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2012-05-30 Nonprofit Fraud Schemes
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2012-05-30 Nonprofit Fraud Schemes

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2012-05-30 Nonprofit Fraud Schemes 2012-05-30 Nonprofit Fraud Schemes Presentation Transcript

  • Nonprofit Fraud Schemes and How You Can Help Prevent Them RAFFA, PC and M&T Bank Larry Hoffman, CPA/CFF CVA CFE, Partner May 30, 2012Thrive. Grow. Achieve.
  • NONPROFIT FRAUD SCHEMES AND HOW YOU CAN HELP PREVENT THEM – AGENDA • Why Talk About Fraud? • Most Prevalent Fraud Schemes • Five Take Aways! • Suggested Resources • Questions and AnswersNonprofit Fraud Schemes/ Page 2
  • WHY TALK ABOUT FRAUD? 1. NONPROFIT ORGANIZATIONS ARE VERY SUSCEPTIBLE TO FRAUD AND ABUSE 2. DON’T COUNT ON YOUR OUTSIDE AUDITOR TO UNCOVER THE FRAUD 3. FRAUD INCREASES WHEN THE “PRESSURE/INCENTIVE” INCREASES, WHICH INCREASES IN A POOR ECONOMY 4. YOU PROBABLY HAVE SOME SORT OF FRAUD IN YOUR ORGANIZATION GOING ON AND YOU DON’T KNOW IT 5. A FRAUD IN YOUR ORGANIZATION COULD BRING UNWANTED OUTCOMES, SUCH AS ADVERSE PUBLICITY AND LOSS OF SUPPORTNonprofit Fraud Schemes/ Page 3
  • WHY TALK ABOUT FRAUD? 6. IRS REQUIRES YOU TO DISCLOSE INSTANCES OF FRAUD – FORM 990 – MORE TRANSPARENT TO DONORS 7. YOU CANNOT AFFORD THE LOSS, COST OF THE INVESTIGATION AND DISRUPTION TO YOUR OPERATIONS 8. ASSET (CASH) MISAPPROPRIATIONS ARE BY FAR THE MOST PREVALENT FRAUDS COMMITTED AGAINST NONPROFITS 9. THE FRAUD PERPETRATOR IS NOT EASILY KNOWN TO THE ORGANIZATION 10. YOU COULD FIND YOURSELF PERSONALLY LIABLE FOR DAMAGESNonprofit Fraud Schemes/ Page 4
  • WHY TALK ABOUT FRAUD?Nonprofit Fraud Schemes/ Page 5
  • MOST PREVALENT FRAUD SCHEMES I. Misappropriation of Assets a. Embezzlement i. Check tampering  Forged maker  Forged endorsement  Altered payee ii. Cash larceny iii. Fictitious invoices/vendors (shell company) iv. Bank wire transfers v. Payroll schemes  Ghost employees  Falsified hours/wages  Overtime abuse vi. Expense reimbursement schemes  Mischaracterized expenses  Overstated expenses (altered receipts)  Fictitious expenses (bogus receipts)  Multiple reimbursementsNonprofit Fraud Schemes/ Page 6
  • MOST PREVALENT FRAUD SCHEMES I. Misappropriation of Assets (continued) b. Noncash i. Misuse of assets for personal use ii. Inventory II. Corruption and Abuse a. Kickbacks b. Illegal gratuitiesNonprofit Fraud Schemes/ Page 7
  • FIVE TAKE AWAYS! 1. SEGREGATE THE CUSTODY OF THE ASSET FROM THE RECORDKEEPING 2. SET THE TONE FROM THE TOP 3. KNOW YOUR EMPLOYEES AND STAKEHOLDERS 4. IMPLEMENT A FRAUD POLICY AND HOTLINE 5. DON’T DESIGN YOUR INTERNAL CONTROLS AROUND TRUSTNonprofit Fraud Schemes/ Page 8
  • #1 – SEGREGATE THE CUSTODY OF THE ASSET FROM THE RECORDKEEPING • If they handle the cash (checks, wires, credit cards) they should not keep the books • No one person should be able to receive, deposit, record and reconcile cash receipts • No one person should be able to authorize payments, disburse payments, and reconcile bank statements • No one person should be able to authorize the purchase of inventory, control the shipment and receipt of inventory, and report on the physical inventoryNonprofit Fraud Schemes/ Page 9
  • #2 – SET THE TONE FROM THE TOP • If you are stealing, your employees are stealing! ̵ Expense reports ̵ Office supplies • Employees will emulate the owner/top management • Take your internal controls seriously. Be diligent in performing your IC proceduresNonprofit Fraud Schemes/ Page 10
  • #3 – KNOW YOUR EMPLOYEES AND STAKEHOLDERS • Perform background checks before hiring and during employment if deemed warranted • Establish a baseline relationship with your key employees • Maintain an ongoing relationship in order to detect unusual behavior • Be observant – “walk the plant”Nonprofit Fraud Schemes/ Page 11
  • #4 – IMPLEMENT A FRAUD POLICY AND HOTLINE • Have a written document outlining the organization’s fraud policy • What actions constitute fraud? • How and to whom do employees report suspected fraud? • Will the organization prosecute fraud and abuse? • Raise awareness and provide ongoing training • Tips are the number one method of detecting fraud! • Can outsource hotline through the ACFE: http://www.acfe.com/ethicsline.aspxNonprofit Fraud Schemes/ Page 12
  • #5 – DON’T DESIGN YOUR INTERNAL CONTROLS AROUND TRUST • Any person, put in circumstances beyond their level of tolerance, is capable of committing fraud (a crime) • Fraudsters are always nice people, well respected, and easy to get along with • Design your procedures and system of internal controls so you do not have to rely on trust as a control. • The higher position of trust a person is placed in, the larger the fraud • Conduct background checks on all new employees TRUST IS NOT AN INTERNAL CONTROLNonprofit Fraud Schemes/ Page 13
  • SUGGESTED RESOURCES • Association of Certified Fraud Examiners www.acfe.com (can download copy of Report to Nations) • Managing the Business Risk of Fraud: A Practical Guide, AICPA, IIA, ACFE (can download copy at http://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/managin g-business-risk.pdf) • RAFFA Three Part Seminar-Fraud: What You Need to Know, Part I-The Fraud, Part II-The Detection, and Part III-The PreventionNonprofit Fraud Schemes/ Page 14
  • QUESTIONS AND ANSWERSNonprofit Fraud Schemes/ Page 15
  • PRESENTER BIOGRAPHYLawrence J. Hoffman, – 30 years of public accounting and consulting experience.CPA/CFF CVA CFE – Founded his own firm in 1982 and merged with Raffa, P.C. in 2008. Prior to that Mr. Hoffman was with a Big-Four international accounting firm. – Managed and conducted audit and accounting engagements ranging from small privately held to large publicly held businesses in various industries, also including multi-national businesses, nonprofit organizations, government entities and agencies. – Performed and supervised business valuations for both public and closely held companies in a variety of industries, individuals and estates, family limited partnerships and limited liability companies, including valuations for business combinations (SFAS 141R), mergers, acquisitions, and divestitures, estate and gift taxes, marital dissolution proceedings, buy-sell agreements, intangible assets and intellectual property, purchase price allocations, goodwill (SFAS 142) and long-lived asset (SFAS 144) impairment, fair value accounting (SFAS 157), cheap stock (IRC 409A), stock-based compensationSenior Partner (SFAS 123R), phantom stock and employee stock ownership plans.Raffa, P.C.1899 L Street, NW – Performed economic and financial analysis, including projections and forecasts, in support of litigation and claims for lost earnings and profits, business interruption,Washington, DC 20036 shareholder disputes, patent and trademark infringements, bankruptcy and restructuring, and structural settlements; assistance with interrogatory, documentTel. 202-822-5000 request and depositions; and serving as an expert witness.Fax 202-822-0669 – Conducted fraud audits and investigations, including fraudulent financial statements,lhoffman@raffa.com misappropriations of assets and embezzlements; money laundering, kickbacks, bribery and conflicts of interest; insurance claims; bankruptcy; financial institutions and loan fraud. Also has conducted fraud risk assessments, anti-fraud programs, and fraud training and education. Nonprofit Fraud Schemes/ Page 16
  • PRESENTER BIOGRAPHYLawrence J. Hoffman, – Formulated strategic short- and long-term business and financial planning for variousCPA/CFF CVA CFE business organizations, including a major North American sports league. – Formulated syndication strategies and prepared business plans and private placement offerings, including financial forecasts, market research and analysis, due diligence, securities pricing and structuring for various public and private securities offerings, including SEC filing. – Founded and developed a regional NASD licensed broker dealer, investment banking firm. Placed over $150 million in debt and equity and represented over $200 million in merger and acquisition transactions. – Founded and developed two private equity funds in excess of $10 million, including investments in early stage and mature emerging companies in the form of debt and equity. – Instructor in audit, accounting, finance, and forensic accounting. Education & Certifications:Senior Partner – Bachelor of Science, Accounting– Mount St. Mary’s University – Certified Public Accountant (CPA)Raffa, P.C. – Certified Fraud Examiner (CFE)1899 L Street, NW – Certified in Financial Forensics (CFF)Washington, DC 20036 – Certified Valuation Analyst (CVA) – Private Investigator (PI), VirginiaTel. 202-822-5000 Professional Associations & Affiliations:Fax 202-822-0669 – American Institute of Certified Public Accountants, Memberlhoffman@raffa.com – Virginia State Society of Certified Public Accountants – Association of Certified Fraud Examiners – National Association of Certified Valuation Analysts Nonprofit Fraud Schemes/ Page 17
  • THANK YOU!Nonprofit Fraud Schemes/ Page 18