Caught In Prescott – Lessons in Fraud Prevention and Monitoring

Quite often, we come across incidents of fraud that make you wonder, ‘Could this be happening at my workplace?’ The uncomfortable reality is that it could.

This article covers the story of an Executive Director of a not for profit organization, misusing the organization’s funds towards personal expenses. Prescott Area Habitat for Humanity is a 501(c)(3) nonprofit charitable organization, providing affordable housing to hardworking families in and around Prescott, Arizona. The organization has been operating since 1989 and recently celebrated a major milestone of helping the 100^th family with affordable housing.

An anonymous letter received by the Prescott Police Department in February 2024, advising to look into the organization’s Executive Director, triggered an internal investigation into the charity’s operations, only to discover missing cash. She had been wrongfully using the organization’s resources to pay down her mortgage and utilities, and to purchase vehicles. Additionally, she made withdrawals amounting to $100,000 and opened an unauthorized credit card, charging another $187,000 to it. Forensic audit revealed a total loss of $826,000 to the charity.

While fraud is a setback to all organizations alike, its implications are felt manifold by a charitable institution that relies heavily on donations to help the community.

Long before a fraudulent event like this occurs, there are warning signs that could help nip it in the bud such as:

• Missing monthly bank reconciliations
• Override of authorization and approval processes
• Increasing complaints from vendors/customers
• Unexplained transactions or journal entry reversals
• Sudden cash shortages

A closer look at the policies and procedures of an organization can highlight lapses that could be potential enablers of a fraud waiting to happen. From an auditor’s point of view, the following strategies help prevent risk of fraud in an organization:

• Segregation of duties – The functions of recording a transaction, maintaining custody of the asset in question, and authorizing the transaction should be assigned to different individuals, never to one person. This prevents misappropriations from remaining undetected.
• Background checks – New vendors must be thoroughly vetted for existence, historical performance, and general reputation in the industry, prior to bringing them onboard. Background checks, confirmation of goods/services received, along with internal control policy requiring authorization for payments to new vendors can help prevent fraud through collusion.
• Multiple-signature checks – Checks for larger amounts requiring additional authorization from top management can help deter frauds involving large amounts.
• Verify payroll employees - To ensure each payroll run is free from fraud, ensure that employees on the roll are real and employed with the organization and no fake names are included.
• Regular reconciliations – Reconciling bank and credit card accounts at least once a month helps uncover discrepancies.
• Enforce documentation and supporting evidence – Policies should emphasize proper documentation including all required approvals to back the transaction.
• Financial red flags – Comparisons to prior years can reveal unexpected or unexplained increase in expenses that can trigger a closer look. It is good practice to perform this comparison in a regular fashion; quarterly, half-yearly, or yearly depending upon the scale of operations and effectiveness of internal controls.
• Regular audits and internal reviews – Subjecting the business to audits and internal reviews regularly is a good way to practice monitoring and uncover discrepancies.

A fraud requires three ingredients to manifest—intent, opportunity, and rationalization. While organizations have little to no control over an individual’s intent and rationalization, they can directly influence opportunities. A conscious effort must be made to limit the availability of opportunities through internal control and, more importantly, its consistent execution and continuous reinforcement.

Frauds are never a welcome event but there is a lesson to be learned; more scrutiny today provides for less financial distress tomorrow.

If you have concerns about possible fraud in your business, or want to prevent it, contact your R&A advisor. We have experts to assist you.