Practical Internal Control Solutions for Nonprofits


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Internal controls are implemented to protect an organization from unauthorized expenditures and fraud/embezzlement. Small to mid-size organizations are vulnerable due to the limited number of staff in the business office or accounting department. The way to combat unauthorized expenditures and/or being ripped-off is through proper internal controls which include communication, process & procedure, and periodic verification and review. Through the review of short case studies this webinar will cover internal controls to implement considering the organization size, where and how fraud can occur, signs to look for, ways to stay vigilant, and what to do if your organization is a victim.

Published in: Business, Economy & Finance
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Practical Internal Control Solutions for Nonprofits

  1. 1. Liars, Cheats, & Thieves: Practical Internal Control Solutions for Nonprofits Susan C Hammond June 13, 2012A Service Of: Sponsored by:
  2. 2. INTEGRATED PLANNING Advising nonprofits in: •  Strategy •  Planning (617) 969-1881 •  Organizational Development A Service Of: Sponsored by:
  3. 3. Affordable collaborative data management in the cloud.A Service Of: Sponsored by:
  4. 4. Today’s Speaker Susan C Hammond Principal scHammond Advisors Hosting:Assisting with chat questions:Jamie Maloney, Nonprofit Webinars Sam Frank, Synthesis Partnership A Service Of: Sponsored by:
  5. 5. Liars, Cheats, & Thieves: , ,Practical Internal Control Solutions  for Nonprofits for Nonprofits Nonprofit Webinars Nonprofit Webinars June 13, 2012 ©2012 SCHammond 1
  6. 6. Welcome ©2012 SCHammond 2
  7. 7. What We Will Cover• What is fraud? What is fraud?• How & Why Fraud Occurs• Case Studies• Ti & P Tips & Procedures to Prevent Fraud d t P tF d• Signs You Need to Investigate• If Your Organization is a Victim… ©2012 SCHammond 3
  8. 8. What is Fraud? What is Fraud? The misappropriation of organizational assets, funds and/or information for the assets funds and/or information for the purpose of obtaining personal gain. ©2012 SCHammond 4
  9. 9. How & Why Fraud Occurs Rationalization‐“I’ll  Opportunity Desperation just borrow the  just borrow the ____ temporarily” Poor division of Lack of attention  Misplaced trust responsibilities Over reliance on  O li Ignorance one individual ©2012 SCHammond 5
  10. 10. More Reasons How & Why  Fraud Occurs F dO Low financial  Insufficient  intelligence‐ Unqualified  executive director   executive directorexecutive director  treasurer & board oversight & board Unqualified  Poor  Uneducated board bookkeeper p communications ©2012 SCHammond 6
  11. 11. Case Study One Case Study OneThe Johnstown Museum maintains a petty cash fund of $500.Historically the fund is replenished every 2‐3 months. Becauseof this the petty cash fund is only reconciled 2‐3 times a year.Over the last 4 months the fund has been replenishedmonthly. The bookkeeper is the custodian and the executivedirector has been too busy to review what it is the fund isbeing used for for. ©2012 SCHammond 7
  12. 12. Poll Question #1 ©2012 SCHammond 8
  13. 13. Case Study Two Case Study TwoThe former CEO of Professional Ed, a nonprofit that providesprofessional development for teachers, really didn’t like to bebothered with the “business side” of the organization and business sidedelegated all operational business matters to the businessmanager. The organization’s business manager was a self‐trainedbookkeeper who had taken it upon himself to order a signaturestamp so as not to bother the CEO. In addition he prepared all themonthly board financial reports including the annual budget andpresented them to the board as over the last year the treasurerhad been unavailable to attend the b d meetings. In additionh db l bl d h board ddthe treasure had minimal interaction with the business manager.The business manager had also terminated the services of theoutside CPA resulting in the organization not filing its Form 990 forthe last two years. ©2012 SCHammond 9
  14. 14. Poll Question #2 ©2012 SCHammond 10
  15. 15. Case Study Three Case Study ThreeSt Joseph’s Academy is a Catholic elementary school that serves1,000 children on an operating budget of $500,000. The ExecutiveDirector has been with the organization for 3 years while thebookkeeper has been with the organization for 20 years. In fact,the ED doesn’t know what she would do without George thebookkeeper. He seems to have an answer to all the questionspertaining to past events and good suggestions when a newsituation develops. The executive director doesn’t review thebank statements and often signs checks without reviewing thesupporting documents. St. Joe’s bank statement is received andopened by George. George maintains his own personal accountsat the same bank as St. Joe’s. George issues several credit memoseach month for adjusting customer accounts. ©2012 SCHammond 11
  16. 16. Poll Question #3 ©2012 SCHammond 12
  17. 17. Case Study Four Case Study FourRoger has been the maintenance manager for 10 years at Camp Wildwood.  He and the bookkeeper are on the same bowling  p gteam.  That’s how Roger came to be hired.  There are 20 counselors and 3 administrative staff of varying degrees of tenure.  While cashflow is sometimes tight, it s never been tenure While cashflow is sometimes tight it’s never beenimpossible to make payroll or pay vendors normally. Lately the Camp Director has noticed on the credit card statement small purchases that might or might not be related to a building project  h h i h i h b l d b ildi jfor Camp Wildwood and Roger has requested several salary  padvances in the last 6 months which have not been paid back.   ©2012 SCHammond 13
  18. 18. Poll Question #4 ©2012 SCHammond 14
  19. 19. Questions Answers ©2012 SCHammond 15
  20. 20. Tips & Procedures to Prevent FraudTips & Procedures to Prevent Fraud Know who you are hiring. Document policies & procedures in  p p writing. Separate the functions of cash receipts  Separate the functions of cash receipts & cash disbursements. Enforce bank & credit card statement  review procedures. ©2012 SCHammond 16
  21. 21. Tips & Procedures to Prevent FraudTips & Procedures to Prevent Fraud Enforce cash receipts & disbursement  procedures. procedures Require mandatory vacation for all staff involved  q y with accounting. Accounting records should be kept in locked files  A i d h ld b k i l k d fil when no one is present. Time cards/sheets should be approved & verified  before payroll is processed. ©2012 SCHammond 17
  22. 22. Tips & Procedures to Prevent FraudTips & Procedures to Prevent Fraud Bond all employees with access to cash &  accounting records.   accounting records Replenish petty cash once a month & review the  p p y type of expenditures reimbursed. Do not use an organization‐wide credit card.   Secure valuable fixed assets. ©2012 SCHammond 18
  23. 23. Tips & Procedures to Prevent FraudTips & Procedures to Prevent Fraud The Treasurer should have the appropriate  background. background Treasurer should engage with the accounting  g g g staff. Treasurer or Finance Committee Chair should  T Fi C i Ch i h ld present the board financial reports. Finance Committee or Board should meet  annually with the outside accounting firm  without staff present. ©2012 SCHammond 19
  24. 24. Cash Receipts ProceduresCash Receipts Procedures• At a fundraiser have two people assigned to cover the cash  coming in. coming in• Have checks deposited by someone who does not mail the  customer invoices.• Periodically review the back side of checks deposited to  make sure the account information is correct.• Periodic review of customer lists. Approve all new  customers.• ED approval of all customer credit memos.  ©2012 SCHammond 20
  25. 25. Cash Disbursement ProceduresCash Disbursement Procedures • All purchases should be authorized in advance All purchases should be authorized in advance. • Check signer verifies the check matches the invoice it is  paying.  • Manually sign all checks. ©2012 SCHammond 21
  26. 26. Cash Disbursement ProceduresCash Disbursement Procedures • Require all entries on expense reports be supported by  receipts.  receipts • Periodic review of vendor lists. Approve all new vendor  services. i • ED approval of all vendor debit memos.  ED approval of all vendor debit memos • Lock up checks at all times Check numerical sequence Lock‐up checks at all times. Check numerical sequence  remains intact.  ©2012 SCHammond 22
  27. 27. Bank/Credit Card Statement  Procedures d Bookkeeper should not be an authorized  signer on checks (or credit card). i h k ( dit d) Bank & credit card statements should be  p y opened & reviewed by someone not  responsible for cash receipts and  disbursements. Reconcile statements monthly. Treasurer receives duplicate bank & credit  Treasurer receives duplicate bank & credit card statement.  Restrict who can conduct which on‐line  bank activities.  ©2012 SCHammond 23
  28. 28. Questions Answers ©2012 SCHammond 24
  29. 29. Signs You Need to InvestigateSigns You Need to Investigate Employee seems  Unexplained  Unwillingness to to be living beyond to be living beyond absences take vacation their means. Unwillingness  Contributions/Grants  Vendors are  are strong but  delegate tasks  cashflow is tighter  complaining  related to cash than it should be. payments are late. Aged receivables  Monthly financial  Monthly financial  yshow many over 90  statements are  statements are reports look  t l kdays, same for aged  prepared late. “funny.” accounts payable. ©2012 SCHammond 25
  30. 30. If Your Organization is a Victim…If Your Organization is a Victim… • Act normal • Keep the matter confidential Keep the matter confidential • Put staff person on paid leave • Contact your attorney & accountant • Consider hiring a fraud investigator • Locate corroborating information • Prepare to fire staff person, press charges & notify  authorities • Check insurance coverage/notify insurance company • Weigh costs to investigate & press charges ©2012 SCHammond 26
  31. 31. Questions Answers ©2012 SCHammond 27
  32. 32. Resources•Preventing and Detecting Employee Fraud and Embezzlement, Stephen Pedneault•Streetsmart Financial Basics for Nonprofit Managers‐Chapter 18, Thomas A. McLaughlin l f f l l lf l•Streetsmart Financial Basics for Nonprofit Managers‐Internal Control Self‐Evaluation, see attached.•Nonprofit Financial Management, Charles K. Coe•Association of Certified Fraud Examiners www acfe com•Association of Certified Fraud Examiners,•What is your Fraud IQ?, Stu Lipkin‐B2B CFO, August 9, 2011,‐and‐white‐papers/•Steps Nonprofits Can Take to Minimize the Risk of Fraud www larsonallen com•Steps Nonprofits Can Take to Minimize the Risk of Fraud,•Is Your Bookkeeper Stealing From You? Calvin Wilder, SmartBooks,•Preventing & Responding to Fraud & Misuse of Assets in a Nonprofit Organization, Preventing & Responding to Fraud & Misuse of Assets in a Nonprofit Organization, Melanie Herman, ©2012 SCHammond 28
  33. 33. Schedule a Call Schedule a CallSchedule a free 30 minute consulting call. Schedule a free 30 minute consulting callContact Susan at susan@schammond.comContact Susan at susan@schammond com Or 781‐837‐1999 Use the code NPW612 ©2012 SCHammond 29
  34. 34. Thank you! Thank you! 781‐837‐1999 781 837 1999 ©2012 SCHammond 30
  35. 35. Find listings for our current season of webinars and register at: NonprofitWebinars.comA Service Of: Sponsored by: