We saw in our last post that grant fraud (not to mention waste and abuse of taxpayer funds) takes place when there are these three key elements:
#1: Opportunity (Can I get away with it?)
#2: Motivation (Do I want it?)
#3: Rationalization (Do I “deserve” to have it?)
The element most controllable by grant managers has to do with opportunity.
Here are some common grant management mistakes that provide opportunity for grant fraud to happen and some examples of what should set you on edge and get you looking deeper.
Have you seen any of these 10 common mistakes?
Mistake #1: Un-Ethical Leadership
• Examples: Management does not place a high value on ethical practice demonstrated by no clear policies, i.e. defined lines of authority, separation of duties, individual accountability, level of competence, and no mechanism in place to report fraud to management
Mistake #2: Tolerance of Risky Behaviors
• Examples: Management engages in and demonstrates a value for high-risk behavior, such as aggressive accounting, liberal estimates, and poor oversight in the preparation of financial statements, inadequate comparison of budgets with performance, lack of HR oversight in hiring competent/trustworthy employees, and a lack of or substandard personnel appraisals/reviews
Mistake #3: Inadequate Technology Security
• Examples: Substandard information technology security, such as easy access, and lack of restrictions on computer usage, data verification and lacking formal data backup and recovery plans
Mistake #4: Poor Protection of Assets
• Examples: Substandard physical security of assets for facilities, records, computers, cash, and data files. No consistent and periodic audit comparing existing assets with records of assets and monitoring of asset condition
Mistake #5: Weak Accounting Controls
• Examples: Substandard inadequate accounting controls and security, i.e. no separation of duties, ineffective or incorrect recording of transactions, duplicate payments, missing payment dates, comingling vendor/supplier procurement and vendor/supplier payment duties
Mistake #6: Insufficient Project Monitoring
• Examples: Projects that have unusually large reliance on students, multiple sources of governmental funding, special requirement projects (i.e. residency requirements), projects showing little or no results, and projects with slow or no reporting
Mistake #7: Incomplete Controls
• Examples: Cost sharing, matching or leveraging where funds are placed separately without adequate controls; inadequately controlled/monitored related party transactions, linked infrastructure between nonprofit and for profit counterpart; transactions/accounts difficult to audit or require managerial estimates, cash or wire transfers, high cash bank deposits, assets easily converted to cash or personal use
Mistake #8: Lack of Monitoring
• Examples: Unusual, complex, or new transactions at end-of-year or reporting period; inadequate credit card oversight; discrepancies between budget and actual cost; shifting line items without proper justification; accounts experiencing sudden shifts
Mistake #9: Conflicts of Interest
• Examples: Principal Investigators (PI) with one or more outside businesses, inadequate oversight and/or allowing PI to authorize/determine allowable charges
Mistake #10: Ignoring Staffing and Payroll Difficulties
• Examples: Inadequate payroll system and monitoring, vague consultant/subcontractor agreements and high staff turnover
Where there’s smoke, there can be fire
These types of mistakes have historically been associated with the occurrence of fraud. While these examples do not “prove” fraud is taking place, they do demonstrate instances and circumstances that warrant careful monitoring of internal controls and/or correction in order to reduce the risk of fraud occurring.
Lucy Morgan CPA, MBA
CEO, Compliance Warrior