Fraud

No Internal Controls Turned a Nonprofit into a Worker’s Windfall

November 25, 2019 by Pamela Avraham

The background: In 2012, a nonprofit hired an accountant from a temporary staffing agency. Diane (not her real name) did so well that the nonprofit took her on permanently even after learning that the staffing firm did not perform any background checks. They later discovered she stole tens of thousands of dollars from them.

The inside scoop: Diane managed the nonprofit’s payroll and credit cards, and reconciled journal entries. She also signed off on her own statements, with no one reviewing her work. This lack of internal controls let her charge personal expenses to the nonprofit’s credit cards — including a snowblower, payroll for her own company, and family vacations — without being detected.

She hid about $45,000 in credit card charges by debiting the credit card clearing account and crediting cash. Credit card charges were supposed to be entered into the nonprofit’s accounting program — so manual checks could be cut to pay for them — but Diane bypassed this by allocating them to different accounts within the system. She also entered the receipts under the wrong vendor name, so anyone trying to trace them would get lost in a maze of dead ends. Finally, she neglected to file payroll taxes for three years, putting the nonprofit about $20,000 in arrears for the tax liability alone.

How She Got Away With It: Besides giving one person control over the credit cards and the reconciliation, the nonprofit’s auditors didn’t review the credit card statements at year end. And they never tried to match the charges to the actual receipts.

How She Got Nabbed: The scheme unraveled when Diane went out on medical leave and others took over her job functions. They saw what was going on; Diane was soon fired, law enforcement was called in, and charges were filed against her.

What Can My Company Do? The biggest mistake was a lack of internal controls. The person responsible for receipts or disbursements shouldn’t be the one reconciling the accounts. Also, internal and external auditors should closely examine significant transactions and random test for others. Staffing firms should be running background checks on all potential candidates. Finally, every employee should be required to take time off so someone else can review his work. Consult with one of our CPAs at Urbach & Avraham to review your internal procedures.

Fraud: It’s More Common than You Think

July 26, 2013 by Admin

Fraud is a shockingly common problem for businesses. According to a 2012 study performed by the Association of Certified Fraud Examiners (ACFE), the average business loses approximately 5% of its gross revenue to fraud schemes each year. Business owners would be wise to realize that financial fraud may be happening right now in their company, perhaps even perpetrated by their most trusted employee. Potential fraudsters are often people of good character who are experiencing intense financial pressure. They are usually aware of the threshold amounts that require higher level approval for fund disbursement, and are cognizant as well of the amounts that internal and external auditors are likely to flag for review. Thus, they are confident that their fraud will go undetected. What’s a business owner to do? The first step is to be aware of the most common fraud crimes. They include:

Billing Fraud – creating false vendors, submitting personal invoices for payment
Check tampering- stealing blank checks or diverting checks to a personal account
Skimming- accepting payments from a customer and failing to report them

The next step is to perform a risk assessment. This involves a review of current internal controls and the ranking of potential vulnerabilities to fraud. These vulnerabilities should be addressed by eliminating the temptation and opportunity for fraud, as well as ensuring prompt detection of fraud, should it occur. The changes made should be revisited on an ongoing basis and reassessed for effectiveness.

Factors that can further enhance fraud prevention include stricter due diligence and control procedures. Business owners should be aware that their conduct plays an important role as well, setting the “tone at the top”. Creating a strict code of conduct that is adhered to by all establishes a low-tolerance atmosphere that keeps fraudsters at bay. Setting up a whistleblower telephone hotline is another prevention practice worth considering.

If fraud is detected, it is essential to seek assistance of an experienced fraud investigator. The expert may choose to conduct the investigation with oversight from general counsel or outside attorneys.

Urbach & Avraham specializes in risk assesment. Our fraud team, which includes several Certified Fraud Examiners, is ready to help you prevent and identify fraud in your business. Contact us today for a free consultation to assess your company’s needs.

Pamela Avraham Achieves Fraud Examiner Certification

January 9, 2013 by Admin

Congratulations to Partner Pamela Avraham on her well-deserved certification as a Certified Fraud Examiner (CFE). It comes as no surprise that Pamela passed all four sections of the CFE exam on the first sitting, as she has used her forensic skills in preventing and detecting fraud for over 25 years. Clients who have gained from her expertise are from a wide range of industries, including medical and health care practices and staffing agencies.

Pamela has also applied her forensic accounting abilities in the reconstruction of books and records for fiduciaries, and has frequently prepared court accountings for executors, trustees and guardians. Her unique expertise and experience is reflected in the outstanding success of the U&A forensic team.

$788,000 Embezzled from Edison Law Firm’s Trust Funds

November 29, 2012 by Admin

In a recent case, two former employees of an Edison law firm embezzled more than $788,000 over 2 years from their firm by improperly writing checks from the law firm’s trust account to themselves as well as to their creditors. One of the conspirators was the secretary who had access to the accounting records, thus she was able to hide the embezzlement by simply changing the payee information in the records. The fact that the embezzlement went on for so long is indicative of weak internal control. A simple reconciliation of the trust account check book would have detected the fraudulent recordkeeping immediately.

Strong internal control is always essential, but particularly when it comes to funds that aren’t privately owned and therefore not as closely monitored, such as an attorney trust fund. Segregation of duties is the cornerstone of any strong internal control, ensuring that no one employee is involved with every part of a transaction. In the above case, however, even though duties were properly segregated, the two workers colluded together. This makes fraud much more difficult to detect. The key is a frequent and ongoing reconciliation of your records. Don’t become a statistic.

NJ Fraud Case Highlights Importance of Internal Control

July 26, 2011 by Admin

On Tuesday, July 12^th, the U.S. Attorney’s Office announced that Kathleen Baker, a former office manager at Bathgate, Wegener & Wolf (a real-estate partnership in Lakewood) has admitted to embezzling $1.14 million over six years. Prosecutors say that Baker created a fictitious company (also known as a “straw man” company) called “Corporate Solutions,” and directed funds to a bank account under its name. The money was subsequently used to pay off her credit card bills and personal debts. Baker faces up to 20 years in prison. [Read more…] about NJ Fraud Case Highlights Importance of Internal Control