Fraud Prevention Issues

Cheque Signing:

A key initial step is to check that the terms of the bank mandate are appropriate. It’s surprising how often this is overlooked even in the largest of organisations.

Consider the following:

• Is the person opening the post & controlling banking also a cheque signatory?
• Are two authorised signatures required for all cheques over a certain limit?
• Are cheques only raised after invoices etc have been properly approved by someone independent for payment?
• Are the authorised signatories appropriately senior individuals, providing some degree of independence of the person raising the cheque?
• Cheques must never be signed in blank
• Cheques should only be signed once the purpose of the cheque has been confirmed.

I have seen several instances in the last few years of organisations that didn’t undertake these basic checks - and suffered as a consequence. In both cases, the individual responsible for preparing the cheques for signature wasn’t adequately supervised and cheques were signed in blank, for use later. Needless to say, some were diverted for personal expenditure.

Staff Culture:

Action can be taken to deter fraud and also to detect it should it arise. Aim to develop a culture that will deter potential fraudsters from fraudulent activity. Educate members of staff and trustees about potential areas of risk and nurture a common set of beliefs that fraud is unacceptable and not to be tolerated.

Charities are increasingly adopting “Codes of Conduct” which cover the activities of staff members (in some cases forming part of their terms of employment) and also consultants and temps.

Making each individual responsible for reporting suspected cases of fraud can drive home the anti-fraud message, whilst guaranteeing anonymity for the “whistle blower” is also important in encouraging reports. Providing a third party contact to guarantee anonymity can assist.

The effectiveness of financial control procedures can be enhanced by introducing an element of random or spot checking of their application in practice, for example of appropriate authorisation on invoices or review signatures on account reconciliations.

With regard to grant applications, publicise the action you would take if a fraudulent application were received, including the involvement of the police.

Always take up references for new staff and check qualifications. A person with unexplained “gaps” in their CV or who has exaggerated their qualifications may not have fraudulent intentions but this should put you on notice that an offer of employment may not be the best route to follow. Procedures should be extended to cover temporary staff and reliance should never be placed solely on a recruitment agency’s checking procedures.

Interestingly, a recruiting officer for a government organisation told me that they ask about the applicant’s financial circumstances to ensure there is no undue financial pressure; I assume this is permitted in employment law!

Charities are used to undertaking regular risk assessments and many have a proactive approach, revising their risk registers on a regular basis. If these revisions are currently done by senior management and the Trustees, consider widening the debate to include other members of staff. Activities that may increase risk to your organisation, whether or not directly related to fraud, may be more obvious to “operational” staff than to those at a senior level.

If the reward remains greater than the risk of getting caught, then the next stage is to try to prevent the attempted fraud from succeeding or to detect it at an early stage if it occurs. Well-controlled internal systems and authorisation procedures are key to effectiveness.

Grants:

Measures that can be taken with regard to grant applications include the following:

• Having guidelines for dealing with applications where more than one organisation is funding a project – how do you liaise with the other funders to reduce the risk of double funding? How do you ensure that you are not relying on the other funder to check the applicant and vice versa?

• Having procedures for identifying multiple or phantom applications to your organisation. How many projects do you visit in advance of funding being given and how do you check the identity of those where no visit is made? Computer searches for multiple postcodes may assist, as may the requirement to provide references from “professional advisers” in addition to standard checks against the Charity Commission register and Companies House records.

• Checking what funds have been spent on. Visits may be effective for capital projects but how should revenue projects be tackled? In what circumstances should an audit be sought and who should carry this out?

Purchasing:

An area that sometimes receives less attention but where the risk of fraud can be significant is in procurement. Trusts can have significant expenditure budgets (over and above payroll costs) for the purchase of goods and services, as well as for capital goods. Sound procurement practice will not only increase the likelihood of buying at the best price and quality but will also act as a check on a potential fraudster. Weaknesses that could be exploited if insufficient checks are built in include:

• entering into contracts with organisations connected to a member of staff from which they will profit (family connections, share ownership etc.);
• collusion with suppliers to award contracts for the payment of a “kickback”;
• diverting goods to an individual’s home or private business with payment being made by the charity to the supplier; and
• setting up “bogus” supplier payment details and authorising payments where no goods or services have been received.

The managing of the risk of fraud must be proportionate – if controls are too unwieldy or onerous to comply with, either staff will fail to apply them properly or applicants will stop applying for funding. But being proportionate should not result in creating loopholes through which a fraudster may easily slip.

Budgets:

A further important defence against elements of such fraud are the budgets prepared by management. Misappropriation of funds or misdirection of income may be identified through adverse variances against budget. Therefore, a proper investigation of variances can help identify or limit fraud.

Indeed investigation of positive variances can also sometimes give warning if income, previously diverted, is received whilst for example the fraudster is on holiday, unable to cover up or continue such activities.

Other:

Areas of fraud risk may also include:

• Ghost employees & incorrect terms of employment

Payroll departments will not always know the individual employees and will then be dependent on the relevant level of management scrutinising the employee lists to ensure the individuals exist and that the pay details are correct. Common frauds in this area include employees who do not exist or inflation of pay awards.

• Incorrect application of Petty Cash

It is vital to the control of petty cash expenditure that receipts are required and checked by the appropriate level of management.

 

• Similarly employee expense claims must be carefully checked by a relevant layer of management for validity of expense and to ensure that these are not overstated.

Summary:

I have provided above some thoughts on fraud prevention. This is clearly not exhaustive and is intended only to provide a focus for consideration and discussion. It is not possible to eradicate the risk of fraud but by putting appropriate safeguards in place and improving general awareness of the threat, the chances of suffering from fraudulent activity can be reduced.

No system can stop fraud, all that one can do is deter and limit the opportunity. Recent examples I have seen (not clients of ours!) have involved:

• The executive in charge of a small team over-rode common sense controls for the sake of convenience and placed too much trust in the one person. Temptation & opportunity were then put in the way of someone who it later transpired was under financial pressure.

• Two individuals, one senior, colluded to over-ride the financial controls. Little could have been done to stop that. Little tightening of the existing controls was possible as the systems were good.

• A very large charity with multiple bank accounts overlooked requiring two signatures on all larger cheques on some of the accounts, and even on those were it did, trustees were in the habit of signing blank cheques. Opportunity was given in both instances as a consequence, and advantage was taken.