Practical Internal Control Solutions for Nonprofits

Internal controls are implemented to protect an organization from unauthorized expenditures and fraud/embezzlement. Small to mid-size organizations are vulnerable due to the limited number of staff in the business office or accounting department. The way to combat unauthorized expenditures and/or being ripped-off is through proper internal controls which include communication, process & procedure, and periodic verification and review. Through the review of short case studies this webinar will cover internal controls to implement considering the organization size, where and how fraud can occur, signs to look for, ways to stay vigilant, and what to do if your organization is a victim.

1. Sponsored by:
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Of:
Liars, Cheats, & Thieves: Practical Internal Control
Solutions for Nonprofits
Susan C Hammond
June 13, 2012
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4. Sponsored by:
A Service
Of:
Liars, Cheats, & Thieves: Practical Internal Control
Solutions for Nonprofits
Susan C Hammond
June 13, 2012

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Susan C Hammond
Principal
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Hosting:
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Partnership
Assisting with chat questions:
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8. Liars
,
 Cheats
,
 & Thieves:
,,
Practical Internal Control Solutions 
forNonprofits for
 Nonprofits
NonprofitWebinars Nonprofit
 Webinars
June 13, 2012
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9. Welcome Welcome
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10. What We Will Cover •
Whatisfraud?
•
What
 is
 fraud?
•How & Why Fraud Occurs •Case Studies
Ti&PdtPtFd
•
Ti
ps 
&
 P
roce
d
ures 
t
o 
P
reven
t
 F
rau
d
•Signs You Need to Investigate •If Your Organization is a Victim…
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11. WhatisFraud? What
 is
 Fraud?
The misappropriation of organizational  assetsfundsand/orinformationforthe assets
, 
funds
 and/or
 information
 for
 the
 
purpose of obtaining personal gain.
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12. How & Why Fraud Occurs
Opportunity
Desperation
Rationalization‐“I’ll 
justborrowthe
Opportunity
Desperation
just
 borrow
 the
 
____ temporarily”
Lack of attention 
Poor division of 
responsibilities
Misplaced trust
Oli O
ver re
li
ance on 
one individual
Ignorance
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13. More Reasons How & Why 
Fd
O
F
rau
d
 O
ccurs
Low financial 
intelligence‐
Insufficient 
executivedirector
Unqualified 
executive director 
& board
executive
 director
  
& board oversight
treasurer
Unqualified 
bookkee
p
er
Poor 
communications
Uneducated board
p
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14. CaseStudyOne
TheJohnstownMuseummaintainsapettycashfundof$500.
Case
 Study
 One
Historicallythefundisreplenishedevery2‐3months.Because
ofthisthepettycashfundisonlyreconciled2‐3timesayear.
Over
the
last
4
months
the
fund
has
been
replenished
Over
the
last
4
months
the
fund
has
been
replenished
monthly. The bookkeeper is the custodian and the executive
director has been too busy to review what it is the fund is
being
used
for
being
used
for
.
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15. Poll Question #1
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16. CaseStudyTwo
The former CEO of Professional Ed, a nonprofit that provides
professional development for teachers, really didn’t like to be
bothered
with
the
“
business
side
”
of
the
organization
and
Case
 Study
 Two
bothered
with
the
business
side
of
the
organization
and
delegated all operational business matters to the business manager. The organization’s business manager was a self ‐trained bookkeeper
who
had
taken
it
upon
himself
to
order
a
signature
bookkeeper
who
had
taken
it
upon
himself
to
order
a
signature
stampsoasnottobothertheCEO.Inadditionhepreparedallthe
monthly board financial reports including the annual budget and
presented them to the board as over the last year the treasurer hd
b
lbl
d
h
bd
dd
h
a
d
b
een unavai
la
bl
etoatten
d
t
h
e
b
oar
d
meetings. In a
dd
ition
the treasure had minimal interaction with the business manager.
The business manager had also terminated the services of the
outside
CPA
resulting
in
the
organization
not
filing
its
Form
990
for
outside
CPA
resulting
in
the
organization
not
filing
its
Form
990
for
thelasttwoyears.
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17. Poll Question #2
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18. CaseStudyThree
St Joseph’s Academy is a Catholic elementary school that serves
1,000childrenonanoperatingbudgetof$500,000.TheExecutive
Case
 Study
 Three
Director has been with the organization for 3 years while the bookkeeper has been with the organization for 20 years. In fact, the ED doesn’t know what she would do without George the bookkeeper. He seems to have an answer to all the questions pertaining to past events and good suggestions when a new situation develops. The executive director doesn’t review the bank statements and often signs checks without reviewing the supporting documents. St. Joe’s bank statement is received and opened by George. George maintains his own personal accounts atthesamebankasSt.Joe’s. Georgeissuesseveralcreditmemos eachmonthforadjustingcustomeraccounts.
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19. Poll Question #3
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20. CaseStudyFour
Roger has been the maintenance manager for 10 years at Camp 
Wildwood.  He and the bookkee
p
er are on the same bowlin
g
 
Case
 Study
 Four
pg
team.  That’s how Roger came to be hired.  There are 20 
counselors and 3 administrative staff of varying degrees of 
tenureWhilecashflowissometimestightit
’sneverbeen
tenure
.  
While
 cashflow
 is
 sometimes
 tight
, 
its
 never
 been
 
impossible to make payroll or pay vendors normally. Lately the 
Camp Director has noticed on the credit card statement small 
hhihihbldb ildij
purc
h
ases t
h
at m
ig
h
t or m
ig
h
t not 
b
e re
late
d
 to a 
b
u
ildi
ng pro
ject 
for Camp Wildwood and Roger has requested several salary 
advances in the last 6 months which have not been 
p
aid back.  
p
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21. Poll Question #4
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22. Questions
Answers
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23. Tips&ProcedurestoPreventFraud Tips
 &
 Procedures
 to
 Prevent
 Fraud
Know who you are hiring. Document 
p
olicies 
&
 p
rocedures in 
p
p
writing. Separatethefunctionsofcashreceipts Separate
 the
 functions
 of
 cash
 receipts
 
& cash disbursements.
Enforce bank & credit card statement 
review procedures.
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24. Tips&ProcedurestoPreventFraud Tips
 &
 Procedures
 to
 Prevent
 Fraud
Enforce cash receipts & disbursement  procedures procedures
.
Re
q
uire mandator
y
 vacation for all staff involved 
q
y
with accounting. Aidhldbkilkdfil A
ccount
ing recor
d
s s
h
ou
ld
 b
e 
k
ept 
in 
loc
k
e
d
 fil
es 
when no one is present.
Time cards/sheets should be approved & verified 
before payroll is processed.
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25. Tips&ProcedurestoPreventFraud Tips
 &
 Procedures
 to
 Prevent
 Fraud
Bond all employees with access to cash &  accountingrecords accounting
 records
.  
Re
p
lenish 
p
ett
y
 cash once a month & review the 
ppy
type of expenditures reimbursed. Do not use an organization‐wide credit card.   Secure valuable fixed assets.
©2012 SCHammond
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26. Tips&ProcedurestoPreventFraud Tips
 &
 Procedures
 to
 Prevent
 Fraud
The Treasurer should have the appropriate  background background
.
Treasurer should en
g
a
g
e with the accountin
g
 
ggg
staff. TFiCiCh ihld T
reasurer or 
Fi
nance 
C
omm
ittee 
Ch
a
ir s
h
ou
ld
 
present the board financial reports.
Finance Committee or Board should meet 
annually with the outside accounting firm 
without staff present.
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27. CashReceiptsProcedures Cash
 Receipts
 Procedures
•At a fundraiser have two people assigned to cover the cash 
comingin coming
 in
.
•Have checks deposited by someone who does not mail the 
customer invoices.
• Periodically review the back side of checks deposited to 
make sure the account information is correct.
•Periodic review of customer lists. Approve all new 
customers.
•ED approval of all customer credit memos. 
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28. CashDisbursementProcedures Cash
 Disbursement
 Procedures
•
Allpurchasesshouldbeauthorizedinadvance All
 purchases
 should
 be
 authorized
 in
 advance
.
•Check signer verifies the check matches the invoice it is 
paying. 
• Manually sign all checks.
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29. CashDisbursementProcedures Cash
 Disbursement
 Procedures
• Require all entries on expense reports be supported by 
receipts receipts
. 
•Periodic review of vendor lists. Approve all new vendor 
i
serv
ices.
•
EDapprovalofallvendordebitmemos
•
ED
 approval
 of
 all
 vendor
 debit
 memos
. 
•
Lock
upchecksatalltimesChecknumericalsequence
•
Lock
‐
up
 checks
 at
 all
 times
. 
Check
 numerical
 sequence
 
remains intact. 
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30. Bank/Credit Card Statement 
d
Proce
d
ures
Bookkeeper should not be an authorized 
ihk(ditd)
s
igner on c
h
ec
k
s 
(
or cre
dit
 car
d)
.
Bank & credit card statements should be 
o
p
ened & reviewed b
y
 someone not 
py responsible for cash receipts and 
disbursements.
Reconcile statements monthly.
Treasurerreceivesduplicatebank&credit Treasurer
 receives
 duplicate
 bank
 &
 credit
 
card statement. 
Restrict who can conduct which on‐line 
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bank activities. 

31. Questions
Answers
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32. SignsYouNeedtoInvestigate Signs
 You
 Need
 to
 Investigate
Employee seems 
tobelivingbeyond
Unexplained 
Unwillingness to 
to
 be
 living
 beyond
 
their means.
absences
take vacation
Unwillingness 
delegate tasks 
related to cash
Contributions/Grants 
are strong but 
cashflow is tighter 
than it should be.
Vendors are 
complaining 
payments are late.
Aged receivables 
show man
y
 over 90 
Monthly financial 
statementsare
Monthly financial 
tlk
y
days, same for aged 
accounts payable.
statements
 are
 
prepared late.
repor
t
s 
loo
k
 
“funny.”
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33. IfYourOrganizationisaVictim… If
 Your
 Organization
 is
 a
 Victim…
•Act normal
•
Keepthematterconfidential Keep
 the
 matter
 confidential
•Put staff person on paid leave
•Contact your attorney & accountant
•Consider hiring a fraud investigator
•Locate corroborating information
• Prepare to fire staff person, press charges & notify 
authorities
•Check insurance coverage/notify insurance company
•Weigh costs to investigate & press charges
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34. Questions
Answers
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35. Resources
•Preventing and Detecting Employee Fraud and Embezzlement, Stephen Pedneault
•Streetsmart Financial Basics for Nonprofit Managers‐Chapter 18, Thomas A. 
McLaughlin
lff
lllf
l
•Streetsmart Financia
l Basics 
f
or Nonpro
f
it Managers‐Interna
l Contro
l Se
lf
‐Eva
luation, 
see attached.
•Nonprofit Financial Management, Charles K. Coe
•
AssociationofCertifiedFraudExaminers
wwwacfe com
•
Association
 of
 Certified
 Fraud
 Examiners
, 
www
.
acfe
.
com
•What is your Fraud IQ?,Stu Lipkin‐B2B CFO, August 9, 2011, 
http://www.stuartlipkincfo.com/category/articles ‐and‐white‐papers/
•
StepsNonprofitsCanTaketoMinimizetheRiskofFraud
wwwlarsonallen com
•
Steps
 Nonprofits
 Can
 Take
 to
 Minimize
 the
 Risk
 of
 Fraud
, 
www
.
larsonallen
.
com
•Is Your Bookkeeper Stealing From You?Calvin Wilder, SmartBooks, 
http://www.smartbookscorp.com/resource_center.php?t=pdf&id=13
•
Preventing&RespondingtoFraud&MisuseofAssetsinaNonprofitOrganization, Preventing
 &
 Responding
 to
 Fraud
 &
 Misuse
 of
 Assets
 in
 a
 Nonprofit
 Organization,
 
Melanie Herman, 
http://www.nonprofitrisk.org/library/articles/internalcontrol05062001.shtml
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