Be aware of fraud indicators, whether you are involved in a privately-held business, a publicly-held company or a tax-exempt organization. In a world with increasing fraudulent incidents, we must always keep our eyes open to potential fraud indicators or organizational anomalies that could lead to a misappropriation of business assets. The fact that something seems unusual doesn’t always correlate to an individual stealing, but don’t completely disregard it either. Start accumulating the warning signs in your memory. You may see that when you begin to gather the puzzle pieces, instead of looking at them individually, you will have a very real concern.
Recently, I was contacted by a successful tax-exempt organization that was materially delinquent in their income tax reporting. This organization handles a lot of cash. That inquiry led to me asking several questions resulting in learning a slew of organizational information.
To me, the fact that the income tax returns are delinquent was a “red flag”. But, let’s “peal back the onion” and learn more as to “Why are the income tax returns delinquent?” Let’s face it, just because an income tax return is delinquent doesn’t mean that any sort of fraud is occurring.
Asking some initial probing questions was telling. I learned:
- The internal accountant – an unpaid volunteer – which is fairly customary in some small tax exempt organizations has no accounting background.
- Not having a qualified, but rather, a well-intentioned warm body handling the books is a “red flag”.
- And, this individual has been unemployed for over a year, and thus has a financial need, compounds my ever-mounting professional skepticism.
It was no surprise to learn that the work product and recordkeeping was in poor condition:
- The fact that the internal accountant wasn’t overly concerned about the tax return delinquency was troubling to me.
- Disorganized records and poor record keeping are red flags. The fact that your job is to do the books and you don’t care about them is a “red flag”.
It didn’t take long to learn that the general internal controls associated with financial reporting were virtually non-existent. Now that’s a serious “red flag”. (Read my blog entry: How to Implement Internal Controls to Prevent Employee Theft)
It wasn’t long after that, I discovered that monthly reports had not been distributed to Board members. Red Flag.
When questioned about the lack of financial reporting, the individual always had a compelling excuse for their absence. When pressured to produce records, the individual always seemed to come up with a new and creative delay tactic thus buying time. This person has repeatedly lied to Board members, but none of the Board members ever shared or discussed their conversations with the internal accountant that would have flushed out the conflicting stories. Red flag. Red flag. Red flag.
Having to account for, and handle cash is always a “red flag”. You see, cash is so easy to misappropriate and in this case, coupled with poor internal controls, AND forgetting the late income tax returns; but the alarm bells going off in my head are begging the question, “Has all of the cash been accounted for?”
By now, I’m not nearly as concerned about the delinquent income tax returns as I am about the organization’s assets.
Would it matter if I told you that this organization was the victim of a material fraud 15 years ago (by former volunteers, none of whom are involved today)? Surprised? Probably not. But that’s yet another red flag!
In this experience I identified a slew of red flags, many of which considered individually could be justified. But when you add them all up, I think you may have a serious problem.
When you start taking an inventory of potential red flags associated with your internal accounting department and determine that you have more flags than a retail store selling “Old Glory” the weekend before the Fourth of July, it’s time to call a certified fraud examiner to perform a fraud assessment. The red flags are trying to tell you something. Listen to them.
To discuss this article or if your organization would like information on a fraud risk assessment, please call Frank A. Suponcic, CPA, CFE, CFF at 440-449-6800 or email at firstname.lastname@example.org to schedule a confidential consultation.
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