You may have seen the new article about a local Edmonton charity that had been defrauded of more than $200,000 by an employee – if not, we’ve linked it for you here.
On October 27, 2020, the leadership team at the Alberta Foster and Kinship Association (AFKA) told Edmonton Police Service (EPS) that they discovered their accountant had been transferring funds into personal accounts for 10 months. EPS had found a total of $209,000 had been e-transferred into multiple accounts “controlled” by the then-accountant between November 8, 2019, and October 2020.
What was the condemning part? The individual did not come in for the scheduled hours while the financial audit at AFKA was taking place, which led to the discovery of the fraudulent activity.
According to the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations, 9% of fraud cases took place at charitable organizations, resulting in a median loss of $75,000US—the lowest of the industries represented in the study. However, these losses can make a tremendous difference for many nonprofits and charities.
What makes the situation worse? Because nonprofits are held to an especially high ethical standard, the potential consequences of fraud can be detrimental. Even one case of financial corruption or abuse can permanently tarnish the reputation of an organization resulting in loss of funding, and more. However, these fears are exactly why NPOs and charities need to take a proactive approach to detect and prevent fraud.
Here’s what we recommend
1. Internal Controls
Internal controls are the mechanisms, rules, and procedures implemented by an organization to ensure the integrity of financial accounting information, promote accountability, and (most importantly) mitigate any potential fraud. Some examples of internal controls include:
- Segregation of duties:
- Those with access to assets should not have access to any related accounting records.
- Regular and timely bank reconciliation:
- Bank reconciliations should be reviewed monthly by someone other than whoever prepared the reconciliation.
- Preferably by a director or shareholder.
- It is important to pay attention to long, outstanding deposits that are not clearing monthly.
- Bank reconciliations should be reviewed monthly by someone other than whoever prepared the reconciliation.
- Petty cash controls:
- Cash should be stored in a locked box with records of any key holders.
- Payroll:
- For larger organizations, or when the CEO has limited involvement, review payroll to ensure there are no fictitious employees.
Monitoring Financial Statements: financial statement fraud has the potential to hit your finances the hardest, and it can be incredibly difficult to detect. Instituting a process for reviewing financial statements and ensuring that the committee or individuals responsible for reviewing financial statements for anomalies have proper knowledge and training on what to look for will drastically improve the likelihood of detection.
When reviewing your financial statements, it is imperative that you compare the month-to-month statements and check for any anomalies (for example, noticing any drastic, unexplainable differences or random increases in common expenses, such as utilities or wages).
Some key indicators of potential theft include:
- Sudden apparent devotion to work or working late
- Lifestyles are well above salary levels
- Drug and alcohol abuse
- Moonlighting with materials available at the business
- Evidence of compulsive gambling
2. Anti-Fraud Training
An important part of any fraud prevention program is training. All employees —including managers and leadership— should participate in the training program to ensure that everyone in the organization is educated on all policies and procedures related to fraud prevention, detection, and reporting.
Empowering employees by giving them proper training and a way to report suspected fraud safely and without the risk of retaliation is incredibly important as the first barrier to fraud prevention.
3. Technology
To support your fraud prevention efforts, it’s critical to adopt financial technology that can help you monitor risks and enforce your control activities.
- Access Controls: Ensure segregation of duties in your financial system by controlling user rights. An advanced technology solution will allow administrators to configure user access at a granular level—from limiting who has rights to edit data to defining specific fields and transactions that can be edited (or even viewed) by individual users.
- Approval Rules: Your financial management software should allow you to configure a seamless approval path where you can require, review, and approve any documentation for expenditures requested by your employees (for example, providing receipts when an employee expenses something to the business).
- Bank Account and Credit Card Integration: Being able to view real-time bank and credit card information directly within your organization’s financial system can be hugely beneficial to catching suspicious activity early. Live bank and credit card feeds can allow approved financial staff to securely review the most up-to-date activity from your financial institution and compare that information to what has been recorded in the system.
How we can help
KBH’s audit team can help design procedures that align with your organization’s needs. Your appointed audit team will be able to access your internal controls and provide feedback on ways to improve.
Our team also has the capabilities to host learning seminars on fraud prevention and provide the tools and insights you need on how to better review your financial statements, in turn aiding in your fraud prevention efforts.
While there are many obvious benefits we could touch on here, ultimately, it’s the ability of the organizations to foster relationships built on trust and continue the good work they do in the community that is at the heart of fraud prevention.
Proper controls, training, and supporting technology will help your organization create a culture of transparency and trust. Ongoing monitoring and upkeep of your fraud prevention program will keep your organization on track.
Meet Amanda Johnson, Senior Manager:
Amanda is a Chartered Professional Accountant with over ten years of experience at KBH, primarily focused on assurance engagements, client management and the training and development of our staff. Born and raised in Alberta, her sector experience represents a wide cross-section of key industries in Western Canada. With expertise in Accounting Standards for Private Enterprises and a strong client focus, you’ll usually find her glued to her telephone, providing value-added advice to one of our clients. On the rare occasions, she’s not at her desk with her ticker-tape in hand, you’ll probably find her baking cookies for the office or travelling internationally – she’s independently visited sixty countries on five continents, and brings a deep cultural appreciation and unique perspective with her when working in cross-functional teams.