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Forensic Accounting and More

Nonprofit Fraud – Cost and Damage Assessment. Forensic Accounting and More. Professors Janet Greenlee and Mary Fischer. Fraudster Profile. Owner Executive with bachelor ’ s degree or higher Tenure of 6 – 10 years Male aged 41 – 50 acting alone

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Forensic Accounting and More

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  1. Nonprofit Fraud – Cost and Damage Assessment Forensic Accounting and More Professors Janet Greenlee and Mary Fischer

  2. Fraudster Profile • Owner Executive with bachelor’s degree or higher • Tenure of 6 – 10 years • Male aged 41 – 50 acting alone • Living beyond financial means – could also be a wheeler/dealer, unwilling to share duties, or have personal problems • Organizations lose an average 7% of revenues annually per ACFE 06-08 report

  3. How does fraud happen? Deterrence FRAUD Motive Rationalization Opportunity Prevention

  4. Asset Misappropriation • Fraudulent billing (largest number) • Payroll -ghost employee • Expense reimbursement (least costly) • Check tampering • Fraudulent register disbursement – register refunds (most costly) • Corruption (second largest)

  5. Financial Statement Fraud • The three M’s • Manipulation, falsification or alteration of accounting records or supporting documents • Misrepresentation in or intentional omission of events, transactions or other significant information • Misapplication of accounting principles concerning amounts, classification or disclosure

  6. Why? • Entitlement and/or greed • Easy • Need $ (personal issue or addiction) • Cover up asset misappropriation • Meets analysis prediction - bonus • Increase stock prices • Avoid loss and/or bolstering financial results

  7. Other Fraud Types

  8. Internal Controls • Control environment and procedures • Accounting system • Accountant’s tools • Common sense • Anecdotal evidence • More considerations … • More in following session

  9. Here is a few 2007 examples of nonprofit mischief: 1. Red Cross – (CA)-$110,000 2. ABC Humanitarian Trust- (MN)-$137,000 3. Elite Gym Starz Parent Club (MI)- $108,604 4. Leukemia and Lymphoma Society – (MI)- $43,616 5. Hickory Grove Elementary PTO- (MI)- $36,000* 6. San Diego (CA) Schools: i. Friends of Jamul-Dulzura Schools - $131,000 ii. Fallbrook High School - $27,000 iii. Valhalla High School -$19,000 iv. Rancho San Diego -$55,000 7. Big Sun Youth Soccer League (FL)- $35,000 8. Salvation Army- (AL)-$160,000 9. Best Choice- (NM) - $1.8 million 10. Citi Performing Arts Center-(MA) - $1.9 million+ 11. North Carolina A&T State University- $1 million 12. Salinas Police Activities League-(CA)- $35,000+ 13. Crotched Mountain Rehabilitation Center-(NH)-$1 million* 14. Cornerstone Christian Fellowship Church - $400,000+ 15. Salinas Police Activities League - $35,000+

  10. Our study - Who are the Victims

  11. Interesting Findings • 37.9 % of losses $100,000 - $500,000 • 53.4 % organizations where fraud was found had fewer than 100 employees • 27% of the perpetrators had been employed for less than 5 years (avg loss $120,000) • Size of organization matters – ogr with revenues over $500M avg loss $1.4 M compared to org with less than $100 M organizations avg loss only $130,000 • Less than half of the losses recovered any $

  12. What Types of Frauds were Committed in Nonprofits?

  13. Cash Misappropriation

  14. Fraudulent Disbursements

  15. Methods of Detection

  16. The Perpetrator • The typical perpetrator was a middle aged woman with only a high school education • Trusted employee • Over 75% has no criminal history • Over 70% were terminated • Only 15+% of the perpetrators made restitution • 6.9% received no punishment at all

  17. Why no No Legal Action Taken (80% of cases) Why??

  18. SAS 109 (cont.)“Amendment to SAS no 95 Generally Accepted Auditing Standards” Damage ControlWhat can be done! • Ensure separation of duties • Implement and install strong internal controls • Employ background checks for new employees • Perform regular fraud audits • Established a fraud policy • Be willing to prosecute • Develop and monitor ethics training for all employees • Install an anonymous fraud reporting mechanism • Apply workplace surveillance if appropriate

  19. SAS 109 (cont.)“Amendment to SAS no 95 Generally Accepted Auditing Standards” Questions and Answers ? ? ? ? ? ? ? ?

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