Tag Archives: misappropriation

Sweet Briar Closure Announcement Raises More Questions than Answers

In March 2015, Virginia’s Sweet Briar College shocked students, staff and alumnae by abruptly announcing its upcoming closure. The announcement stated that the women’s liberal arts college would close “as a result of insurmountable financial challenges,” despite the school’s reported $85 million endowment. Even as more details emerge about the closure, however, there are more questions than answers.

One year earlier, the College introduced an initiative that would explore ways to combat challenges like a declining number of qualified students and female students’ willingness to attend a single-sex school. While Sweet Briar’s plight is not dissimilar from that faced by many small liberal arts schools, many are questioning whether or not the College and its administration have worked hard enough to come up with a viable solution to their financial woes, particularly when one considers Sweet Briar’s sizeable endowment.

The Commonwealth of Virginia, at the behest of Amherst County Attorney Ellen Bowyer, recently filed a lawsuit against the College, as well as Paul G. Rice and James F. Jones, Jr., Sweet Briar’s Board Chair and President, respectively. The lawsuit charges that the Board failed to consider courses of action other than closure, such as a capital campaign, more aggressive fundraising efforts, enhanced recruiting efforts, or a reduction of tuition rates to attract more students.

The lawsuit also hints at a more troubling allegation by a now-dismissed Board member that the College engaged in untenable financial practices, secretive governance, and a lack of experience and accountability by the administration.

In Bowyer’s lawsuit, she claims that the College’s annual financial statements show that operating deficits were more than offset by the endowment’s investment gains, grants, gifts, and alumnae donations, resulting in an increase of the College’s net assets. Forensic accountant Steve Spitzer backs up these assertions, writing:

“Assuming the College’s finances are handled in a prudent and responsible way going forward, it would still remain financially viable. Our preliminary conclusion upon a review of the publicly-available data is that, as of approximately eight months before the closure announcement, the College was financially viable, and there was not an urgent financial reason to close.”

Additionally, the Commonwealth asserts that Sweet Briar continued to raise funds to “support the College’s ongoing educational mission, while simultaneously acting to close the college.” President Jones commented that the school intends to use the endowment to offer severances to faculty members, pay back creditors and cover the costs of shutting down the college.

Even as the College moves forward with closure actions and efforts to help students find new institutions for the fall semester, there is a grassroots effort underway to save the school. A nonprofit group formed to save Sweet Briar College, which has raised nearly $1 million in donations in recent weeks, celebrated a decision by Bedford County Circuit Court Judge James W. Updike Jr. that gives the Bowyer the authorization to speak for the Commonwealth when charitable funds are being misused.

Staff, donors and alumnae are largely dissatisfied with the way Sweet Briar’s administration has handled the situation and they are beginning to ask tough questions. In a public letter published by the Washington Post, Virginia State Senator Chap Peterson (D-Fairfax) asks the following of Virginia Attorney General Mark Herring:

“As I understand, the College has a ninety four million dollar endowment and has been soliciting and collecting donations right up until a few weeks before the announced closing. I also understand that it owns a 3,200 acre campus with fixed assets, which is specially designated for the maintenance of a women’s college,” as stipulated by the original landowner who founded the college. So, he asked:

  1. What are the rights of the donors who made gifts to the institution in the past year, i.e. after the plans for closing had apparently been decided but not disclosed? Do they have a right to seek a refund if the school continues with its plan for closing?
  2. What is the obligation of the school to its existing students, particularly those students who are within a year of achieving their degree?
  3. What will happen to the property if it is no longer operating as a women’s college? Does it not revert to the donating party?
  4. What is the role of the Board of Visitors in this process? Does the Board have a fiduciary duty to protect the interests of donors and students, as well as the mission of the College?”

Yesterday, Judge Updike issued a temporary injunction that prevents Sweet Briar College officials from using solicited funds to advance their plans to close the school. We expect that, as the lawsuit moves forward, we will learn more about how this happened, including details on governance and internal controls within the institution. We will update you as new information becomes available.

For more information on how Aronson’s Nonprofit & Association Industry Services Group can help private institutions safeguard their legacy for years to come, please contact Craig Stevens at 301.231.6200.

Questions to “Check” Yourself about Check Tampering

Zemanta Related Posts ThumbnailThere are many different fraud tampering schemes.  One area that is easy to tamper with is checks.  When considering your organization’s vulnerability to fraud, here are a few questions to keep in mind to help mitigate the risk from tampering of checks.

  • Are unused checks stored in a secure container with limited access?

Blank checks, which can be used for forgery, should be stored in a secure area such as a safe or vault.  Security to this area should be restricted to authorized personnel.  Keep in mind, a locked cabinet is no good if the key is easily accessible!  In addition, it is important that people who have access to blank check stock do not have signing authority. Safekeeping and authorizing should be kept separate.

  • Are bank reconciliations completed immediately after bank statements are received?

Companies should complete bank reconciliations immediately after bank statements are received.  The Uniform Commercial Code states that discrepancies must be presented to the bank within 30 days of receipt of the bank statement in order to hold the bank liable. Also, it will be easier to spot a discrepancy while the information of recent events is still fresh in your mind and it’s always better to catch a fraud scheme sooner rather than later.

  • Are two signatures required for check issuance?

Requiring multiple people to review and sign checks reduces the risk of check fraud. Generally, a threshold is recommended whereby larger checks require more people involved. The amount of the threshold depends on the risk level you have assessed for your organization. $2,500 may not be practical if you habitually write large checks but to a smaller organization, that may be the level where things get risky and a separate set of eyes acts as a good control.

  • Are hand written checks prohibited?

Handwritten checks are especially vulnerable to check fraud and should be prohibited. The problem here is that they can be written without entering anything into the accounting system which means an extra close eye needs to be paid to that bank reconciliation!

  • With the exception of payroll, are checks issued to employees reviewed for irregularities?

Checks payable to employees, with the exception of regular payroll checks, should be closely scrutinized for schemes such as conflicts of interest, fictitious vendors, or duplicate expense reimbursements. Nobody likes chasing people down for their expense receipts, so make it a standard part of the control environment that submitting receipts before reimbursement is expected of everyone.

For more information on business matters affecting nonprofit organizations, contact Aronson’s Nonprofit & Association Industry Services Group or Brandon Williams at 301.231.6200.

 

Warning Signs Fraud May Be On The Way

money on the clotheslineThe means by which employees intentionally steal or perpetrate fraud is growing immensely especially with recent advances in technology. An important question for all companies and nonprofits (especially the latter) to ask themselves is whether their security and management oversight is keeping up with the changing game of fraud perpetrators. Looking for the warning signs of fraud is a key component of any organization’s fraud risk assessment.

A few quick facts will help to setup the warning signs that fraud may be on its way to your Organization. The Association of Certified Fraud Examiners’ (ACFE) Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Study states that 1,445 of the 1,483 cases studied included information regarding the total dollar amount lost to fraud. The median loss from fraud was $145,000. The same report also claims that asset misappropriation is the most commonly used means of committing fraud. Additionally, the report claims that nonprofit entities make up roughly 11% of the population studied. What should be pointed out concerning nonprofits is that there has been a steady climb in frequency fraud has been committed. The study states that employees accounted for roughly 42% of occupational fraud, while managers accounted for approximately 36% and owners/executives claim the remaining 19%.

It is surprising to read (in the ACFE 2014 Global Fraud Study referenced above) that only 5% of the perpetrators studied had been previously convicted of committing fraud. That means that a lack of fraud related offenses does not always provide peace of mind.

The listing below includes a few of the behavioral red flags and portrays the rough distribution of behavioral red flags according to the Behavioral Red Flags Displayed by Perpetrators graph found in Figure 71 taken directly from page 59 of the ACFE Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Study:

Living Beyond Means             44%
Financial Difficulties             33%
Unusually Close Association w/ Vendor/Customer             22%
Control Issues, Unwillingness to Share Duties             21%
Complained About Lack of Authority               7%
Excessive Family/Peer Pressure for Success               6%
Instability in Life Circumstances               6%
Past Legal Problems               6%

 

Further analysis was performed in order to gain insight into how the perpetrator’s position within the organization affects red flags. The idea was to obtain an understanding of how motivations and/or pressures that vary from level to level in organizations lead to fraud. The results are as expected and consistent with the distribution of the behavioral red flags by perpetrators (shown above) however the owners/executives and managers categories had a higher rate of living beyond means than did employees. Additionally, the employees category won the financial difficulties red flag by showing a rate of roughly 40% as compared to the next highest category (managers) showing a rate of roughly 28%. In order to see the chart from the ACFE’s 2014 Report to Nations, click here and navigate to page 60 where you will find “Figure 72: Behavioral Red Flags Based on Position”.

The study also found that those individuals who committed financial statement related fraud tended to be under extreme pressure compared to those who committed fraud through asset misappropriation or corruption. Alternatively, there was a correlation found between those individuals that exhibited abnormally close relationships with a customer and/or vendor and those perpetrators that committed fraud through corruption. In order to see the entire chart from the ACFE’s 2014 Report to Nations, click here and navigate to page 61 where you will find “Figure 73: Behavioral Red Flags Based on Scheme Type”.

Lastly, gender roles were found to have played a surprising role. The results show that men are less likely than women to commit fraud while under duress from financial related difficulties, family problems such as divorce, and showing signs if instability in the individual’s personal circumstances. On the other hand, men did show a higher likelihood to display “wheeler-dealer” attitudes and abnormally close relationships with customers and vendors which correlate more with financial statement and corruption fraud. Women also tended to engage in corruption and financial statement schemes at a lower rate than men.

Another great resource “Ten Early Warning Signs of Fraud in Organizations” published by ITBusinessEdge.com can be found by clicking here.

The entire Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Study published by the Association of Certified Examiners can be found by clicking here or using the following URL: http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

Specific findings in the Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Study that were not discussed but should be noted include:

  •             Anti-Fraud Controls at the Victim Organization (page 31 of the report)
  •             Effectiveness of Controls (page 38 of the report)
  •             Control Weaknesses That Contributed to Fraud (page 39 of the report)
  •             Fraud Prevention Checklist (page 76 and 77 of the report)

Resources used in summary above:

1)      Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Studypublished by the Association of Certified Examiners, http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

Fraud Perpetrators

There are two main reasons employees commit fraud.  One because they can and two, their situation has changed and they need money. The first type of employee is the worst –  those that commit fraud because they can, whether it is stealing money from the organization or falsifying accounting records to make themselves look better.  The second type of employee takes the money planning on paying it back, because they feel it is the only way to get out of the situation they are in.  They may need the money to pay crushing debt, medical bills, etc.  These employees don’t have malicious intent, but are still committing fraud.

Real world examples: A controller hired an incompetent accounting staff and was using them to pay himself more than approved.  He would use them to pass through fraudulent invoices and cut checks that would end up in his pocket.   This could have easily been prevented if competent staff had been hired and someone was supervising what the controller was doing. In another example, an employee who had been with the organization for many years came into a bad financial situation. In order to get money, she set up a fake company with a similar name to an actual current vendor. She would use real invoices from the actual vendor to make payments via credit card to the fake vendor.  This was found after the real vendor called to ask why the client was delinquent on their bills.

A few examples of schemes from the ACFE 2014 Report to the Nations:

Billing – A fraudulent disbursement scheme in which a person causes his or her employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for personal purchases (e.g., employee creates a shell company and bills employer for services not actually rendered; employee purchases personal items and submits an invoice to employer for payment)

Check tampering – A fraudulent disbursement scheme in which a person steals his or her employer’s funds by intercepting, forging or altering a check drawn on one of the organization’s bank accounts (e.g. employee steals blank company checks and makes them out to himself or an accomplice; employee steals an outgoing check to a vendor and deposits it into his or her own bank account)

Once you have discovered or suspect fraud, what do you do? First take a deep breath and exhale. It’s not the end of the world and you aren’t alone. Even if you have done everything to try and prevent fraud, there is no 100% prevention guarantee.  Second, either contact your auditors or conduct a review yourself to ensure all instances of related fraud have been found.  Third, if possible press charges against the employee so that you can try to recoup what was lost if they were stealing, as well as send the message that fraud will not be tolerated within your organization. Lastly, review how it happened and see if you can strengthen your controls to prevent it from happening again in the future.

Fraud and Basic Prevention

Per Dictionary.com, fraud is defined as deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.   Fraud as it relates to accounting is the intentional misrepresentation or alteration of accounting records or the misappropriation of assets.  Fraud occurs when an invoice is booked in the wrong period to make the financials look better.  Fraud is writing an unauthorized check to yourself.  Fraud is charging personal expenses on a corporate card and not reimbursing the organization for them. According to the 2014 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners (ACFE), 85% of the fraud committed during their two year study was asset misappropriation with a median loss of $130,000 per case. Per the same study, the most common type of asset misappropriation was in billing at 23.3% of the cases.  The most costly type per case was check tampering with a median fraud of $120,000, this only occurred 10.9% of the time.

Now that you know what fraud is, how do you protect your organization from it?  The first thing is to ensure you have a competent staff.  Why is this important? Without employees that know what they are doing someone could easily perpetrate fraud and hide it, or coerce the staff to commit the fraud for them because they don’t know any better. You should also conduct background checks on employees who will be handling financial assets before you hire them.

Secondly, encourage strong internal controls.  Determining the controls to set in place and creating formal policies are important, but actually implementing them and checking that they work is more important.  An accounting manual is worthless if the processes aren’t followed.  Good controls involve management properly supervising and reviewing the work of staff.  Proper controls can be set up in organizations of any size. If you need help, contact your auditor. They will be able to give you tips and suggestions for strengthening your controls. A good control to have in place is a tip hotline. Per the Report to the Nations, 42.2% of cases are discovered by tip.

Lastly, you need to ensure all employees are taking vacations.  How does this help prevent fraud?  Employees who never take vacations could be conducting frauds that would be easy to uncover if someone else were to take over their duties for a short time.  An example of this would be if the employee took the funds from Customer A, and deposited them into the employee’s private account.  Now to cover this up the employee uses funds from Customer B to pay Customer A’s balance and so on and so forth.  The employee keeps doing this, and maybe they plan on paying the funds back one day but that day never materializes.  If this employee were to take a vacation and someone else were in charge of mailing out invoices and late notices, they would potential find the scheme when Customer B receives a late notice and calls to complain saying they paid it.

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