Internal Controls to Prevent Fraud

By Samantha Abraham

Now that we’ve explored the fraud triangle and you understand how motivation, opportunity, and rationalization combine to create circumstances for individuals to commit fraud: What do you do to protect your organization?

Preventing financial fraud involves removing one of the three elements of the fraud triangle.

It’s nearly impossible to change the way someone thinks or feels and it’s unlikely you’ll be able to influence their life’s circumstances, so the easiest element of the fraud triangle for nonprofit leadership to remove is the opportunity to commit fraud by creating strong, effective internal controls.

While every organization will need to analyze their particular set of financial processes to identify and eliminate the opportunities for fraud, there are a few processes that can safeguard any nonprofit. Ultimately, these safeguards boil down to building checks and balances and ensuring that each person in the accounting process knows that a second, third or even fourth set of eyes will be checking on their work.

  1. Do a background check for employees or volunteers in financial roles. This gives you the opportunity to identify any red flags before granting someone access to funds or the books.
  2. Separate duties within the accounting process. For example, the person who opens the mail should not be the same person who records payments, deposits checks and reconciles the accounts. The person who approves accounts payable shouldn’t be the same person who processes the payables. The person posting entries in the software shouldn’t necessarily be the same person who reconciles the account or reviews the account payables. The size of your organization will affect the segregation of duties, but even the smallest of organizations can design a process where no single individual controls the entire financial process.
  3. Reconcile the bank account regularly. Reviewing the general ledger and ensuring your accounts balance can quickly reveal irregularities.
  4. Bank statements should be delivered to management unopened. This allows an outside review of the bank statement before it is used by the accountant for the bank reconciliation.
  5. Require regular vacation, job rotation or surprise work review for all individuals in the accounting process. When a single person or entity has too much control over a part or the entirety of the process and there is no opportunity for someone else to review their work product, the opportunities for fraud grow.
  6. Create procedures to handle cash, signature stamps and checks. When there is a clear process in place for cash and cash equivalents with at least two individuals involved in each step, there’s less likelihood for cash to “go missing.”
  7. Review your vendor listing to make sure there are no unusual or unknown vendors. Sometimes individuals commit fraud by setting up new vendors or vendors with similar names as regularly used vendors to siphon off cash during the regular accounts payable process. The person signing the checks may not even realize that the vendor’s name is slightly different or that new vendors have popped up in the process; however, a periodic review of the list may help catch abnormalities and prevent an individual from trying this trick.
  8. Use unique logins and passwords on computers and for online banking access. If every individual has their own credentials, it forces accountability and eliminates opportunities for finger-pointing. Unique usernames and credentials for various computers and software allow you to limit access so each individual can only see and use what they need, rather than having access to everything.

It is the responsibility of nonprofit leadership to limit opportunities for fraud and do everything in their power to create strong internal controls. While this list is by no means exhaustive and it’s not possible to guarantee fraud can never happen, start protecting your nonprofit today by implementing these internal controls.

 

Samantha Abraham is the CEO & Co-Founder of My Paper Pusher LLC, a bookkeeping firm specializing in building relationships with nonprofits and small businesses. She is a Certified QuickBooks Proadvisor and holds two certificates in nonprofit financial management. Samantha’s goal for her clients is to give business owners and nonprofit leaders the time, energy and resources to pursue their passion and focus on their strengths while providing exceptional services to streamline operations and catalyze their business’ progress and growth. Learn more at www.mypaperpusher.com.

 

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