Fraud Survey Demonstrates Importance of Internal Controls

by | News

The latest of BDO’s annual surveys of fraud in not-for-profits has revealed that once again, the most common methods of detecting fraud are strong internal controls and tip-offs. Internal controls have been the most successful method of detecting fraud over the years. However, there is concern that organisations are placing less reliance on them as a preventative measure.

 

Key Survey Findings

The Not-for-Profit Fraud Survey 2012 is the fourth in a bi-annual series produced by accounting firm BDO. Key findings of the 2012 survey of 645 organisations were:

  • Total fraud of $2,916,616 was reported
  • The average value of each fraud was $8,838
  • Small organisations (turnover less than $100,000) reported 31 frauds
  • Average fraud value ($13,107) was highest in the $500,000 – $1,000,000 turnover band
  • For almost half those who suffered fraud, it was not the first time

Key Messages Going Unheeded

While the average value of reported fraud has decreased over the past 8 years of surveys, the authors are concerned that
“key messages and outcomes from previous surveys appear to be going unheeded. This is particularly in relation to internal controls and whistle-blower policies.”
For instance, internal controls have been shown again and again to be one of the most effective ways of preventing and of discovering fraud. Yet, organisations are placing less reliance on them now. In other words, their preference is to rely on trustworthy staff, external audits and good culture. While these are important, most frauds continue to be detected by internal controls or tip-offs. This clearly suggests that improving these areas is the best defence against theft.

Respondents’ Perceptions

To bring home the gravity of fraud and its effects on NFPs, here are some of the respondents’ perceptions and experiences:

‘Fraud was discovered six years ago and it took five years to recover financially…as a result the funding bodies increased their reporting requirements’.

 

‘Fraud destroys goodwill…the reputation risk is huge’.

 

‘Although we are a small organisation now, as we continue to grow the risk of fraud will increase’.

Hence, the lesson is that not-for-profits could benefit from a formal whistle-blower policy and stronger internal controls.