Fraud, waste and abuse

Effective Management as Your First Line of Defense

Before we begin, it would probably be helpful to define Fraud, Waste and Abuse as seen in associations:

Fraud - An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misuse of assets and ultimately a misstatement in financial statements.  

Waste - Failure to maximize the use of resources to advance the association's agenda.

Abuse - An intentional act which disregards standards of conduct which has a negative impact on the association but not necessarily results in the misuse of assets.

Examples of fraud, waste and abuse abound on the internet, but here are some of the effective controls we have implemented in our work and believe these effective systems could substantially reduce or eliminate the risk of fraud in your association:

Segregation of Duties

There are three main reasons fraud occurs and the number one reason is that the opportunity exists.   It is sad to say, but an environment where the assumption that fraud can't exist is exactly where you will find it.  By splitting up work so that those in charge of records are not in control of assets, you immediately reduce the risk of fraud as now it would take at least two people to commit fraud.

Documented Approvals

Without a system to verify that the right person reviewed and approved transactions, how can you be certain that the control wasn't overridden to hid a fraud?  Requiring that a second party review transactions and document their approval helps detect fraud.   Don't make the mistake that the approval need only be on larger transactions as most frauds are small dollar items that add up to big losses.  Document approval of every transactions and make sure that a board member signs off on larger transactions.

Rotate Jobs

The old adage, familiarity breeds contempt, is especially true when it comes to the risk of fraud.  A person who has been doing the same job for years learns the process and becomes trusted through longevity which is an easy way to override systems designed to prevent and detect fraud.  Make sure employees are rotated out from their assigned positions and their assigned clients (for management companies).  Fresh eyes can spot classic signs of fraud as well as bring a fresh perspective to the role which might even lead to enhanced profitability.

Create Effective Budgets

It goes without saying that simply taking last year's budget and increasing it by 3% is a tragic mistake.   Effective budgeting not only allows you to assess owners at the right amount, it allows you to manage expenses.  Plan what you intend to spend, add a small contingency and then watch the numbers closely.   Your budget can be a great tool to prevent fraud by establishing expectations and helping you identify areas of overspending.

Ensure the Minutes Identify Spending

Your minutes are a great tool to spell out what you should expect.  Every major spending decision should be documented in the board minutes and then that amount should be compared to what actually happened.  Recurring contracts, one-time projects, consultations with lawyers, accountants and other professionals should be planned and budgeted for so that everyone can see what is expected.   Make sure you identify who is performing the service, the amount you expect to pay and the time horizon if its known.  

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Preventing and detecting fraud begins with effective systems and a desire to root out the means, methods and most importantly opportunities to commit fraud, waste and abuse.   Remember, protecting assets should not rely upon people, but upon solid effective processes which provides checks and balances on the people in the system.

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