FRAUD AND INTERNAL CONTROLS FOR SMALL ORGANIZATIONS

INTRODUCTION Asset misappropriation schemes are the most common type of occupational fraud, comprising 87% of the cases reported; they have a median loss of $120,000. Occupational fraud is a significant threat to small businesses. The smallest organizations suffer the largest median losses. These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud. The most common factor of not reporting fraud is fear of bad publicity, followed by a determination that the organization’s internal sanctions were sufficient punishment for the misconduct.

CONTROL WEAKNESSES THAT CONTRIBUTED TO FRAUD 3

DURATION OF FRAUD SCHEMES 4

INITIAL DETECTION OF OCCUPATIONAL FRAUDS 5

INITIAL DETECTION OF FRAUDS IN SMALL BUSINESSES 6

TYPE OF VICTIM ORGANIZATION 7

METHODS OF FRAUD IN SMALL BUSINESSES 8

ANTI-FRAUD CONTROLS AT SMALL BUSINESSES 9

BEHAVIORAL RED FLAGS DISPLAYED BY PERPETRATORS 10

HUMAN-RESOURCES- RELATED RED FLAGS 11

SEGREGATION OF DUTIES Employing competent, trustworthy people with clear lines of authority and responsibility Having adequate separation of duties Having proper procedures for authorizing business transactions Maintaining adequate documents and records Having appropriate physical controls over assets and records Conducting independent checks on performance

INTERNAL CONTROLS 2 PERSON OFFICE BookkeeperPastor, Finance Council or other Record Accounts Receivable Write ChecksSign Checks Mail Checks Record G/L entriesPerform Bank Transfers Reconcile Bank StatementsReview Bank Reconciliations Receive CashComplete Deposit Ticket Disburse Petty CashReconcile Petty Cash Authorize Check Request Authorize Invoice for PaymentProcess Vendor Invoices

INTERNAL CONTROLS 3 PERSON OFFICE BookkeeperOther office EmployeePastor of Finance Council Record A/RReceive CashComplete Deposit Slip Reconcile Petty CashDisburse Petty Cash Write ChecksProcess Invoices, Approve Invoices and Mail Checks Sign Checks Record G/L EntriesPerform Bank Transfers Reconcile Bank StmtReview Bank Stmts

INTERNAL CONTROLS QUESTIONS?