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Forensic Accounting and More

Professors Janet Greenlee and Mary Fischer

Nonprofit Fraud – Cost and Damage

Assessment

per ACFE 06-08 report 2

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

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How does fraud happen?

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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)

Asset Misappropriation

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• 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

Financial Statement Fraud

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• 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

Why?

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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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• Control environment and procedures• Accounting system• Accountant’s tools

– Common sense– Anecdotal evidence

• More considerations …• More in following session

Internal Controls

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Here is a few 2007 examples of nonprofit mischief:1. Red Cross – (CA)-$110,0002. ABC Humanitarian Trust- (MN)- $137,000 3. Elite Gym Starz Parent Club (MI)- $108,604 4. Leukemia and Lymphoma Society – (MI)- $43,6165. Hickory Grove Elementary PTO- (MI)- $36,000* 6. 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 -$55,0007. Big Sun Youth Soccer League (FL)- $35,0008. Salvation Army- (AL)- $160,000 9. Best Choice- (NM) - $1.8 million 10. Citi Performing Arts Center-(MA) - $1.9 million+ 11. North Carolina A&T State University - $1 million 12. Salinas Police Activities League-(CA)- $35,000+ 13. Crotched Mountain Rehabilitation Center-(NH)-$1 million* 14. Cornerstone Christian Fellowship Church - $400,000+ 15. Salinas Police Activities League - $35,000+

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Our study - Who are the Victims

Type of Organization

% Median Loss from Fraud

Private Company 41.8 $123,000

Public Company 30.3 $100,000

Government Agency

15.8 $37,500

Nonprofit Organizations

12.2 $100,000

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• 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 $

Interesting Findings

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What Types of Frauds were Committed in Nonprofits?

Type of Fraud % Median Loss

Fraudulent Financial Statements

5.2 $3,000,000

Corruption 22.2 $105,000

Misappropriation of Assets

97.5 $100,000

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Cash MisappropriationType 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 DisbursementsType of Disbursement % Median Loss

Billing 46.7 $128,000

Check Tampering 44.8 $163,500

Expense Reimbursement

13.8 $83,373

Payroll 17.2 $110,873

Register Disbursement 3.5 $375,842

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Methods of DetectionDetection 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 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

The Perpetrator

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Why noNo Legal Action Taken (80% of cases) Why??

Reason for no legal action %Private settlement 24.0Fear of bad publicity 19.0Too costly 11.9Internal discipline sufficient 11.9Organization wanted closure 9.5Government declined to prosecute 9.5Lack of evidence 9.5Perpetrator lacked assets 7.1Perpetrator disappeared 4.8Fear of countersuit 2.4

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SAS 109 (cont.)“Amendment to SAS no 95 Generally Accepted Auditing Standards”

• 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

Damage ControlWhat can be done!

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SAS 109 (cont.)“Amendment to SAS no 95 Generally Accepted Auditing Standards”Questions and Answers