Fraud Prevention and Remedies: When to Call a Forensic Accountant

Insights for Nonprofits of All Sizes

By Scott Koman, CPA, CVA, CFE, MAFF

Fraud is a critical issue affecting organizations across all industries, including nonprofits. Understanding how to prevent, detect, and respond to fraud is essential for safeguarding your nonprofit's resources and reputation. As a forensic accountant, I aim to provide clarity on this topic and offer actionable insights supported by real-world examples.

Prevention First

Creating a culture of ethics within your organization is the first line of defense against fraud. Implement policies that encourage transparency and accountability, and seek guidance from industry groups on best practices for internal controls. Collaborate with external auditors to ensure robust systems are in place. Engaging a forensic accountant can provide an additional layer of protection by offering expert advice on how fraud occurs and how to prevent it.

When Prevention Fails

Despite your best efforts, there may be times when fraud slips through the cracks. This is where a forensic accountant becomes invaluable. Forensic accountants use specialized investigative skills to collect, analyze, and interpret evidence, often uncovering the extent of fraudulent activities and providing insights into the harm caused.

Case Study: Payroll Fraud

An irregular payroll report revealed that an employee had received over $20,000 in unauthorized compensation over four years. The forensic accountant discovered that the employee had access to payroll and had paid themselves overtime without approval. The investigation led to criminal charges and highlighted the need for tighter payroll controls.

Litigation and Resolution 

Fraud can manifest in various forms, from simple theft of cash to complex financial statement misrepresentation. Forensic accountants can assist victims (or accused suspects) by providing clear evidence to support effective resolutions.  A forensic accountant’s work may be used to help facilitate a private settlement, support an insurance claim, and/or provide expert credibility at criminal or civil trials, depending on the goals of the defrauded organization (or wrongfully accused suspect). 

Case Study: Misuse of Company Credit Card 

A company lost just under $60,000 due to an employee's misuse of a company credit card. The forensic accountant's investigation provided the evidence needed for the organization to decide on the best course of action. In this case, they opted for a $50,000 out-of-court settlement to recover most of the losses without incurring further legal costs. 

Practical Steps for Nonprofits 

Nonprofits must understand that even minor suspicions of fraud warrant attention. Launching a preliminary investigation can reveal the scope of the issue and guide the next steps. Forensic accountants can help determine whether fraud occurred and quantify the losses, providing a solid foundation for any subsequent actions. 

Case Study: Overstated Revenue 

A nonprofit CFO overstated revenue by over $200,000 due to improper bank reconciliations. While no theft was found, the investigation uncovered significant gaps in the CFO's knowledge and the external auditor's oversight. The board decided to replace both the CFO and the external auditors to prevent future discrepancies. 

Conclusion 

If fraud is suspected, engaging a forensic accountant can offer clarity and direction. An internal investigation might suffice, but leveraging the expertise of a forensic accountant ensures a thorough and unbiased review. This approach not only addresses the immediate issue but also strengthens your organization's defenses against future fraud. 

Nonprofits of all sizes can benefit from understanding the complexities of fraud and the value of forensic accounting. By proactively addressing potential risks and responding effectively when fraud occurs, you can protect your organization and continue to fulfill your mission with integrity. 

About the Author

Scott Koman, CPA, CVA, CFE, MAFF is a Director with Boyer & Ritter LLC. He is a key member of the firm's Advisory Services Group and leads the firm's Forensic Accounting team. He has experience working with for-profit organizations, not-for-profit organizations, and governmental entities. Reach Scott at (717) 761-7210 x1285 or skoman@cpabr.com.