On April 20, 2011, Martin Terpstra hosted a seminar focusing on fraud detection and prevention methods for not-for-profit organizations.
Marty began the seminar describing the various types of fraud that can occur in an organization. Misappropriation of assets, corruption, and financial statement fraud are all common types of fraud. Marty also presented findings from the 2010 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners.
Marty cited criminologist, Dr. Donald Cressey’s three factors necessary for fraudulent activity to occur. These three factors are commonly referred to as the Fraud Triangle. The Fraud Triangle consists of three elements: pressure, opportunity, and rationalization. Pressure exists when a person has a need for additional resources or feels a need for retaliation. Opportunity arises when there is lack of internal controls or a breakdown of existing controls. Finally, rationalization occurs because a fraudster typically does not consider himself/herself a criminal and believes that he/she is owed the money.
While there is no absolute and cost-effective way to prevent or detect all fraud, an organization can reduce its fraud exposure by removing the drivers of fraud. This can be accomplished by:
- Performing a fraud risk assessment
- Demonstrates an anti-fraud culture
- Helps in early detection of fraud
- Having a strong internal-control environment
- Identify controls and potential gaps
- Periodically test and review internal control
- Review user-access controls
- Review the oversight and monitoring of controls
- Establishing a whistle-blower hotline
- 49% of fraud is detected through tips
- Responding to tips is as important as having a means to get them
- Establishing a code of conduct
- Demonstrates a culture of anti-fraud
- Include an annual review and reconfirmation from each employee
Concluding the seminar, Marty described some typical fraud indicators or "red flags.” The most common behavioral indicators are living beyond one's means, financial or relationship difficulties, and unusual relationships or closeness with a vendor or customer. There are also indicators considered by auditors, such as unreconciled accounts, untimely reconciliations, missing bank statements, “off-limit” accounts, and unsigned documents.