1. 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, 2012
Thrive. Grow. Achieve.

2. 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 Answers
Nonprofit Fraud Schemes/ Page 2

3. 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 SUPPORT
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4. 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 DAMAGES
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5. WHY TALK ABOUT FRAUD?
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6. 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 reimbursements
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7. 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 gratuities
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8. 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 TRUST
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9. #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 inventory
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10. #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
procedures
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11. #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”
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12. #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.aspx
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13. #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 CONTROL
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14. 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 Prevention
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15. QUESTIONS AND ANSWERS
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16. PRESENTER BIOGRAPHY
Lawrence 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 compensation
Senior 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, document
Tel. 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.
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17. PRESENTER BIOGRAPHY
Lawrence J. Hoffman, – Formulated strategic short- and long-term business and financial planning for various
CPA/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), Virginia
Tel. 202-822-5000 Professional Associations & Affiliations:
Fax 202-822-0669 – American Institute of Certified Public Accountants, Member
lhoffman@raffa.com – Virginia State Society of Certified Public Accountants
– Association of Certified Fraud Examiners
– National Association of Certified Valuation Analysts
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18. THANK YOU!
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