Nonprofit Fraud –
Cost and Damage
Forensic Assessment
Accounting and More
Professors Janet Greenlee
and Mary Fischer
1
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
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How does fraud happen?
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Asset Misappropriation
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•
•
•
•
Fraudulent billing (largest number)
Payroll -ghost employee
Expense reimbursement (least costly)
Check tampering
Fraudulent register disbursement –
register refunds (most costly)
• Corruption (second largest)
4
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
5
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
6
Other
Fraud
Types
Employee Fraud
Management Fraud
External fraud
Misuse cash/assets
Expense account
False insurance claims
Lapping
False F/S
Credit card fraud
Check forgery
Misuse cash/assets
False invoices
Expense accounts
Unnecessary purchases
Check forgery
Petty cash
Check forgery
Bribes/ secret
commissions
Kickbacks
Kickbacks
Bid rigging
Loans
Ghost vendors
Produce substitution
Avg loss +$ 100
thousand
Avg loss +$ 3 million
Avg loss + $250
thousand
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Internal Controls
• Control environment and procedures
• Accounting system
• Accountant’s tools
– Common sense
– Anecdotal evidence
• More considerations …
• More in following session
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Here is a few 2007 examples of nonprofit mischief:
Red Cross – (CA)-$110,000
ABC Humanitarian Trust- (MN)- $137,000
Elite Gym Starz Parent Club (MI)- $108,604
Leukemia and Lymphoma Society – (MI)- $43,616
Hickory Grove Elementary PTO- (MI)- $36,000*
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
Big Sun Youth Soccer League (FL)- $35,000
Salvation Army- (AL)- $160,000
Best Choice- (NM) - $1.8 million
Citi Performing Arts Center-(MA) - $1.9 million+
North Carolina A&T State University - $1 million
Salinas Police Activities League-(CA)- $35,000+
Crotched Mountain Rehabilitation Center-(NH)-$1 million*
Cornerstone Christian Fellowship Church - $400,000+
Salinas Police Activities League - $35,000+
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Our study - Who are the Victims
Type of
Organization
Private Company
%
Median Loss from
Fraud
41.8
$123,000
Public Company
30.3
$100,000
Government
Agency
Nonprofit
Organizations
15.8
$37,500
12.2
$100,000
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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 $
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What Types of Frauds were
Committed in Nonprofits?
Type of Fraud
%
Median Loss
Fraudulent
Financial
Statements
Corruption
5.2
$3,000,000
22.2
$105,000
97.5
$100,000
Misappropriation of
Assets
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Cash Misappropriation
Type of
Misappropriation
%
Median Loss
Fraudulent
Disbursement
76.6
$145,000
Skimming
22.4
$40,000
Cash Larceny
17.2
$145,000
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Fraudulent Disbursements
Type of Disbursement
%
Median Loss
Billing
46.7
$128,000
Check Tampering
44.8
$163,500
Expense
Reimbursement
Payroll
13.8
$83,373
17.2
$110,873
Register Disbursement
3.5
$375,842
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Methods of Detection
Detection Method
%
Median Loss
Tip from Employee
24.1
$40,333
By Accident
22.4
$85,636
Internal Controls
13.8
$177,900
External Audit
12.0
$91,745
Internal Audit
10.3
$119,000
Anonymous and others
such as tips from
customer or vendor
17.4
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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
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No Legal
Action
Why
no Taken
(80% of cases) Why??
Reason for no legal action
%
Private settlement
24.0
Fear of bad publicity
19.0
Too costly
11.9
Internal discipline sufficient
11.9
Organization wanted closure
9.5
Government declined to prosecute
9.5
Lack of evidence
9.5
Perpetrator lacked assets
7.1
Perpetrator disappeared
4.8
Fear of countersuit
2.4
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SAS 109
(cont.)
Damage
Control
“Amendment to SAS no 95 Generally Accepted Auditing Standards”
What can be done!
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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
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SAS 109 (cont.)
Questions and Answers
“Amendment to SAS no 95 Generally Accepted Auditing Standards”
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