not directly related to preventing, deterring, and detecting fraud and corruption.

• Internal control is not required in small and medium-sized (SMEs) entities.

• Internal control is not related to business risks.

• Good governance is not related to internal control.

• Strategic management is not related to internal control.

• Internal control is not related to the board responsibilities.

• Accountability, transparency, and responsibility are not related to internal control.

• Compliance is not part of internal control.

• Expenditure on internal control is a waste of resources and expense.

• Internal control is static.

• Internal control prevents and detects every fraud and corruption event.

The more widespread these misconceptions among decision makers of an organization, the higher the corruption risks and business failure. 

Why do we call these assertions and beliefs "misunderstandings about internal control"? 

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The First Interview with Mr. L. B. Files, president of The American Anti-Corruption Institute (AACI)

The First Interview with Mr. L. B. Files, president of The American Anti-Corruption Institute (AACI).

As The American Anti-Corruption Institute's (AACI) journey approached five years since launching its operations in late 2012, fraud and corruption scandals continued to make headlines. Though the Volkswagen Dieselgate costs exceeded $30bn to date, and Samsung's CEO will spend time in prison for corruption charges, the corporate world does not seem to be paying attention. Corruption removed several heads of states from power, in South Korea, Brazil, a senator in the United States, UN officials and Ambassadors and, EU officials.

Despite the setbacks, or maybe because of the exposure, the global political landscape became more determined than ever to fight graft. For the first time, the United States equated the efforts of combating corruption to the fighting financing terrorism.

Fighting corruption has, in fact, became a prerequisite to fighting financing terrorism. Amid the global turmoil of corruption, the media and public relations of The AACI met Mr. L. Burke Files, the president of The AACI, at its headquarter in Tempe, Arizona to discuss The AACI's global efforts in fighting corruption, among other relevant issues.

The AACI: On behalf of our members, constituents, and advocates worldwide, we thank you Mr. Files for this opportunity to answer our questions.

Files: You are most welcome.

The AACI: As you know, corruption is a prevalent phenomenon hitting all over the world. How do you evaluate the commitment of the international community to fighting corruption?

Files: The 1977 Foreign Corrupt Practice Act, The United Nations Convention against Corruption (2005), the UK 2010 Bribery Act and those of the OECD relevant anti-corruption demonstrate an unprecedented global commitment to unequivocally fighting corruption. The most explicit U.S. message in this regard came at the May 2016 London anti-corruption summit where John Kerry, the former US Secretary of State said:  “We are fighting a battle, all of us. Corruption, writ large, is as much of an enemy, because it destroys nation states, as some of the extremists we are fighting or the other challenges we face." This proclamation changed the global landscape for fighting corruption. It tied, in public, for the first time, combating terrorism and combating corruption.

"This proclamation changed the global landscape for fighting corruption. It tied, in public, for the first time, combating terrorism and combating corruption."

The AACI: Why does The AACI focus all its efforts on executive management and those charged with governance?

Files: To answer your question, let me remind you that our founders are visionaries and responded strategically to the financial crises of 2008. The financial meltdown of 2008 shocked us though we had SOX and all the other relevant laws. When you read the report of THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, you will find the crises was 100% avoidable. Further, that corporate of America suffered from significant weakness at the top. We found that the “tone at the top” was severely weak and at best sickened from significant lack of anti-corruption intelligence and short-term visions. We believe that the Board Of Directors and Executive Management must possess the minimum required anti-corruption knowledge and skills to enable them to meet their duties. As of today, The AACI is the only organization all over the world that targets decision makers to help them deter, prevent, and detect fraud and corruption through the methodical management anti-corruption certification program Certified Anti-Corruption Manager (CACM).

"The AACI is the only organization all over the world that targets decision makers to help them deter, prevent, and detect fraud and corruption through the methodical management anti-corruption certification program Certified    Anti-Corruption Manager (CACM). "

The AACI: What do you mean by anti-corruption intelligence?

Files: The AACI coined it to mean the minimum, optimum knowledge a decision maker should have to avoid fraud and corruption intelligently. Such knowledge includes the proper blend of due diligence, internal controls, anti-corruption, governance, decision making, process auditing ( from a management perspective and duties) to avoid anti-corruption and fraud. By avoidance, we emphasize the concept of deterrence and prevention.  Corruption prevention is less expensive and better than any cure.

Click here for the complete interview

Introduction to Internal Control

Tempe, September 26, 2017; Technical Staff

This document is a part of The AACI series of anti-corruption resources made available to our CACM members. The contents of this document constitute an integral part of the CACM Review textbook that would be available in countries where the CACM will only be offered by exam. 

Internal Control

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control in its Internal Control - Integrated Framework as:

“Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.” 

Elements of Internal Control Definition

Internal control

1. Is a process. Process means related and interdependent tasks. It is ongoing tasks and activities—a means to an end, not an end in itself. For example, a sales department would approve a credit sales invoice when management already approved dealing with the customer and granted it certain credit terms. The management decision also relied on a due diligence report carried out by another department of the organization. 
2. Effected by an entity’s board of directors, management, and other personnel. It is the responsibility of those who are charged with governance to establish and maintain systems of internal controls. However, those who are charged with governance should ensure that each member of the organization understands his role and duties with respect to the systems of internal controls.
   
3. Applies to any entity irrespective of its size, industry, geographical location, or legal structure ( for- profit, not-for-profit, and to any governmental unit). It also applies to each department and unit in any entity.

To continue reading selected parts of this document, we made it available at our Facebook note. A Member can access, read and download this document when she (he) log into her (his) account.

The board of directors is the weakest link in fighting corruption.

Setting the proper tone at the top requires executive management to be equipped with adequate and sufficient anti-corruption intelligence. Anti-Corruption Intelligence is is what #CACM does. It provides those charged with governance in any entity with the path to prevent, deter, and even detect fraud and corruption from the top. 

When one does not know what corruption is, she or he will never see it. A board of directors members has duties they should meet: the duty of care and loyalty. They have a fiduciary duty shareholders expect them to fulfill as well. Fighting corruption costs are investments: they are not an expense.

The American Anti-Corruption Institute (AACI) targets those charged with governance and executive management to help them meet their duties and set the proper tone at the top. #نزاهة #corruption #theaaci

Skimming (Theft of Cash) in Nonprofits

Significant Fraud Schemes in Nonprofits

1. Skimming

When an entity receives cash, it must record (recognize) it in its accounting system. Skimming occurs when an employee steals cash or checks BEFORE recording it in the entity’s accounting system. Skimming schemes are usually called “off-books” schemes. Because cash theft happens before cash is recorded in the accounting records, it is tough to detect such a scheme: there is no audit trail.  

For example, when a cashier of a supermarket receives cash from a customer, does not issue a cash sales invoice, and pocket the money into his wallet, we call this skimming. When a nonprofit volunteer collects a donation from a donor where she did not issue him a cash receipt and pocketed the donated money for personal use, we call this skimming. 

“A recent case illustrates the ease with which funds can be skimmed when both of these characteristics are present. The president of an organization personally solicited and collected contributions from donors. He skimmed more than $4 million of contribution income over a 15-year period before being detected. He was only detected once his successor solicited one of the donors who had contributed, under the impression that the individual had never made a contribution to the organization. When the donor indicated he had been a significant supporter of the organization for several years, the fraud was then uncovered.”

Who may commit skimming schemes? Any employee who receives cash or checks from donors may skim funds. Therefore, cashiers, employees receiving payments/donations through the mail, or volunteers who collect funds from remote locations are a great skimming risk.

Therefore, nonprofit management should focus on preventing and deterring skimming schemes as detection is difficult. A proper design and implementation of specific internal control processes for cash receipts would significantly help lower skimming schemes risks. For example, a deficiency in any of the following controls would constitute a “red flag” that management should handle in a special care and professional skepticism. 

• The employee who opens the mail should be independent of the cashier and accounts receivable staff.
• Unopened business mail should be kept away from employees having access to accounting records. 
• The employee who receives mail should

• Stamp (“For Deposit Only”) on all checks received?
• Prepare a list of the money, checks, and other receipts? 
• Forward all remittances to the person responsible for preparing and making the daily bank deposit?

• Forward the total of all remittances to the person responsible for comparing it to the authenticated deposit ticket and amount recorded?
   
• Cash receipts should be prenumbered and independently be checked daily and reconciled with cash collections.
• Nonprofit should bond employees or volunteers handing cash. 

The following schemes and topics are discussed thoroughly in Part 2: Corruption Prevention, Deterrence, and Detection - Nonprofit Organizations.

1. Check Tampering
2. Expense Reimbursements
3. Payroll Schemes

Fraud and Corruption Risk Assessment 

The Minimum a Nonprofit Can Do to Prevent and Deter Fraud and Corruption

Download the associated PDF document.

Check more free resources at the Anti-Corruption Library

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The AACI to start teaching sixth Royal Discussion Paper

Amman, August 8 (Petra) — The American Anti-Corruption Institute (AACI) will be teaching the content of His Majesty King Abdullah II’s sixth Royal Discussion Paper: “Rule of Law and Civil State” at the universities which the AACI cooperates with globally, said Mike Masoud, senior director of The AACI in the Middle East and Africa.

He told Petra, on the sideline of Bright Jordan company delivering its Anti-Corruption certificate, that AACI considers the sixth Royal Discussion Paper as a primary anti-corruption resource in developing countries.

“This Discussion Paper is a prerequisite to any effective national anti-corruption strategy”, he added. Masoud stated that awarding this certificate for a local Jordanian company working in the healthcare sector is considered a precedent in the Middle East in terms of implementation of anti-corruption and transparency measures. He added that Bright Jordan is an international pioneer in the field of medical protection and preservation of medical tourists’ and patients’ rights.

CEO and founder of Bright Jordan, Amid Sabri, said that Bright Jordan certification by the AACI as the first in the Middle East and North Africa region reaffirms the company’s commitment to the ethical and transparency standards within healthcare services.

He added that the core foundation of this certification is built on the principle of financial and operational transparency. Bright Jordan does not receive any fees or commissions from healthcare providers. This is essential to preserve the integrity of our professional role as a healthcare consultant providing total medical protection and achieving best results within minimum costs.

Sabri confirmed that such certification has a positive impact on the Jordanian economy through boosting trust in the local healthcare industry and promoting Jordan as a unique destination for medical tourism.

The sixth Discussion Paper was based on several principals among which: The rule of law is a foundation for effective management and eliminating nepotism or “Wasta” as the core of the civil state.

//Petra// YK 

8/8/2017–04:03:01 PM

Cost of Corruption

Corruption cost is, at least, 5% of revenues or GDP. It adds to costs of service & products. It's higher in developing countries.

Corruption: are you an expert? [quiz]

Headlines regularly focus on political scandals and corruption. From public officials embezzling government monies, selling public offices, and trading bribes for favors to private companies generate public indignation and calls for reform—corruption, it seems, is inevitable. But what really is corruption, and who is responsible for its continuation?

Read more

The First Global Organizations Anti-Corruption Certification Program

For more information, click here. You will find FAQs when you click here.

Election Fraud and Corruption: Issues and Solution

In cooperation with TAMU. You may watch the complete one-hour-long interview at tamu.theaaci.com

Transparency and Corruption[1]Prevention in the Healthcare Industry

June 13, 2017

Technical Staff

The AACI currently prepares an initiative for the Arab countries healthcare sector.  It is an ambitious and innovative anti-corruption project. Transparency, integrity, and accountability are fundamental pillars of the project. The Arab countries healthcare decision makers and executive management will always play a pivotal role in preventing and deterring fraud and corruption. They set the proper tone at the top!

The following constitutes an integral part of The AACI's anti-corruption initiative in the Arab countries healthcare sector.

INTRODUCTION

Ban Ki-moon’s, the United Nations Secretary-General, message on the International Anti-Corruption Day on December 9, 2016 was forceful and alarming: “Corruption strangles people, communities and nations. It weakens education and health…..No country is immune, and every country bears a responsibility to end it.”[2] Fighting corruption is not an option; it becomes a global objective of the international community. Goal 16[3] of the 17 Sustainable Development Goals (SDGs)[4] of the 2030 Agenda for Sustainable Development — adopted by world leaders in September 2015 at an historic UN Summit — urges substantial reductions in corruption and bribery and the development of effective, accountable and transparent institutions at all levels.

CORRUPTION IN THE GLOBAL HEALTHCARE

Since 2008 global average fraud, error, and corruption losses in healthcare have risen 25% from 5.59% of expenditure to 6.99%. Reduction in fraud and error losses of up to 40% is possible within one year - freeing up to $195 billion globally. The world is losing some $487 billion to fraud and error annually according to a report "The Financial Cost of Healthcare Fraud 2014" from BDO LLP, the accountancy and business advisory firm in partnership with The Centre for Counter Fraud Studies at the University of Portsmouth.[5]

The global healthcare expenditure for 2013 was $7.35 trillion while the estimated global average loss rate of 6.19% [6] was due to fraud, error, and corruption. Such a loss amounted to $ $455 billion. Other studies estimated the annual loss in the global healthcare market to be worth 10% of the global gross national product. [7][8][9][10]

It is evident that developed and developing countries are struggling with this disease in the healthcare sector. According to the National Health Care Anti-Fraud Association, as much as 10% of what the US spends on healthcare is lost to outright fraud and corruption. The most common examples of fraudulent abuse include misrepresenting services, overcharging for services delivered, providing more costly services than required, altering diagnoses, waiving copayments, or submitting claims for free services.[11] Healthcare fraud, error, and corruption rates in developing countries are much higher than those of developed countries. Developing countries’ healthcare corruption rate exceeds 15% of the annual healthcare expenditures. Healthcare corruption levels in the Arab countries are worse and more complex than too many other developing countries.

CORRUPTION IN THE ARAB COUNTRIES HEALTHCARE

“The Middle East and North Africa’s total healthcare spending is estimated to be $125 bn this year, according to Al Masah Capital, a Dubai-based alternative-investment management firm. Government spending is estimated to account for 64 per cent – or $80 bn – of the total market, with private-sector healthcare spending making up the rest.

The role of the private sector is expected to increase in the Mena market, according to Al Masah Capital. It forecasts that the private-sector healthcare market will be worth $61bn in 2020, more than double its size in 2011.” [12]

Waste due to widespread inefficiencies, over-prescription of drugs, and needless medical tests amounts to $40 billion in the MENA public healthcare sector, according to Haidar Al Yousuf, the head of funding at the Dubai Health Authority.[13] "In our region … 50 per cent of the money we spend on health, due to inefficiency, is not properly utilized," he said. Medical insurance fraud and abuse — ranging from over prescribing medication or keeping patients in hospital longer — is hitting operators’ margins. GCC countries try to tackle a growing healthcare corruption multibillion US dollar problem.[14]

The corruption prevailing in the Arab countries casts its shadows on the healthcare services. In a survey published by Transparency International (TI) on May 3, 2016, it states that fifty million people in the Middle East and North Africa had to pay bribes to access the basic services that they needed.[15] That is nearly 1 in 3 public service users like medicine, education, or water. The survey uncovers the public pessimism and skepticism of the governments efforts in fighting corruption. An analysis by Transparency International in 2010 showed that increasing transparency, accountability and integrity in 48 countries has a robust correlation to better outcomes in health, education and water.[16] This holds true irrespective of a country’s wealth or how much it spends in a specific sector.

To continue reading the white paper, please click here.

***END***

Strategic Partnership: The Canadian Centre of Excellence for Anti-Corruption (CCEAC) of the University of Ottawa

PRESS RELEASE

Tempe, June 9, 2017

On April 25, 2017, The AACI and the Canadian Centre of Excellence for Anti-Corruption (CCEAC) of the University of Ottawa signed a general agreement to cooperate and innovate in pursuing their respective missions globally. It is a long-term strategic professional and business relationship that will focus on both developed and developing countries. 

Click here to read the press release. 

Al Jazeera expose on Maldives wins One World award

A documentary exposing wrongdoings of the Maldives' government wins a prestigious award at the One World Media ceremony.

For more details, click here.

Corruption Prevention, Deterrence, and Detection — Nonprofit Organizations — Part 2

Tempe, May 31, 2017

Technical Staff

Significant Fraud Schemes in Nonprofits

1. Skimming
2. Check tampering
3. Expense reimbursements
4. Payroll schemes

As we will discuss what nonprofits can do to assess and evaluate fraud risks, we will list efficient and affordable anti-corruption practices nonprofits may use to prevent, deter, and detect fraud and corruption.

1. Skimming

When an entity receives cash, it must record (recognize) it in its accounting system. Skimming occurs when an employee steals cash or checks BEFORE recording it in the entity’s accounting system. Skimming schemes are usually called “off-books” schemes. Because cash theft happens before cash is recorded in the accounting records, it is tough to detect such a scheme: there is no audit trail. (Read more)

2. Check Tampering

A check tampering scheme occurs when a fraudster (usually an employee) takes a physical control of one or more than one check of an entity where the employee-fraudster benefits from controlling who the payee would be by forging the signature of the check maker and/or make certain alteration on the face of the check (financial instrument).

A check tampering scheme requires a physical control of the entity’s check. If the employee-fraudster cannot access a check or a check book, he just cannot complete any check tampering scheme.

Most forgery schemes are committed by accounts payable clerks (Read more)

3. Expense Reimbursements

Nonprofit organizations like for profits reimburses its officers and directors for “legitimate” business expenses. Qualified expenses for reimbursement varies from one entity to another. However, such expenses should be known to the nonprofit employees, management, and directors. As long as these expenditures are for agreed on business purposes and incurred in compliance with the nonprofit policies and procedures, they are reimbursed to the employee or manager who incurred them. Airline tickets, transportation, and lodging are examples of reimbursable expenses.

Under normal reimbursement procedures, …..

Expense reimbursement fraudulent scheme occurs through one of the following classifications:

1. Mischaracterization expense reimbursement — listing expenses that are not for legitimate business purposes where they are correctly classified to look authentic. (Read more)

4. Payroll Schemes

In a payroll scheme, the perpetrator usually falsifies a timecard or alters information in the payroll records. The most common payroll frauds are ghost employee(s), falsified hours and salary schemes, and commission schemes. We will briefly discuss the ghost employee scheme.

In a typical ghost employee scheme, the fraudster should do all the following: (Read more)

A ghost employee is not necessarily a fictitious person. It could be a real person who is conspiring with the fraudster to defraud the company. For example, (Read more)

Fraud and Corruption Risk Assessment

Those charged with governance and executive management of nonprofits should be aware of the nature and type of fraud and corruption risks their organizations face. It would be impossible to address such risks unless they are identified and quantified. (Read more)

The Minimum a Nonprofit Can Do to Prevent and Deter Fraud and Corruption

Recognizing that small charities and nonprofits do not have sufficient resource to segregate duties, too many identified fraud and corruption cases suggest that they could have been avoided with low cost and efficient controls and without a need for sophisticated financial expertise. It is common sense and a questioning mind.(Read more)

END

Note: Members will find the complete text of this paper at the membership portal