WHOSE MONEY IS IT
ANYWAY?
FRAUD, WASTE & ABUSE
in Not-for-Profits
FLORIDA ASSOCIATION OF COMMUNITY ACTION
May 12, 2011
Mark A. Morgan, CPA
M & M Consulting; Meloria Partners
Have you seen the Headlines?
Why are we concerned about Fraud?
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CFO Jeff Atwater and State Attorney Jerry Hill Announce the Arrest of Three Polk County Women Charged with Stealing State
Funds
TALLAHASSEE - Florida CFO Jeff Atwater, together with State Attorney Jerry Hill, today announced the arrests of three Polk County
women charged with stealing state funds that were supposed to help citizens in need with utility costs. The arrests resulted from a joint
investigation conducted by the Florida Department of Financial Services’ (DFS) Office of Fiscal Integrity and the Florida Department of
Community Affairs Inspector General.
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Rosalind McCutchen Loften has been charged with grand theft and criminal use of personal identification information. Wilhelmina McMillan
and Sheila McMillan were both charged with grand theft.
“Stealing state funds is no different than stealing directly from hard-working and honest Floridians and, in this case, from those who were in
need,” said CFO Atwater. “The Office of Fiscal Integrity was established to fight this type of fraud and will continue to protect your tax
dollars.”
Rosalind Loften, between January 2008 and June 2010, was employed by The Agriculture and Labor Program, Inc. (ALPI), in Lake Alfred, a
non-profit corporation under contract to administer the federal Low Income Home Energy Assistance Program (LIHEAP). The program
provides energy assistance payments (utility payments) to eligible citizens.
In the summer of 2010, officials at ALPI and the City of Fort Meade discovered discrepancies in energy application files prepared by Loften
and notified the Florida Department of Community Affairs Inspector General and the DFS Office of Fiscal Integrity.
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Loften, while employed at ALPI, is accused of creating energy assistance application files containing fabricated, fraudulent and sometimes
fictitious documents which generated illegal payments credited to utility accounts of Fort Meade residents and, in many cases, to Loften’s
personal utility account. Loften’s alleged thefts total $15,622.71.
Sheila McMillan, a cousin of Loften, is a former employee of the City of Fort Meade where her duties included the receipt and processing of
LIHEAP payments from ALPI. Sheila McMillan is charged with theft and accused of creating a new utility account in her own name and
crediting ALPI energy assistance payments to her account.
Wilhelmina McMillan, Loften’s mother, is accused of signing ALPI applications for energy assistance understating her true income, giving
the appearance of eligibility when her income actually exceeded the income eligibility threshold.
The Office of Fiscal Integrity is responsible for statewide investigations of allegations of fraud, waste, or abuse involving State of Florida
property and money. To report fraud, waste or abuse of State of Florida resources, call 1-800-GET-LEAN (1-800-438-5326) or the Office of
Fiscal Integrity directly at (850) 413-5514.
Fraud: a Definition
According to the
Association of
Certified Fraud
Examiners Fraud is:
The use of one’s
occupation for
personal enrichment
through the
deliberate misuse or
misapplication of the
employing
organization’s
resources or assets.
Five elements of Fraud
 A representation about a material fact,
which is false;
 Made intentionally, knowingly, or
recklessly;
 It is believed;
 Acted upon by the victim; and
 To the victim’s damage.
Factors of Fraud
 A supply of motivated offenders
 Availability of suitable targets
 Absence of capable guardians or an
inadequate control system
Elements of Fraud
 Opportunity;
 Small chance of
getting caught;
 Rationalization in the
fraudsters mind, and;
 Justification that
results from the
rationalization.
Types of Fraud
 Internal
Fraud committed by
those within an
Organization, such as
employees,
management, officers,
and directors.
 External
Fraud committed by those
who are doing business or
have a business interest
within the Organization,
including such as vendors,
contractors, subrecipients, grantees,
Grantors, clients, family
members, and participants.
Fraud Facts
2010 Report to the Nations on Occupational Fraud and Abuse
 Typical Organizations loses 5% of its
annual revenue to Fraud; (applied to 2009 GWP would
equal $2.9 trillion)
 Median lose equals $160,000;
 ¼ of Frauds are over $1,000,000;
 Small organizations are most vulnerable;
 Frauds last 18 months before detection;
 Most likely by an anonymous tip (40.2%);
Fraud Facts (continued)
2010 Report to the Nations on Occupational Fraud and Abuse
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Management review (15.4%);
Internal Audit (13.9%);
By Accident (8.3%);
Account Reconciliation (6.1%);
Document Examination (5.2%);
External Audit (4.6%);
Surveillance/Monitoring (2.6%);
Police (1.8%); and
Confession (1.0%).
Fraud Facts (continued)
2010 Report to the Nations on Occupational Fraud and Abuse
 Anti-Fraud controls reduce cost and duration of Fraud;
 High-level perpetrators cause greatest damage;
Frauds committed by owners/executives 3 times more
costly compared to manager frauds and 9 times more than
employee frauds;
Employee Fraud averages $80,000 (up $10,00);
Manager Fraud averages $200,000 (up $50,000); and
Owner/Executive $723,000 (down $109,000).
Fraud Facts (continued)
2010 Report to the Nations on Occupational Fraud and Abuse
 Frauds take longer to detect the higher the level the fraud is
occurring in;
 80% of frauds are committed by: accounting, operations,
executive/upper management, purchasing, customer
service;
 85% of fraudsters have no previous charges or convictions
to fraud events; and
 Display warning signs they are engaging in illicit activity:
43% are living beyond there means; and
36% are experiencing financial difficulties
Reports Conclusion and Recommendations
 Fraud reporting – Hotlines;
 Organizations OVER-RELY on AUDITS;
 Employee Education;
 Surprise Audits;
 Small Organizations (less than $5 million);
 Internal Controls;
 Behavioral Warning Signs;
SO WHOSE MONEY IS IT
ANYWAY?
The Fraud Triangle
Incentive/Pressure
Fraud Risk
Fraud Risk
Opportunity
Attitude/Rationalization
Fraud Triangle - Defined
 Pressure – what causes a
person to commit fraud.
Examples are:
Bills
Expensive Tastes
Addictions
Divorce
Civil Lawsuit
Spouse loses job
 Typically a financial
pressure
 Greed
Fraud Triangle Defined (cont)
 Opportunity – ability to
commit Fraud.
 Opportunity arises out of:
– Weak internal controls
– Poor Management oversight
– Use ones Position or
Authority
– Ineffective Board of
Directors
– Decentralization
– Failure to punish in the past
Fraud Triangle Defined (cont)
 Rationalization – reconciliation of behavior with
the commonly accepted notions of decency and
trust.
 Some common ones include:
Justified to save a family member or loved one;
They will lose everything if they don’t do it;
No help is available from outside;
Label it as “borrowing” and intends to repay;
Job dissatisfaction (owed something);
Don’t understand or care about consequences of actions;
and
“I deserve it……..”
Personality Traits of Fraudsters
 Wheeler and Dealer
 Domineering/Controlling
 Don’t like having work
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reviewed
Strong desire for Personal Gain
“Beat the System” attitude
Live beyond their means
Close relationships
Don’t take time off
Work excessively
Drastic change in personality or
behavior
Appear trustworthy
Common Not-for-Profit Frauds
 Asset misappropriations
Skimming
Theft of donated merchandise
 Purchasing and cash Disbursements
Credit Card Abuse
Fictitious vendor schemes
 Payroll and Employee
Ghost employees
Overstatement of hours worked
Fictitious expenditures
Withholding embezzlement
Common Not-for-Profit Frauds (cont)
 Fundraising costs (in-kind) charged to programs
for improved expense ratios of M&G;
 Misrepresentation of portion of donations used for
charitable programs;
 Misrepresentation of value of charitable
contribution;
 Non compliance with donor imposed restrictions;
 Failure to comply with reporting to IRS for wage
compliance and those who earned over the
minimum thresholds;
Financial Reporting Frauds
 Failure to disclose SIGNIFICANT related party
transactions
 Failure to disclose noncompliance with debt
covenants
 Misclassification of restricted donations and/or
expenses
 Valuations of receivables, inventory, donated
assets and liabilities;
 Failure to properly report trade payables in proper
period
 Failure to report deferred compensation or
retirement benefits
Red Flags
 A red flag is a set of
circumstances that are
unusual in nature or vary
from the normal activity.
It is a signal that
something is out of the
ordinary and may need to
be investigated further.
Red flags DO NOT
indicate guilt or innocence
but merely provide
possible warning signs of
fraud.
Red Flags - Changes in Behavior
 Buying more material
 Turns down promotion
items
 Bragging
 Creditors/Collectors
showing up at work
 Borrows money from
coworkers
 Becomes irritable or
moody
 Becomes territorial
 Coming in early and
staying late
 Carrying unusual
amounts of cash
 Redo of work
 Mentioning of family
or financial problems
 ??????
Management Red Flags
 Reluctance to provide info to
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auditors
Management has frequent disputes
with auditors
Management decisions are
dominated by small group
Management disrespects regulatory
bodies
Weak internal control environment
Accounting personnel lax or
inexperienced
Decentralization
Excess number of checking
accounts
 Frequent change in bank accounts
 Frequent changes in external
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auditors
Company assets sold under market
value
Downsizing in healthy market
Continuous rollover of loans
Excessive number of year end
transactions
High turnover rate
Unexpected overdrafts or declines
in cash balances
Photocopied or missing documents
Service Contracts with no product
Costly Types of Fraud
 Financial Statement Fraud
 Check Forgery
 Credit Card Fraud
 Medical/Insurance Claim Fraud
 Assistance Fraud (Falsification of Data)
 Fund Request Fraud
Waste
 The intentional or
unintentional, thoughtless
or careless expenditure,
consumption,
mismanagement, use or
squandering of resources.
Including incurring
unnecessary costs because
of inefficient or
ineffective practices,
systems, or controls.
 Purchasing unnecessary
supplies, materials and
equipment
 Purchasing without regard
for cost
 Using supplies, materials
and equipment carelessly
resulting in waste and
replacement
 Failure to reuse or recycle
major resources or reduce
waste generation
Abuse
 Intentional
destruction, diversion,
manipulation,
misapplication,
maltreatment, or
misuse of resources.
Extravagant or
excessive use as to
abuse one’s position
or authority.
 Making procurement or vendor
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selection contrary to policy
Receiving favor for awarding
contracts to certain vendors
(Corruption)
Using the position for personal gain
or gain advantage over another
(Asset Misappropriation)
Creating unneeded overtime
Request subordinates to perform
personal errands or work tasks for a
supervisor or manager
Travel choices that are contrary to
existing policies or unnecessarily
extravagant or expensive
Using Federal or State funds or
equipment for non-State or Federal
purposes
SO WHOSE MONEY IS IT
ANYWAY?
Presidential Executive Order 13520
(as Codified)
 LIHEAP regulations 45 CFR 96.84© state:
Grantees must establish appropriate systems
and procedures to prevent and detect, and
correct waste, fraud and abuse in activities
funded under the low income home energy
assistance program. The systems and
procedures are to address possible waste,
fraud and abuse by clients, vendors, and
administering agencies.
Program Integrity Plan
 Prevention - Eligibility
 Detection -
Monitoring
 Correction - Action
 Prosecution Reporting
2011 State Integrity Assessment
Supplemental Template
 Recent Audit Findings
 Compliance Monitoring
 Fraud Reporting Mechanisms
 Verifying Applicant Identities
 Social Security Number Requests
 Cross Checking SS # against Govt Systems
 Verifying Applicant Income
 Privacy Protection and Confidentiality
 LIHEAP Benefits Policy
 Procedures for Unregulated Energy Vendors
 Verifying Authenticity of Energy Vendors
 Audits of Local Administering Agencies
Effective Internal Controls
Expectations
Adherence
Consequences
Controlling Fraud, Waste & Abuse
 Officers, Directors,
Management MUST
“Set the Tone at the
Top”
Controlling Fraud, Waste & Abuse (cont)
 Assessment of Fraud Risks and Responses
1) Identify and measure Fraud Risk;
2) Take steps to mitigate identified
risks; and
3) Implementation and monitoring
appropriate prevention and detective
internal controls and other deterrent
measures.
Red Flags Controls – Financial Analysis
 Comparable of actual v budget;
 Ratio Analysis;
 Reconciliation of accounts;
 Review of general ledger adjustments;
 Duplicate or non existent social security for employees;
 Job rotations & mandatory vacations;
 Client complaints;
 Unusual patterns of overtime payments;
 Drawing of excess funds;
 Surprise Audits.
Red Flags Controls – Non-Financial
 Pre-screen potential employees;
 Communication often with employees;
 Communicate the consequences of committing
fraud;
 Set a good example by following rules;
 Provide a hotline;
 Conduct anti-fraud training for managers and
employees; and
 Implement an anti-fraud policy.
Conversion Triangle
Theft
Concealment
Conversion
The 3 “C”s of Fraud, Waste & Abuse
 Collusion - A secret agreement between
two or more persons, who seem to have
conflicting interests, to abuse the system;
 Conspiracy - An agreement between two or
more persons to commit a criminal act;
 Complacency - One or more persons
having knowledge of an instance or abuse
but failing to notify anyone
WHOSE MONEY IS IT
ANYWAY?
Fraud Approach Triangle
Prevention
Detection
Insurance
The Antifraud Team
 Audit Committee
 External Auditors
 Internal Audit Process
 Certified Fraud Examiners
 Others
The Antifraud Team – Audit Committee
 Should constantly challenge management to
enforce antifraud policies
 Evaluate managements identification of
fraud risks and responses to those risks
 Support and assess managements creation
of a culture with “zero tolerance” for fraud
 Assess the risk of fraud by management and
develop appropriate responses to those risks
The Antifraud Team – Audit Committee (cont)
 Periodically review managements travel and other
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expenses
Review unusual and complex transactions
Monitor compliance with code of conduct and conflict-ofinterest policies
Identify and assess related party relationships and
transactions
Communicate to everyone the “whistleblower” policy
Lead investigators of suspected fraud
Review insurance coverage relating to fraud and abuse
Work with external auditors
Should always document its actions and report to full
board
The Antifraud Team – External Auditors
 The AICPA has issued
standards that provides
guidance for external
auditors to assess
fraud risks in planning
and implementation
procedures to improve
the likelihood of
detection
The Antifraud Team – External Auditors
 Unusual accounting or reporting practices
 Assess estimates
 Significant audit adjustments
 Unrecorded differences noted but not
material
 Illegal acts or material noncompliance
 Weaknesses in internal controls
 Disagreements with management
The Antifraud Team - Others
 Internal Auditors
- If an agency can
afford them, they
function in some of
same roles as external
auditors, except they
have ability to test
100% of transactions
- Should work closely
with the Audit
Committee
 Certified Fraud
Examiners
- They can assist in the
fraud investigation or
the development of the
antifraud/internal
controls
The Antifraud Team - Others
 Governmental
agencies
 Internal Revenue
Service
 Peer Monitoring
 State Organizations,
such as FACA
Fraud Discovery
 Notify the audit
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committee, if one is in
existence, first!
Report it to a Hot Line
Consult the next highest
level of management or
Board Oversight from
where Fraud is occurring
Grantees
External Auditors
Legal Counsel
Fraud Discovery
 Legal counsel if notified to protect rights of
Organization
 Insurance carrier should be notified
 Preservation of documents or other
evidence
 Repair breach in controls that allowed the
Fraud to occur
Results of Discovery
(According to a 2006 ACFE study)
 70.6% of cases
 23.5% resulted in civil
referred to law
enforcement when
median loss was
$200,000 or more
 Prosecution resulted in
88.3% guilty pleas or
convictions with
11.7% rejected by
legal authorities
suit filed by the victim
organization (with
medial loss exceeding
$1.2 million)
 Received judgment in
60% of cases, 38.5%
of cases settled
 Perpetrator judgments
in 2% of civil suits
Development of Policy
“The Antifraud Policy”
 Overview
 Fundamental Concepts
- Creating, demonstrating and maintaining a
culture of honesty and high ethics
- Regularly accessing fraud risks
- Creating, implementing and monitoring a strong
system of controls
- Training employees to be alert to warnings signs
and to provide a reporting system
- Conducting regular audits
 Summation
Development of Policy
“Audit Committee Charter”
 Oversight responsibilities
 Authority the committee has
 Membership
- Minimum of 3 members
- Required financially literate, with at least 1 with
an expertise in financial reporting for not-forprofits
 Meetings
 Responsibilities
Development of Policy
“Audit Committee Charter” Responsibilities
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Financial Statements
Internal Control
Internal Audit
External Audit
Compliance
Fraud detection and
prevention
 Reporting
 Other
Development of Policy
“Antifraud Policy”
 General Statement (overview)
 Outline Actions Constituting Fraud
 Reporting Responsibilities and Safeguards
 Confidentiality
 Investigation Procedures
 Resolution Procedures
Development of Policy
“Code of Conduct”
 Organization Policy
 Employee Policy
 Volunteer Policy
 What constitutes
“Conflicts of Interest”
 Handling of Organizations
Resources and Records
 Make EVERY board
member, officer, manager,
employee, and volunteer
sign and date form
Development of Policy
“Conflict of Interest Policy”
 Define – Conflict of Interest
 What constitutes Related Party Transactions
 Make sure each board member, director,
member of senior management employees
and volunteers with purchasing and/or
hiring authority or responsibilities are
required to sign the statement.
 Update annually
Reporting
 Agency Hotline
 State Hotline
 Federal Hotline (800-
HHS-TIPS)
 Office of Inspector
General
Department of Health
and Human Services
ATTN: HOTLINE
PO Box 23489
Washington, DC
20026
What to report?
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Who was involved?
What happened?
When it happened?
Where it happened?
Why was it done?
How did it happen?
Who else is aware of
incident or has
knowledge?
 What is the source of the
information?
Confidentiality
 Individual should refrain from discussing with
anyone other than those persons investigating the
case
 Inquiry by individual or attorney should be
referred to Agency/State/Federal investigator, say
“I am not at liberty to discuss this matter.”
 Do not make accusations against the person to
anyone
 Do not promise anything
 Do not contact the suspected individual(s) to
attempt to further determine the facts
OIG Hotline (HHS)
 Fraud/Waste in ARRA grants
 Gross misconduct of employees
 Conflicts of Interest
 Cost overruns in programs due to
mismanagement
 False applications
 Failure to provide services
 Kickbacks.inducements
Personal Fraud Consequences
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Termination/Loss of career
Loss of Professional License
Criminal Record
Restitution
Prosecution
Public Embarrassment
Family Disruptions
Personal Bankruptcy
Serving Time in Prison
Agency Fraud Consequences
 Repayment
 Loss of Future Funding
 Layoffs
 Closure
 Public Spot Light
 Decrease in Private Contributions
 Financial Statement Disclosure
What can you do?
Financial Pressure
Opportunity
Rationalization
SO WHOSE MONEY IS IT
ANYWAY?
QUESTIONS
THANK YOU
Mark A Morgan
304-634-1040
mmorgan@uhswv.com