Only You Can Prevent Fraud by Using Internal Controls and Audits

When it comes to protecting your organization from scandal or, more likely, fraud, relying on internal controls and audit trails is a foolproof way to protect your organization and ensure its financials are safeguarded.

To ensure your organization is protected from similar controversies and fraud:

Use general organization-level controls to monitor who and when employees can access financial data.
Implement general rules to prohibit errant parties access to financial data.
Segregate duties in your organization to create a system of checks and balances.
Be good stewards of responsible record-keeping, such as those set out by the Sarbanes-Oxley Act.
Authorize and track users that handle purchasing and accounts payable.

The Importance of Audits

According to the Association of Certified Fraud Examiners’ 2022 Report to the Nations, a typical fraud case occurs for 12 months before it’s detected and results in a median loss of $117,000.

Audits are one method your organization can use to find and combat fraud and help ensure your organization operates ethically and stays in line with compliance regulations. They also ensure your organization is responsibly managing its funds and has a thorough history of fiscal competence.

The process improves significantly when your organization takes the steps to prepare. As audit season approaches, work with your finance or audit committee to define critical attributes around selecting an auditor and create a plan to oversee the selection process:

Talk to peer organizations for guidance and referrals.
Allow plenty of time to plan and execute a request for proposals if needed.
Look for auditors with relevant experience.
Find out what level of detail auditors will provide.

When you go through an audit, you’re forming a relationship with your auditor. As the auditor investigates your organization, ask how they can help if they uncover fraud. As you operate throughout the year, you can execute a series of steps that make the audit process easier:

Collect relevant documents and figures year-round and keep them in a central location that’s easy to access.
Establish a clear timeline and work milestones with your auditor.
Hold a kickoff meeting that includes the audit staff and your finance team, so everyone in your nonprofit audit committee is in sync about timetables and duties.
Prepare electronic and hard copies of an “audit binder” with standard documentation for bank accounts, investment accounts, fixed assets, payroll, and other relevant documents.
Designate one person as the point of contact when the audit team has questions.

When it’s time for the audit to begin, you’ll mostly let the auditor do their job in a defined space—but ensure your organization’s point person is available to answer any questions. Once the auditor submits their report and you receive feedback, act on what they uncover.

Stopping Controversy in Its Tracks

Audits aren’t the only way to stop fraud in its tracks; internal controls inhibit intentional or unintentional misappropriation of funds. In the accounting space, your team can configure internal controls to control transaction entries and define which segments can or cannot be combined. Certain providers allow for automation to ensure these controls apply to every transaction.

Your organization’s software also needs audit trails that show complete logs of who accessed the system and when. These trails track all changes that are made to the system by user ID with time stamps and the information of the computer that made the change.

Be Proactive and Transparent

According to ACFE’s report, when it comes to detecting fraud, 42% of cases were detected by tips, with more than half of all whistleblower tips coming from an organization’s employees. Your organization must have clear and transparent communication policies, and employees must know how to use anonymous tip lines.

Take a lesson from Smokey Bear, because only you can prevent controversy and fraud in your organization. But you can rely on technological systems to ensure you have the safeguards to prevent fraud from ever happening.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Neil Taurins is the general manager of nonprofit solutions at MIP Fund Accounting. He has been with the company for more than 12 years and is passionate about working with nonprofits to provide them with solutions to improve efficiency and help them accomplish their missions.