non-profit fraud prevention, deterrence and …...fraud facts employee education foundational for...

Non-Profit Fraud Prevention,

Deterrence and Response

US Youth Soccer Workshop

February 25, 2011

© Grant Thornton LLP. Rights Reserved.

� Brad Preber, Partner Grant Thornton LLP

� Learning objectives:

• Obtain a common understanding of fraud

• Examine research on fraud

• Finds ways to prevent and deter fraud

• Explore ways to respond to fraud

Introduction & learning objectives

2© Grant Thornton LLP. Rights Reserved.

This presentation is intended to be a basic

introduction to non-profit fraud issues and

should not be construed, used or referred to as

professional advice from Brad or Grant Thornton

LLP. Your situation should be discussed with your

own qualified professional.

Disclaimer


Failure to heed disclaimer


� Define fraud

� Research on fraud:

• Facts

• Victims

• Bad guys

� Preventing and deterring fraud

� Fraud response

Agenda


Non-profit fraud in the headlines


Fraud defined


Fraud facts

� The typical organization loses 5% of its annual

revenue to fraud

• 2009 Gross World Product = $2.9 trillion

� The median fraud loss $160,000

• Almost a quarter of losses = at least $1 million

� Frauds undetected = average18 months


Fraud frequency


Fraud losses


Fraud duration

Median Duration of Fraud Based on Scheme Type


Fraud facts

� Asset misappropriation = 90% of cases

• Median loss = $135,000

� Financial statement fraud = less than 5%

• Median loss = more than $4 million

� Corruption = less than 33%

• Median loss of $250,000


Non-profit fraud

Occupational Frauds by Category (U.S. only) — Frequency


Non-profit fraud

Occupational Frauds by Category (U.S. only) — Median Loss


Ask the audience

"How is most fraud discovered

in the workplace?"


Fraud facts

� Frauds most likely detected by tip

� Small organizations disproportionately victimized

• Lack anti-fraud controls


Fraud detectionInitial Detection Method by Organization Type


Pick the likely big time fraudster

1

4

3

2

5


Fraud facts

� Senior ranked personnel = greatest damage • Owners/executives:

� More than 3 times as costly as managers

� More than 9 times as employees

� Take longer to detect

� More than 80% of frauds committed by individuals in six departments: • Accounting, operations, sales, executive/upper

management, customer service or purchasing

� Anti-fraud controls help reduce the cost and duration of occupational fraud schemes


Fraud position

Position of Perpetrator in the United States


Fraud frequency

Gender of Perpetrator — Frequency


Fraud gender losses

Position of Perpetrator — Median Loss Based on Gender


Non-profit fraud

Age of Perpetrator — Frequency


Non-profit fraud

Age of Perpetrator — Median Loss


Fraud facts

� More than 85% of bad guys never been previously

charged or convicted for a fraud-related offense

� Fraud perpetrators display warning signs

• Common behavioral red flags:

� Living beyond means (43% of cases)

� Financial difficulties (36% of cases)


Fraud red flagsBehavioral Red Flags of Perpetrators Based on Position


Non-profit fraudMethods of Fraud by Size of Victim Organization


Industry reaction to fraud� Governance landscape

• Increased accountability for accuracy and integrity in

business operations

• Heightened Board expectations

• Audit committee interest in key controls

• Concerns about reputational risk

• Pressures of economic downturn


Fraud & governance

� Non-profit governance changes:

• Whistleblower processes and protection

• Performance metrics

• Improving risk management

� Identifying key areas of concern

� Creating internal audit functions

� Rethinking internal audit priorities

� Enhancing control policies and procedures

� Assuring that assets and reputation are secure


Non-profit risk landscape


Fraud risk management

� Effective fraud risk mitigation strategies include:

• Business processes improvement

• Policy and procedure development

• Deployment of appropriate, skilled resources

• Technology improvements

• Regular monitoring


Ask the audience

"How do you prevent or deter fraud?"


Fraud facts

� Fraud reporting mechanisms are critical

• Implement hotlines for internal and external sources

� Allow anonymity and confidentiality

� Employees encouraged to report suspicious activity

� No fear of reprisal

� Organizations tend to over-rely on audits

• External audits most widely used control mechanism

� Comparatively poor for detecting fraud and limiting losses

� Important and can have a strong preventative effect

� Should not be relied upon exclusively


Fraud facts

� Employee education foundational for preventing and

detecting fraud

• Staff are top fraud detection method

• Must be trained about fraud and how to report

• Anti-fraud training results in lower fraud losses


Fraud controls

Primary Internal Control Weakness by Size of Victim Organization


Fraud controls & losses


Fraud response

� Assess claims for validity and significance

� Contact senior leadership (e.g., executive

management or directors) at least 1 level above

suspect

� Seek appropriate counsel

• Inside organization

• External advisors

� Know your insurance coverage

� Indemnification


Fraud response

� Investigate with caution• Independence and objectivity

• Legal & business ramifications

• Evidence considerations

� Timely, prudent actions • Employment actions

• Insurance proof of claims

• Civil and criminal lawsuits

• Remedial/corrective actions

• Communicate with stakeholders

• Other matters


Non-Profit Fraud Prevention,

Deterrence and Response

US Youth Soccer Workshop

February 25, 2011


non-profit fraud prevention, deterrence and …...fraud facts employee education foundational for...

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