FRAUD PREVENTION AND STRONG INTERNAL CONTROLS

A Survey of Housing Co-operatives Highlight Issues that relate to Poor Governance and Management that can Contribute to Fraud... - Click link to access ::  http://tinyurl.com/d68zyto

Durham Regional Police Service - Fraud Safety Tips: "Real Life Scam of Not-for-Profit". Click link to access :: http://tinyurl.com/47mn7gd                                                        

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How to Spot a Liar

Example #1

macleans.ca

August 9, 2010

By Julia McKinnell

"Tips from a professional lie spotter"

http://tinyurl.com/62nl4zs

Example #2

buzzle.com

March 3, 2010

By Abhijit Naik

"How to Spot a Liar"

http://tinyurl.com/3m3gd2v

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PREVENTING AND DETECTING FRAUD IN NOT-FOR-PROFIT ORGANIZATIONS :: Keller & Owens, LLC Certified Public Accountants

Click link to access the 46-page PDF Document :: http://tinyurl.com/m2g9z5w 

 

cooperator.com

January 2010

By Jonathan Barnes

"Fraud Detection for Co-ops and Condos" - "When You suspect Something is Amiss"

Click link to review this article :: http://tinyurl.com/pw2md3j 

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Review some examples of Audit Investigations :: http://tinyurl.com/ckw86bq

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PREVENTING FRAUD: HOW TO SAFEGUARD YOUR ORGANIZATION---------------------------------By Andrew S. Lang and Tammy S. Ricciardella

Copyright 2010 The Foundation Centre. All rights reserved. Permission to use, copy, and or distribute this document in whole or in part for non-commercial purposes without fee is hereby granted.

The Foundation Centre :: http://foundationcentre.org

Please note Ken Hummel's remark's in bold, respecting  the excerpts.

Nonprofits are vulnerable to embezzlement by their vary nature. First, there is no "owners" watching every dime of their money. Unfortunately, most people are less concerned when it is not their own money at risk.---Often those in authority at nonprofits are reluctant to acknowledge that they may be subject to fraud or mismanagement.---Things like safeguards and controls over items of value are often the first things to get brushed aside. Additional effort is required to convince nonprofit managers or board members that excellent controls are essential---The critical measurement in most organizations-is considerably more time consuming to check. It requires line-by-line review of many items of income and expense---Many nonprofits do not consider the importance of having a solid system of controls, called internal controls, as their for-profit counterparts do.---Board members would do well to see that an effective, up-to-date internal control system is in place in their organization. Unfortunately, for great numbers of nonprofits, it is not.---

Impact Of Fraud---Why does such great attention need to be paid to this somewhat unusual occurrence? First of all, because it is not all that unusual. Fraud is an common occurrence---

Protection Against Fraud---Don't Have The Wrong Attitude---There are a number of misconceptions that can prevent a nonprofit from appropriately handling the potential for fraud in their organizations. Once these misconceptions are recognized, you have a better opportunity of dealing successfully with this serious threat.-"Most employees will not steal"-Under the right circumstances, if they are under enough pressure and they think it is justified, the vast majority of employees will steal. John J. Hall, a well known fraud expert, estimates that 95 percent of employees will commit fraud given the right circumstances.-"Our Controls will prevent fraud"-Every system of controls can be circumvented; every financial operation has its weakness.-"If it is happening, we'll detect it"-The most successful frauds are those that involve small sums taken on a regular basis, even larger frauds perpetrated by someone familiar with the system of controls can go undetected for years.-"Our auditor's will catch it"-Financial audits conducted by independent auditor's are not designed to detect fraud.---

For nonprofits, the potential impact of having a fraud become known to volunteers or donors, much less the public, is so great that such occurrences are most frequently swept under the rug.---Another behavioral issue worth investigating further is a cavalier attitude. This type of attitude often occurs once an employee has "beaten the system." He or she often will begin to exhibit a new level of confidence approaching that of arrogance.---

KEN NOTED HOW THE INFORMATION ABOVE CAN RELATE TO THE NON-PROFIT CO-OPERATIVE HOUSING SECTOR AND IT'S STAKEHOLDERS.

The Critical Importance of Internal Controls---It is important to realize that internal controls will not provide assurance that fraud will not happen but should ensure that, if fraud is committed, (1) it will be discovered on a timely basis, and (2) identification of who committed it will be probable. However, even the best system of internal controls usually will not prevent collusion of two or more persons---Internal controls can be broken down into two basic categories: administrative controls and internal accounting controls. Good administrative controls require two things: first, commitment by top-level volunteers and management to the principles of good control, and second, direct involvement in the oversight process. Problematic attitudes that start at the top, work their way down the organizational chart, and major problems can result. ---The ideal system of controls would provide good internal accounting control by not only safeguarding assets, but also simultaneously ensuring reliability of financial records of the organization---financial reports must be timely, complete, and in a form that is easy to comprehend.---One of the most effective internal controls is the use of a budget that is regularly compared to actual results with all significant variances (and sometimes the absence of a variance where one would be expected based on other factors) being reviewed. Budgets should be realistic and based on past experience, not wishful thinking. Then, where actual results deviate significantly from expectations, staff, and board members can ask questions and gain insight on the variances.---An effective system of controls has to be tailored to each specific organization and its particular finances, functions, and staff. Moreover, any such system needs to be reviewed regularly-at least annually-and altered for efficiencies or changing conditions. The board may actually need to perform certain oversight responsibilities to ensure that an adequate internal control system is in place based on the limitations within the organization.---

Why Have Internal Controls?---Remember, the key to good internal controls is to be aware of the potential for problems and to act before they occur. An organization should review its controls on a regular basis.---

Establishing internal controls in small nonprofit organizations can be especially challenging. Often resources, both monetary and staffing, are restricted. Small organizations need to be creative, perhaps involving volunteers and board members in the process to a large extent to ensure that adequate systems are in place.---Most good internal controls are based on common sense. The real challenge is in simply taking the time to examine the situation to determine what is needed.  Most organizations can accomplish basic improvements themselves---use your members-Your members can be a source of cost-free and highly dedicated labor.---Internal Controls Outside The Accounting Department---review income and expenditures identifying any errors in accounting records and reports.---Monthly review of data is part of the procedures used to mitigate any lack of segregation of duties---regularly and promptly review actual expenses versus budget expenses to maintain control over operating costs. This step also enables to identify any inconsistent results.---Another important element of internal controls throughout the organization is reconciling records between the accounting system and the departments. Other records should agree with figures reported in the accounting system. Other activities such as meetings and publications will also have records that should support and agree with the numbers reported in the accounting records.---

The Roll of the Board Member in Internal Controls-Board members of a nonprofit need to take firm action to see that important controls are in place. For instance, the board should insist on the nonprofit having written policies and procedures. In addition, the board should make sure that the organization has the practices such as requiring competitive bids for products and services over a certain amount.---The board is also responsible for ensuring that the organization has not only a code of conduct for all employees but also a clear conflict of interest policy for itself. The board should see to it that there is only one style of financial statements used for budgeting, financial reporting, and external audit reports. This allows members to better understand financial activity. To further assist in that regard, the treasurer and finance committee should review the interim financial statements monthly (or at least quarterly in small organizations-unless they are having financial difficulties).---The organization's external auditors should also be able to give advice and help the board in the proper discharge of these responsibilities.---

Internal Control Studies are special engagements designed to review an organization's system of internal controls such as Attestation reviews or studies can be performed as a consulting engagement.---Internal control studies can provide an organization with thorough documentation of the current system of internal controls over the organization as a whole or on a specific area of concern. These studies can determine areas where internal controls are lacking and the is exposed. Recommendations to address areas of concern are provided. The organization can review these recommendations, weigh the cost versus benefit, and design an appropriate system of internal controls tailored to the needs and resources of the organization.--

It is important to emphasize that an audit of your financial statements does not give an opinion on your internal controls. An audit provides an opinion on the financial statements. An audit is an examination of items and transactions on a test basis only. Thus, the receipt of an unqualified or "clean" auditor's report does not provide assurance as to the quality of internal controls; it merely means the auditor was satisfied that the numbers in the financial statements were not significantly misstated.-

How Can You Know if Fraud Is Occurring?---While Fraud can be quite difficult to detect, there are certain signs to Watch for:

-Abnormal changes in account balances, shortages in cash, investments, inventories, or other assets

-Supporting documents altered or missing

-Unusual write-offs or other out-of-the-ordinary transactions, complaints from members about their accounts.

-Incomplete financial data

-Infrequent or late financial reports

-Unexplained variances between budgeted amounts and actual amounts

-Large liabilities related to unexpected contracts

-Untimely audited financial statements

-Failure to correct internal control deficiencies noted in prior periods

-Significant unanticipated changes in the assets of the organization

-Significant internal control issues reported by the external auditors

-Sudden departure of personal in key positions

-Appearance of personal living beyond their means

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Habitat Magazine, March 8, 2010 - 3:56 minute video

"Five Ways Co-op & Condo Boards Get Defrauded"

http://www.tinyurl.com/6j4ssse

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habitatmag.com

February 15, 2010

By Bill Morris

"Co-op / Condo Fraud Is Back, Baby! Here's How to Spot It---And Stop It"

http://www.tinyurl.com/79krxpz

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Information noted above may be revised and/or deleted without prior notification.

Ken Hummel, Administrator, CHIE