Internal Controls and Fraud Prevention in Non-Profit Organization

I believe this number is not a result from a single cause, and I do think that numerous scandals in the nonprofit sectors caused larger negative influence than a general decline in confidence. When asked people what kind of spending they consider unwise, the biggest portion answered salaries and administration cost, which demonstrated that the public were still lack of knowledge about the nonprofit sectors. Nonprofit organizations, like for-profit organizations, also need to hire professionals to maintain service to the public, so it makes no sense that the leader of a nonprofit sector should not be paid with good money. If people do not have a clear understanding about how nonprofit sectors work, it will be easy for them to have a bad impression

Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay

According to our text, “Not-for-profit organizations lack a residual ownership claim and the organization’s purpose is something other than to provide goods and services at a profit.” “Because significant resources are provided to governments and not-for-profit organizations, financial reporting by these organizations is important.” (Page 2).

Embezzlement seems to be a white collar crime that is victimless. However, when monies are embezzled from a non profit it affects all those involved especially those benefitting from the work of the nonprofit organization. I thought of our local community nonprofit arts foundation. They not only produce a full slate of shows each season, but also provide classes in painting, sculpting, drawing, acting, music, and dance. If they were defrauded in the amount of $93,000 it would affect educational programs and community outreach.

Fraud is a problem that nonprofits must be prepared to prevent within their financial departments. Embezzlements and financial statement fraud can destroy the financial health of a nonprofit organization and undermine the organization’s mission. Skimming is particularly difficult to identify because the money is often taken off incoming funds before the donations are ever annotated or accounted for (Zack & De Armond, 2015). However, these financial woes can be easily avoided. Nonprofit Quarterly identifies the issue of financial fraud as a “people problem” (Zack et al, 2015). Financial departments within corporations are required to follow strict laws and regulations that are not required to be followed by nonprofit organizations. The Sarbanes-Oxley

Internal fraud consists in “a type of fraud that is committed by an individual against an organization. [Furthermore], a perpetrator of fraud engages in activities that are designed to defraud, misappropriate property, or circumvent the regulations, law, or policies of a company”[8]. Not only has the incidence of internal fraud increased in frequency because of the availability of sensitive information such as client details or confidential business documents; moreover, this type of fraud is found in various types of organizations, ranging from corporations, public service institutions and financial institutions. Our analysis will concentrate on the most common and prolific types of internal fraud, namely identity theft, insider trading, loan fraud and wire fraud. Interestingly, PriceWaterhouseCooper conducted a survey that revealed that the “demographics of a typical fraudster are as follows: males (85% of cases), 31-50 years (72% of cases), reached high-school level (50%), Bachelor’s or post graduate degree (50%) and middle or senior management (52%)”[9].

In fraud committed against organizations, the victim of fraud is the employee’s organization. In frauds committed on behalf of an organization, executives usually are involved in some type of financial statement fraud; typically, to make the company’s reported financial results appear better than they actually are. In this second case, the victims are investors in the company’s stock. A third way to classify frauds is via the use of the ACFE’s occupational fraud definition, “the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE, 2010). The ACFE includes three major categories of occupational fraud: asset misappropriations involves the theft or misuse of the organization’s assets, corruption involves the wrongful use of influence in a business transaction in order to procure benefits contrary to their duty to their employer, and fraudulent financial statements involving falsification of an organization’s financial statements for personal gain.

Problem: A big issues with Nonprofit organizations is that they have to continually keep their relevance. They also face ethical issues such as unethical commissions. a. Employees: They may not be able to get paid because of the company may not be getting enough money to pay them. Recieving commision in a non profit organization is unethical which may result in the firing of those employees. Employees may also recieve certain incentives like a travel budget that can seem unethical.

Non-profit organizations do not belong to the commercial sector or the public sector, but occupy an intermediate position. It gives

Fraud is defined as a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses through deception or concealment. And Occupational Fraud as defined by the ACFE is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. Traditional fraud triangle theory by Donald Cressey explains that propensity of fraud occurring in an organization lies on three critical elements which are Pressure, Opportunity, and Rationalization.

A not for profit organization is a corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive (Legal, 2013).” There are immense community benefits as a not-for-profit generally accepts everyone regardless of ability to pay. Nonprofit organizations are granted tax-exempt status which helps them to provide services to the public and are expected to be effective managers of their finances as well as being efficient (Financial Management, 2010). In doing so, they can gain exemptions from federal and state incomes taxes and have the ability to solicit tax-deductible contributions (Financial Management, 2010). Organization must follow legal financial

A Non-profit Organisation (NPO) is an establishment that uses its funding for the pursuit of a specific purpose such as for a charitable cause (Lorette, 2015). It is different from a for-profit organisation as its objective is to provide greater good to the society rather than to maximise the wealth of its stakeholders. The surplus revenues of an NPO are used for either its expansion, self-preservation or plans and no part of the profit is distributed to its members. NPOs are increasingly starting to operate like traditional business organisations as strategic planning and marketing is imperative for their survival.

If I suspected fraudulent activity within n organization where I work, I would use a professional skepticism approach. This can be broken down into there attributes:

Over the past two years, corporate America has endured a plethora of fraudulent acts committed by those of high status within their respective corporations, most of which involve internal fraud. Internal fraud has two main aspects, misappropriation of assets and fraudulent financial reporting, with the focus of this discussion lying within the former. Misappropriation of assets is defined as fraud for personal gain. It is the most common type of fraud found among employees and frequently includes theft of cash and inventory.

INTERNAL CONTROL AND FRAUD DETECTION IN THE BANKING INDUSTRY (A CASE STUDY OF GUARANTEE TRUST BANK PLC)