CPA Practice Advisor

JUL 2017

Today's Technology for Tomorrow's Firm.

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6 JULY 2017 ■ www.CPAPracticeAdvisor.com COVER STORY Nonprofit Financial Fraud Internal Vulnerabilities and Steps to Address Them The most vulnerable area is prob- ably cash receipts - especially if the organization handles cash - but even checks are subject to mis- use. With cash receipts it's critical to have a separate person handle the initial receipts and to log them in a book or spreadsheet. Then t he receipts should be forwarded to a second person to enter into the accounting system and batch into deposits. The deposits should be reconciled to the original log. Even in a small organization these duties can be separated. I've seen the executive direc- tor's assistant and front desk clerks do the original opening of envelops and log- ging the receipts, for example. The second area to review is accounts payable where two kinds of fraud can take place: fraudulent charges and redirected payments. In the first case extra bills are slipped in from a dummy company or for services not really rendered. An employee puts them into a run and they get approved because they look correct or are simi- lar to other charges from real vendors. I have heard of this going on for a long time as once it's started the manager gets used to seeing bills from the fraudulent vendor. The best solution for this is to have the operat- ing departments approve all invoices prior to payment and to have a fiscal review. If an agency is large enough to support it, this should be one of the functions of the internal auditor: to spot check invoices and determine that the services or supplies were actually delivered. Even in a small organization there should be two reviewers/approvers for all invoices. If the invoices and payments are for the finance department perhaps the Executive Director should review their bills for appropriateness and validity. Fraudulent charges is an important area to monitor as it can be easy to slip in a bill if the review and approval steps are not in place. Redirected pay- ments is the third area to monitor for fraud. Typically this happens either by substituting the vendor name on the check for valid bills, or by cutting extra checks. Again with the flow of funds through a bank account and the fact that checks don't even get returned anymore it can be difficult to capture this fraud. There are several actions an organization can take to reduce this. First, separate invoice entry and payment selection from the person who actually cuts the checks. If the AP clerk is doing entry and preparing the check run, have a second person process the check run and compare it to the preliminary register. The name and amounts should be the same. Treat it as a batch to be reconciled and require the preliminary register be delivered with the checks to be signed. If check signing software is used, it's even more important to have the batch reviewed by a second party. Some software records the name actually printed on the check as part of creating the check record. In this case a final register should also be printed showing the stored vendor name. Part of this process should also be to track all check numbers in a batch and from batch to batch. If there are missing check numbers determine why there are breaks. This may not stop someone from cutting a check manually and not including in the system, but this will show up quickly during the reconcilia- I RECENTLY MODERATED a session at an association meeting "The Role of Internal Controls in Preventing Bank Fraud." The speakers included a bank examiner, a CPA and the CEO of a nonprofit agency. They provided a nice balance of different points of views and resulted in a good discussion. ONE THING QUICKLY became apparent: There are really two avenues for bank fraud, internal and external, and there are different activities or functions that a nonprofit should include to reduce the chance of fraud in their organization. All of these apply to government agencies as well. I'm going to spend the rest of this article on internal issues. FOR INTERNAL FRAUD there are three areas that must be man- aged, including cash receipts, accounts payable and payroll. Each provides an opportunity for individuals to divert funds illegally and in all cases separation of duties and multiple eyes on activity reduces the chance for fraud. This month's focus is on nonprofit entities - informa- tion that will be helpful to you in guiding your nonprofit clients with their decisions. In addition to information about best practices relating to nonprofits, we reviewed many nonprofit accounting software solutions. You'll also find resources that can help you with issues specific to nonprofits. Throughout this issue, there are tips and tools to improve your skills in this area. By Peter Stam Peter Stam is the President of AccuFund.

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