Wednesday, September 17, 2014
Fraud takes a bite out of nonprofit revenue
Posted by Armanino Nonprofit Team
A new report puts some important detail on an unfortunate truth: Fraud is a major drag on business.
Overall, fraud is costing business 5% of gross revenue, according to the biennial Report to the Nations on Occupational Fraud and Abuse authored by the Association of Certified Fraud Examiners. The media loss is $145,000, and in 58% of cases, there is no recovery. Small or large. Private, public or nonprofit. It doesn’t matter. Dishonest employees don’t discriminate.
Think of fraud as a triangle, Jeff Stegner, Partner with Armanino’s Forensic and Valuation Services Group, and I explained during a recent webinar focusing on fraud prevention in the nonprofit sector. The legs of that triangle are:
- Pressure – An employee is in need and feeling pressure
- Rationalization – An employee rationalizes the fraud as justified or an entitlement
- Opportunity – An employee finds an opportunity to commit fraud
And opportunity is the only one employers can control. Our best advice involves tightening internal controls and putting your firm in a position to detect a crime. The report showed that 42% of fraud is discovered through a tip from an insider. Another 30% is uncovered by internal controls and internal audits. An additional 11% is discovered purely by accident.
At the bottom of the list at 3% is external audits, highlighting a crucial lesson. Don’t count on external auditors as a frontline detection strategy. That’s not what external audits are designed to do. But that doesn’t mean your auditors can’t help. Ask them for suggestions on how to tighten your internal controls to make fraud easier to detect.
Fraud comes in three main forms, the report said:
- Fraudulent financial reporting – This category of white-collar crime makes up just 9% of total fraud but carries a median loss of $1 million. As bad as that it, the figure is down from the $4.1 million median chronicled in the 2010 report. Sarbanes-Oxley reporting requirements deserve much of the credit.
- Asset misallocation – This is the largest category, making up 85% of U.S. cases with a median cost of $130,000. The category includes everything from no-show employees to skimming, theft of supplies to fictionalized expense reports.
- Corruption — This is a larger problem overseas than in the U.S. but represents 37% of reported cases. (Some cases involve more than one category, sending the total over 100%). The median corruption case costs $200,000.
The old school anonymous tip hotline is one of the most effective steps employers can take. Employers with hotlines find 51% of detection comes from tips while that number dips to 30% for employers without hotlines.
Nonprofits aren’t immune from fraud. Almost 11% of cases involve nonprofits and carry a media loss of $108,000. A common factor is lax internal controls. Also, for small nonprofits, a few key employees are often forced to take on incompatible roles that can open the door to fraud. Rotating duties and roles can lessen the opportunity for fraud.
To learn more about fraud and prevention techniques, download the PowerPoint presentation or replay the entire webinar on our website.
Nonprofit organizations have specialized audit, tax and operational needs that require specialized service. Armanino has been committed to the nonprofit sector since 1953, and we now work with more than 500 nonprofit clients. This hands-on experience gives our staff of CPAs and former CFOs a deeper understanding of the issues nonprofits face, so we’re able to meet their needs and help them fulfill their missions in the most efficient, cost-effective way possible.