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)

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