Billing schemes involve issuing a payment from the organization for fictitious goods or services, inflated invoices, or personal purchases.
How to prevent:
- Adopt zero-based budgeting — this involves starting a budget from scratch each year based on needs, rather than based on previous years' spending. This may unearth unnecessary or fraudulent spending in the previous year.
- Bring in a purchase order system — this matches each payment to an approved purchase order and invoice before it is paid. The main benefit: it creates several levels of authorization.
- Ensure proper segregation of duties — for example, an employee involved in purchasing goods or services should not be the same person who approves and pays the supplier. The more people involved in a financial transaction, the less likely that fraud will go undetected.
- Implement proper reviews and approvals:
- Regular scrutiny of budget against actual spending, minimally on a quarterly basis. This will identify fraudulent spending before it is too late.
- Independent due diligence and approval of all new vendors. This will prevent an employee from setting up and paying a fictitious vendor.
- Dual approvals for disbursements, with review and approval of supporting documentation.
- Independent review of corporate credit card spending, bank statements and cancelled cheques.
- Periodic review of market rate for services used. Overpayment for services often gives employees the opportunity to launch kickback schemes with vendors. The market rate review protects against overpayment — and therefore against kickback schemes.
- Enforce annual declaration of conflicts of interest by employees that provide visibility into their relationships with suppliers — this will limit personal benefits received by employees or related parties.
- Use a bidding system for larger expenditures — this will ensure that the contract is awarded to the best bidder instead of a chosen favourite.
This scheme involves stealing employer funds by intercepting, forging, or altering a cheque or electronic payment drawn on one of the organization's bank accounts.
How to prevent:
- Ensure unused cheques are accounted for and kept in a secure location.
- Keep cheques secure after they are signed — cheques are sometimes altered by employees after they are signed by changing the payee or amount paid.
- Ensure proper segregation of duties between the employee who handles cheques and the employee who enters transactions in the accounting system.
- Review cheques after they have cleared the bank, focusing on the payees, amounts, and signatures — this will help identify any cheques that have been altered.
- Reconcile funds expected versus funds received by the organization.
- For electronic payment tampering:
- Limit the people who have online access to the bank account.
- Make sure the bank notifies you of any strange payments.
This scheme involves an employee claiming non-business expenses for reimbursement on their expense report.
How to prevent:
- Set up proper expense claim forms that require detailed information: date of expenditure, nature of expenditure, purpose of expenditure, and name of other participants.
- Allow reimbursement only with original receipts, not with copies.
- Ensure that a line supervisor approves all expense reports by checking expenditures against the employee's calendar and work requirements.
- Audit expense claims periodically.
This scheme involves an employee stealing cash meant for the organization before it is recorded on the organization's books and records.
How to prevent:
- Reconcile expected cash with received cash.
- Estimate expected results of every fundraising activity.
- Segregate duties of fundraising from handling of funds from issuing of receipts.
- Issue receipts for all donations received, and compare to amounts deposited to the organization
- Have more than one person handle cash at all times.
- Conduct random audits by calling donors to determine amount donated — to ensure you do not alarm donors, position these calls as routine follow-ups.
In whatever manner employees or volunteers defraud an organization, they often attempt to conceal the scheme. They may do this with a complementary scheme: creating false financial results. The onus to combat this scheme often falls on an NPO's leader.
How to prevent:
- Ensure financial information prepared by employees is independently reviewed.
- Do not rely solely on the financial information provided by management. Consider adopting some additional procedures to gain comfort:
- Examine supporting information on which financial reports are based.
- Always know what your cash balances are in all bank accounts.
- Keep track of amounts owed to vendors on a regular basis. If vendors are not being paid on a timely basis, that could indicate fraud in your NPO. This is because fraudsters often pay themselves before paying amounts due to vendors.
- Know what your fixed costs are each month, such as utilities, salaries, insurance, and rent. Additional costs outside the fixed costs need to be monitored and pre-approved.
- Review all credit card statements and bank statements each month to ensure that the expenditures are in line with the organization's goals.