Fraud that makes the headlines are typically disbursement schemes, meaning that they are frauds that occurred from the disbursement of cash, such as embezzlement and purchasing frauds. While these are very significant and should be considered by every type of organization by addressing internal controls surrounding cash disbursements, associations may have a fraud risk that isn’t as attention grabbing.
Here are different types of fraud schemes:
Asset misappropriation schemes:
- Cash and other asset theft
- Disbursement schemes
Financial statement fraud schemes:
- Over-statements of assets or revenues
- Under-statements of assets or revenues
- Conflicts of interest
- Illegal gratuities
An association could skim funds for personal use by recording off-book invoices or fictitious invoices with incorrect amounts. These invoices would be for legitimate membership dues or event ticket sales which have been received, thus creating unrecorded or understated revenues, as the amounts recorded are less than the actual amounts received or were never recorded on the association’s official financial records. An example would be when a membership is renewed for the year, the member receives an invoice/receipt for the renewal and pays the renewal fee, however the invoice is never recorded on the books and the fee is diverted for personal use.
Another method for diverting cash collected is to write off bad debts. This would be possibly more prevalent for tickets sales or sponsorships where tickets are sold and recorded as receivable and then written off as a bad debt and the subsequent collection of the ticket price is then diverted for personal use.
Financial statement schemes
If an association is feeling a lot of pressure from the board of directors to meet certain membership revenue goals or event revenue profits, management of the association might be tempted to overstate revenue. This is a risk area due to the nature of how membership revenue is generally collected annually but should be recognized over the year of the membership monthly. This scheme would be perpetrated by recognizing revenue either in the current period to make the current period look better or deferring that revenue to a future period inappropriately to help that period. This type of scheme would be committed through deferred revenue computations and manual journal entries.
How can organizations monitor and mitigate the risk surrounding these schemes?
- Be vigilant in the review of membership dues. Consider doing predictive tests of membership revenue by taking total members provided by the membership department times the annual rates.
- At the end of each period, review to ensure that the amounts recorded as deferred revenue are truly deferred membership dues and are being properly recognized over the life of the membership.
- Validate that invoicing software used for membership renewals and events don’t allow for duplicates or fictitious invoices, or at a minimum understand how the software could be manipulated so that controls can be put in place to address such risks.
Fraud risks cannot be completely eliminated so it is important for management and the governing boards to be diligent in their review and to ensure there are controls and mitigating factors in place to prevent and deter fraud.
Contact Olsen Thielen Principal, Andrea Addo, CPA, MBA, CFE, CITP, with any questions.