Who Commits Financial Fraud?

As someone charged with the management or governance of a non-profit organization, you have a responsibility to your supporters to be a good steward of the monies you receive. While this responsibility includes the obvious, such as making and using a good budget and keeping administrative costs low, it also includes a responsibility to beware of fraud within your organization.

However, it is often very difficult for non-profit leaders to successfully assess and mitigate the risk of fraud within their team. No one likes to consider the possibility that someone who shares your vision and goals may be stealing from your organization, but like getting mugged on the street, misappropriation of assets can happen to anyone and it can cost your organization a great deal of money.

The Association of Certified Fraud Examiners lists the following characteristics of the average fraudster:

  • Employee or manager
  • Male
  • 35 to 45 years old
  • Has been with the organization for 1 to 5 years
  • Highly educated
  • Above average intelligence
  • Has a background in accounting
  • Understands the internal control structure of the organization

However, it’s important to understand that there are two different types of fraudsters: (1) calculating criminals and (2) situation-dependent criminals. Calculating criminals are predators, on the prowl for their next victim. They are usually repeat offenders, highly intelligent, good with people, and lack a sense of any remorse for their wrongdoings.

Situation-dependent criminals are very different and make up the vast majority of the fraudsters encountered. They genuinely intend no harm to anyone but get caught up in something they find themselves unable to stop. Situation-dependent criminals arise when the three “legs” of the “fraud triangle” are present, as outlined by auditing standards: (1) pressure, (2) opportunity, and (3) rationalization.

A classic example is a bookkeeper at a small but successful company, who gets into too much personal debt, putting pressure on herself to come up with extra money. The company is small enough that she performs essentially all of the accounting functions herself, with little to no oversight, providing the opportunity to steal company funds and cover it up. She starts off taking small amounts to pay bills, telling herself she’ll pay the money back, maybe even doing so the first or second times, but soon she has taken more than she can ever pay back. This scenario is all too common.

How can you make your organization less susceptible to fraud? There are two key measures that can be taken to drastically reduce your exposure to fraud. First, perform a thorough background check on all potential employees before hiring. You would be surprised how many calculating criminals are given chance after chance to defraud the unsuspecting even after being criminally convicted of prior thefts. Thoroughly vetting the history of anyone with any access to your organization’s funds is the best defense against misplacing your trust.

Second, meaningfully segregate all authorization, custody, and recording functions. For example, no one employee should have more than one of the following: (1) the ability to authorize a payment, (2) access to the physical checkbook, and (3) the ability to record payments in the accounting system. This even includes managers! While most fraudsters are employees, the losses attributable to managers and executives are far higher and take, on average, twice as long for an organization to find. Effective segregation of duties can be challenging to implement but can be a valuable asset to your organization.

Effective solutions do not have to overwhelm you. Even organizations with small accounting departments can implement the principles discussed. If we at Cynthia A. Cox CPA LLC can help you find workable solutions, give us a call at 281-399-8153.

One of the most common things to hear when a fraud has been discovered is “John? But it couldn’t be John! He’s the nicest person here. He is always helping someone out. He’s the last person I’d suspect.” Sadly, it is exactly because John was the last person anyone would suspect that John was able to commit the crime. As distasteful as it may feel, adopting former President Reagan’s philosophy of “Trust, but verify” will go a long way to protecting your organization and its mission.

In the next newsletter, we will discuss practical applications of segregating duties within your accounting department.