Fraud -- How to Prevent It In Your Association!
....and it is more likely than you think
You are wrapping up late on a Friday afternoon looking forward to a relaxing weekend without any meetings or other association business when one of your staff walks in with a bombshell – clear evidence that suggests someone on staff has been embezzling money from the organization. The prospect of a quiet weekend disappears as you begin placing calls to the Chair of the Board, the auditor and the organization’s lawyers.
Now consider this – it is highly likely that your organization is also susceptible to employee and/or volunteer fraud. The potential exists, because many organizations do not have adequate internal controls.
Internal control can be defined as policies, procedures, practices, and organizational structures designed to provide reasonable assurance that operational objectives will be achieved, and that undesired events would be prevented, or detected and corrected. The definition of internal control extends beyond financial aspects, however the aspect that we will focus on in this article is the prevention, and/or detection and correction of undesired events, specifically employee and volunteer fraud.
In many cases, the employee theft does not become public. The employee is fired, and charges are not filed. Here are some examples that have become public:
An employee of the Midnapore Residents Associations of Calgary is alleged to have stolen $300,000 over an 8-year period. According to newspaper reports, the employee did not have authority to withdraw funds from the associations 3 bank accounts, but could transfer funds. The employee set up a fourth account, transferred funds to it, and then withdrew the funds from that account. Accounting records were manipulated to cover up the theft. The Chairman of the association’s finance committee noted that “we trusted this person”.
In 2001, the former treasurer of Calgary's Rundle Community Association was fined $45,000 and placed under house arrest for two years for stealing more than $154,000 over a 3-year period ending in 1998. She admitted to writing over 300 cheques on the association’s account. Recently, she was back in court for failing to make the payments on the $45,000 fine.
The former voluntary treasurer of the Calgary Catholic Women’s League recently admitted to stealing $40,000 from the organization between 1998 and 2000. She had signing authority on the association’s chequing account, and wrote herself 51 cheques over a 30-month period.
In 2000, it was reported that the VP Finance of the Concordia Student Union had allegedly stolen over $190,000 from the organization. The loss represented nearly one-third of the $625,000 in fees that are collected by the university from students and remitted to the CSU as their main source of income for student associations, clubs and other activities.
A long-time employee of the Girl Guides of Saskatchewan was convicted in February 2000 of embezzling more than $91,500 from the organization's guiding supplies store between 1994 and 1999. According to sentencing testimony, the money was used to fund a gambling addiction. She stole money from the store's cash register and claimed that shortfalls were the result of refunds to customers on returned merchandise.
In 1998 and 1999, the Langley Minor Hockey Association faced a situation where there was a discrepancy in regards to bingo monies. A former member of the Executive was alleged to be responsible for the loss of funds. Given that the loss appeared to have been in potential revenue, it was difficult to quantify
In the United States, the National Legal and Policy Center’s Organized Labor Accountability Project (http://www.nlpc.org) has shone a spotlight on fraud within U.S.-based labour organizations. The amount of fraudulent activity is astounding. If a similar spotlight were cast on Canadian membership-based organizations and registered charities, I wonder just how extensive fraudulent activity would be? Unfortunately, organizations are very reluctant to make employee fraud public.
Some common fraudulent activities
include:
This
is not a complete list. It is impossible to conceive of every way that theft
will occur, so the best response is to ensure that effective internal control
measures are in place.
The
internal control measures that should exist in associations and non-profits
include:
In
addition, each organization needs to implement additional internal controls
specific to their organization and the activities undertaken.
For example, an organization that has a retail outlet needs to implement
measures specific to that operation.
According
to Joseph T. Wells, a fraud researcher and author of Occupational Fraud and
Abuse, common motivations for fraud include:
In
addition to implementing internal control measures, it is important to watch for
tell-tale indications that an employee may be stealing from the organization.
While
these signs are not evidence of fraud, they are indicators that may suggest
investigation. This can be
reinforced if indicators at the organization level also exist.
Some of these to watch for include:
The
above also represents a to-do list of what needs to be changed in your
organization. Not only do they
point to an environment that can breed and support fraud, the existence of these
indicators also suggests that there is sloppiness in how
the organization conducts
its operations. That should be motivation enough to make the changes.
Published statistics show that employee fraud occurs in both small organizations where there is not as much to steal, and large organizations where you expect more systems and processes to prevent fraud. Our experience with associations and charities supports this fact. There are no organizations that are exempt from fraudulent activity -- including private sector enterprises, non-profit organizations, and government.
Still wondering about your organization's susceptibility? Then consider this: Employee A requests a refund for member John Doe (it could be for any one of a number of reasons) except that John Doe is not expecting a refund. Employee A processes the refund through the credit card machine using her own credit card number instead of John Doe's number. It is unlikely that anyone will notice unless there is a process to compare credit card numbers for refunds with the original purchases. Now, If you think about your organization's refund process, could this happen without anyone noticing?
If you are concerned about your organization’s susceptibility to fraud, consider having someone come in to examine and suggest improvements to your internal control systems.
Wayne Amundson, president of Association Xpertise Inc. can be reached at (403) 607-4821(or admin@axi.ca) if you want to discuss how AXI could assist your organization with improving its internal control processes. Wayne is a Certified Management Accountant and a Certified Association Executive.