Preventing Fraud in Nonprofit Organizations

Edward J. McMillan, CPA, CAE, is an experienced fraud examiner and teaches fraud prevention courses to organizations such as the American Institute of CPAs, the Maryland Association of CPAs, other state societies of CPAs, the U.S. Chamber of Commerce, and the American Bar Association, among others. Ed also speaks regularly on the subject of fraud prevention at business conventions of all types and can be reached at (410)893-2308 or contacted via email at emcmillan@sprintmail.com.

• About the Author ixAcknowledgments xiPreface xiiiDisclaimer xvAbout the Companion Website xviiSection 1 Not-For-Profit Organizations: Four Consistent Areas of High Risk Embezzlement: Who Does It and When 1Not-For-Profit Specific Issues 1Summary 4The Perpetrators: Who They Are, Why They Do It, and How They Are Caught 4The Embezzler’s “Window of Opportunity” 9Section 2 Statement of Auditing Standard No. 99 “Consideration of Fraud in a Financial Statement Audit” 13Statement of Auditing Standard No. 99“Consideration of Fraud in a Financial Statement Audit” 13Section 3 Essential Internal Control and Administrative Procedures to Avoid Embezzlement 23The Background Check 23Conditions of Employment Agreement 28Conflicts of Interest 34Nepotism 37Whistleblowers 39Noncompete Agreements 41Confidentiality of Information 43Bonding Issues 45Signers on Bank Accounts 46Two-Signature Checks 46Lockbox 48Positive Pay 49Deposit Security and Restrictive Endorsements 50Check Stock 52Cash Transactions 53Cash Register Issues 54Insurance Committees 54Computer File Backups 55Check and Wire Transfer Signatures 56Inventory Issues 58Company Credit Cards 58Lines of Credit 59Bad Debt Policy 61Internal Audits 63Stop Payment Orders 64Voiding Checks 66Numbered Check Request Forms 68Expense Accounts 70CPA Management Letters 71Random Disbursement Checks 73CHECK 21 74Section 4 Clever Examples of Embezzlement 77Payroll Tax Deposits 77Check Switching 82Ghosts on the Payroll and Ghost Vendors 88The Danger of Acronyms 94Bank Account Reconciliations 95Wire Transfers 96Postage Issues 98Kiting 100Manual Checks (Handwritten and Typed) 101Auditing Receipts 104Section 5 Steps to Take If You Have Been Victimized by Fraud 105Documenting a Fraud Action Plan 105Fraud Examinations and Assembling the Fraud Team 109The Basics of Forensic Accounting 113Section 6 Internal Control Analysis, Documentation, and Recommendations for Improvement 121Internal Control Analysis, Documentation, and Recommendations for Improvement 121Fraud Glossary 197Index 217