Holding Management Accountable to Prevent Fraud

Monday May 24, 2021 comments Tags: nonprofit, accounting, fraud, fraud risk, assessment, fraud triangle

Any accounting business and tax advice contained in this podcast is not intended as a thorough in depth analysis of specific issues. Nor is it a substitute for format information. Nor is it sufficient to avoid tax related penalties. If you have specific questions that you need advice for, be sure to schedule a strategy session and not solely rely on information in this podcast. Alright, back to the episode. If your organization is wanting the link to the fraud risk assessment questions, check out the show notes. We will have a link for them there. 

Hi, it’s Chyla Graham, welcome to another episode of The Nonprofit Ace Podcast. This season it's all about fraud, fraud prevention. So CNRG is my company. We work solely with nonprofits. My goal is that nonprofit leaders become comfortable talking about money and having conversations about fraud is part of developing that comfort. I'm working through a fraud risk questionnaire that is available for download. So if you check out the show notes, you can get that for yourself. But this week's questions are about management and this is incredibly important because one of the areas in the fraud triangle. So things that you should be aware of is, is there too much trust and in management, there typically is.

So the board believes this person would never do it, this person loves us. But that might be true. They might love you but they can also steal from you. That doesn't mean those two are not mutually exclusive. But what I want you to think about, as you question management, think of these questions that take it outside of this person really cares about the organization to like, what's a real tangible thing that could occur that we should be mindful of? This does not negate how they feel about the organization. This is again, taking out that emotion and saying okay, but in real talk practicality, is this something that could happen? 

So question number one, I think of management as your CEO, the executive director, as well as the person who's on the finance team. And so these are the questions you want to think about for them. Is the organization dominated by only one or two people. So all questions and all requests have to go to the same one or two people. If that is the case, that means that they they could be the bottleneck. 

This is not just a fraud issue. This is a functionality of restriction on growth issue, the concern there is, what will it take to empower other people, I like to say that this is not just about the organization protecting itself, it's about protecting your employees. And if everything has to go to the same one or two people, those one or two people might be spending all their time answering questions and not getting their work done. 

This could lead them to working after hours, this may lead them to the “I'm not getting paid enough for this” road. So really think about that of Hey, how is this happening? Who's answering the questions? Who has to complete this request? And then think about the rest of the pieces, financial pieces? And think about the accessibility of financial reports. So is there only one person who can answer questions about the reports? 

Yes, your bookkeeper might be the person entering the information or you have an accountant who's helping you analyze the information. But if those are the only people and your executive director can’t also answer those questions, or only the executive director can answer those questions or the bookkeeper can’t, the bookkeeper always says, Well, you have to talk to the executive director because I just did what they told me to do. This is a problem. 

Think about when the last time the board reports were explained and not just presented for a vote. So oftentimes, money can be a sensitive topic. People are uncomfortable talking about it. They don't want to say that they don't know and so they don't ask any questions. I don't ask questions and of course I understand. No. So think about, okay, we review the reports. It's not just about an action, we're going to ask a question. Maybe consider what's one question that you could ask yourself, what's one commentary that can be axed? Maybe you don't ask any questions, but is a narrative presented is each month the report is presented, people are giving you information, and you are able to say, Oh, that makes sense. Cool. I don't have a follow up.

It's not just hides. The financials are in your packet. Would you like to vote? That is not enough. That is not enough to mitigate any risk because there’s no proof that anyone looked at it. So another thing is, how timely other reports, if your reports are consistently late, is there a reason? So think about the timing, when you get the reports, they're two months late. So for example, if now in March, or now, April, are you looking at reports from January, this might indicate there's a problem in your system? What is the reason why reports are coming out so late? If it's because your board meeting is the first week of April, whoa, you need to push your meeting back, if you want to be looking at more recent reports. 

So think about things like that. Like why, if they're late, why are they late? Is it that our meeting is too early or is that there's an issue in the system that prevents timely reports from me. Another question to ask is, are we getting lots of notifications from regulatory bodies be that your city or your state, the IRS saying hi, you didn't pay this. Hi, thing for vendors? Are you getting lots of reports and anyone saying that you did not pay a bill. 

If you're finding that every month, when you look at the financials, our liabilities are growing, but we're not paying them, ask why? What's happening? What's causing this and get to the heart of the matter and not just accept like our bills keep going up, do we not have cash to pay it? If we had cash, why are we not paying it? 

So really think through what's happening on that front, so that you can be better prepared. Alright then, this has been another episode of The Nonprofit Ace Podcast. If you are interested in getting the full list of the fraud risk questionnaire, go to the show notes and the link will be there. Alright, bye. Thanks for listening to another episode of The Nonprofit Ace podcast.

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