Fraud in the private and nonprofit sector

Internal control, decision making, and effective management are at the core of fighting fraud in the private and nonprofit sector. It is unfortunate that management and those charged with governance do not give sufficient attention to the importance of the linkages between internal control and decision making.

Internal control is the foundation of the decision making and decision making processes. Effective decision maker should be able to consume effectively and efficiently reliable and proper information. Unless private and nonprofit management have effective decision makers, they will continue to suffer from all kinds of fraud that will cost their stakeholders too much money, pain, and most importantly trust in the justification of their existence.

I wrote this commentary based on the following article that appeared in "THE ATLANTA JOURNAL-CONSTITUTION"  

Fraud in the private and nonprofit sector, December 4, 2012

To prevent fraud, offer a hotline, train employees on fraud prevention, report says

To prevent fraud, offer a hotline, train employees on fraud prevention, report says


"For all geographic regions, corruption and billing schemes comprised more than 50% of the frauds reported to the ACFE, making those types of schemes a worldwide risk.

The ACFE survey also found that:

• Small businesses are particularly vulnerable to fraud because they often have fewer resources and less effective fraud controls than larger organizations.
• In 49% of cases, the victim organization had recovered no losses from fraud at the time of the survey. Just 16% reported recovery of 100% of losses.
• As in 2010, accounting was the most common area of employment for perpetrators, representing 22% of cases. Operations ranked second at 17%.
• Behavioral red flags most commonly associated with perpetrators were: living beyond their means (36%) and financial difficulties (27%)."

As the report was issued buy the ACFE on May 10, 2012, I will read it and provide my insights at a later time this month. I would like to assert the fact that is clear enough for us as experts in fighting fraud and corruption: The most effective fraud prevention and detection is Whistle Blowing ( Tips and Hotline).

Don't Mention It: How 'Undiscussables' Can Undermine an Organization

These are parts of an article that was published December 20, 2011 in Knowledge@Wharton. My comments follow in red.

"After everything falls apart, the failures to act become obvious: Why didn't somebody at Penn State do more to pursue allegations that former assistant football coach Jerry Sandusky was sexually abusing young boys? Didn't anybody at MF Global Holdings notice that something was wrong before $1.2 billion in customer cash disappeared? Why, decade after decade, didn't anyone at Olympus protest $1.7 billion in accounting irregularities?

"Why was there almost a conspiracy of silence?".......

Most experts agree that leaders must set the tone for the entire organization, work to elicit discussion about taboo topics and maintain transparency about how they respond to any concerns........Companies should also establish metrics, routines, audits and incentives to help identify problems and suggest areas of change, says Wharton management professor Lawrence G. Hrebiniak, who has acted as a consultant to dozens of companies such as General Electric, AT&T, Microsoft and DuPont. When top management diligently works to measure performance, elicit feedback and respond openly to problems when raised, it can usually make progress, Hrebiniak has found. "Control systems are important to implementing strategy and identifying problems," he says.

The caveat, of course, is that leaders need to pay attention to the facts. "In two cases, I've reported data to top management and they disinvited me from a strategic session," Hrebiniak recalls. "Some of the problems that were identified seemed to suggest poor leadership from the top.... They didn't want it to come out on their watch."

When companies have a culture in which managers are "more interested in hiding things than solving problems," there is little anyone can do to help, Hrebiniak says. "You need top management to react strongly. If they bury the stuff, they're dead.""

It is unfortunate that management usually discusses the undiscussables too late. It is evident that it will always be true that tone prevailing at the top is what sets other tones across each layer in any entity. 

Top management will always be responsible and accountable about the culture and ethical values in their entities. I would like to reiterate the fact that controls in general and internal control systems in specific will be of no value when top management does not support such control systems. Mere compliance with all kinds of polices, rules, and regulations is not enough. Great leadership is an ethical leadership that has no taboos when it comes to group politics and internal politics. Group loyalty may sometimes be a sort of collusion rather than any thing else. 

I do believe that unless top management leads by example at the highest ethical standards and supports each member their staff to speak up about each and any suspected immoral, unethical or corrupted acts, the collapse of such entities will be devastating and a matter of time. 

Birzeit Consulting Partners in the 4th Forensic Conference For Africa - Accra - Ghana

Birzeit Consulting will be participating as a partner in the 4th Forensic Conference Fro Africa titled " Fighting Fraud  / Corruption and Money Laundering in Africa Using Investigative Accounting Skills to enhance Operating efficiency"  in Accra - Ghana during the period  December 5 - 9, 2011. Birzeit Consulting will be participating by several of its associates and experts coming from the United States of America, the United Kingdom, and Jordan. The chief international speaker at the conference would be Mr. Mohammed J. Masoud, CPA, CFE, CICA, MBA, co-founder and managing director of Birzeit Consulting. He is an adjunct professor at the Arab American University, serves as an ACFE advisory board member, and a board member of the Arab Accountants Union (AAU) in Egypt.   Participants will be from several African, Middle Eastern, and European countries.
The guest of honor of the conference would be Mr. Adu Anane Antwi, BSc, LLB, MBA, CA, Director General of the Securities & Exchange Commission-Ghana.
The conference detailed brochure and its condensed one can be found when you click on each of them. For registration, please contact O'Sullivan Associates Ltd, our partner in Kenya. 

Enterprise Risk Management

JANUARY 2010

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) released a thought paper, Strengthening Enterprise Risk Management for Strategic Advantage, that highlights specific areas where senior management can work with directors to enhance the board’s risk oversight capabilities and the organization’s strategic value. This document builds on four specific board risk oversight responsibilities outlined in another COSO thought paper, Effective Enterprise Risk Oversight: The Role of the Board of Directors, that was released Sept. 1 to provide more detail on ways senior management can work with the board and others in the organization to strengthen risk management in all types of organizations. Both thought papers can be downloaded for free at coso.org.

More to Risk Management Than COSO ERM

By Arnold H. Schanfield, CPA, CIA, CFE

DECEMBER 2009

The authors of “ERM: Opportunities for Improvement” (Sept. 09, page 28) only discuss/reference the COSO ERM Framework.

The body of risk management knowledge includes many other sources, including lectures and books from recognized thought leaders, such as Robert Shiller, Nassim Taleb and others; at least 15 professional risk-related organizations such as the Casualty Actuarial Society, the Federation of European Risk Management Associations, the Global Association of Risk Professionals, and the Institute of Internal Auditors; and at least 15 other risk-related frameworks, including ISO 31000 and AS/NZS (Australian/New Zealand standard) 4360:2004. The authors suggest a COSO-driven risk management process without any regard for this body of knowledge. Why?

These are some of the problems with the COSO ERM Framework:

Enterprise Risk Management

NOVEMBER 2009

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a document to help boards of directors strengthen their oversight of enterprise risks.

The four-page paper, Effective Enterprise Risk Oversight: The Role of the Board of Directors, calls attention to COSO’s Enterprise Risk Management—Integrated Framework (2004) and its definition of ERM.

In emphasizing the critical role boards of directors play in overseeing ERM, it points to the following areas discussed in COSO’s 2004 ERM framework that contribute to board risk oversight:

• 
  
  Understand the entity’s risk philosophy and concur with the entity’s risk appetite.
• 
  
  Know the extent to which management has established effective enterprise risk management of the organization.
• 
  
  Review the entity’s portfolio of risk and consider it against the entity’s risk appetite.
• 
  
  Be apprised of the most significant risks and whether management is responding appropriately.

The paper can be downloaded at coso.org.