Armanino Blog

How to Detect & Reduce the Risk of Fraud

by Paul O Grady
September 23, 2016

How to Detect & Reduce the Risk of Fraud
Do you have an employee who never takes a vacation? Does your Controller always bring you invoices to sign at the end of the day on Fridays as you’re preparing to leave? Are your financial statements and bank reconciliations perpetually late? If you answered yes to any of these red flags, you and your organization could be at risk of fraud.

The Association of Certified Fraud Examiners (ACFE)’s 2016 Global Fraud study found that organizations on average lose five percent of their annual revenue due to occupational fraud and on average, these fraudulent schemes lasted 18 months before they were detected.

Warning signs of fraud
Nonprofit organizations are particularly susceptible to fraud. There are three conditions that must be present for fraud to occur. To help protect your nonprofit, be on the lookout for employees facing:

  • Pressure: Problems at home, expensive tastes, medical bills and addiction create personal financial pressure that is difficult for some employees to resist.
  • Opportunity: Individuals who have the authority to conduct transactions on behalf of your organization and who are feeling “pressure” are more likely to commit fraud.
  • Rationalization: Employees who feel “pressure” and have access to funds or bill paying rationalize stealing. In nonprofits, where budgets are often tight and compensation may be frozen for extended periods, employees who would otherwise be ethical can convince themselves they are “borrowing” money and intend to pay it back, but never do.

Two of these conditions, pressure and rationalization, are beyond the control of senior management or boards, because they can’t be easily detected. Even when they are, senior managers don’t often view them as warning signs of fraud. Opportunity, can be taken away or greatly reduced by ensuring your nonprofit implements fraud prevention techniques.

Prevention techniques
You can make it very difficult to commit occupational fraud by implementing strong, but practical controls. The following are a few enterprise-wide examples you should consider:

  • Create an anonymous whistleblower or tip system: If you have an employee intranet website, you can implement a section where personnel who suspect or observe fraud can anonymously feed tips to your human resources or executive team. The employee may opt-in or -out of revealing their identity through the page, and the program can include incentives for employees who tip management off to problems. 
  • Conduct surprise audits: Ask your internal or external auditors to conduct surprise audits of specific departments or operations, and plan to rotate the audits through an annual cycle.
  • Require mandatory vacations: Insist that all employees take vacations.
  • Make job rotation routine: Cross training and job rotation is an excellent way to increase fraud detection (as employees with fresh eyes come into a new job they are more likely to identify issues).
  • Review financial controls: There are numerous financial controls that can be implemented that remove the opportunity to commit fraud. Some of these include:
    • Encourage all employees to take direct deposits
    • Review detailed payroll reports on a regular basis
    • Reconcile bank statements promptly
    • Insist on original receipts for all out of pocket expense reimbursements
    • Segregate accounting from cash receipts reporting
    • Ensure the monthly close happens at the end of each month
    • Regularly review accounts payable and vendor listings
    • Employ your auditors to look at financial processes and test transactions following a downsizing (downsizings where employees are laid off often reveal previous fraudulent activity)
    • Do not allow a single employee to perform multiple financial tasks (e.g., signing checks, authorizing disbursements, recording transactions and reconciling bank statements)

Next steps
To protect your organization from fraud, it is more important than ever to create a strong culture of ethics and to implement even stronger financial controls. Contact your local Armanino nonprofit expert to learn more ways on how your organization can reduce fraud risks.

September 23, 2016

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Related News & Insights
Armaninos 10th Anniversary Reception in Chicago
Live Event
Rooftop reception to celebrate Armanino’s 10th anniversary with the firm’s supporters and friends.

September 29, 2022 | 02:30 PM - 05:30 PM PT
Nonprofit Symposium 2021
Live and Virtual Event
Nonprofits - Get Back to [Focusing on] the Future

September 29, 2022 | 08:00 AM - 12:00 PM PT
Workday Adaptive Planning 2022 R2 Release
Learn about Workday’s newest features and enhancements.

August 30, 2022 | 10:00 AM - 11:00 AM PT