I’ll be speaking on ways internal controls can increase trust at the upcoming AICPA Not-for-Profit Industry conference in Washington in June.
Sometimes we get lost in the jargon of internal controls and forget that strong checks and balances can increase trust with our funders, employees and the general public.
How to Increase Trust with Funders
Let’s face it!
The common goal of funders and donors is that grant recipients to do what they say they will, with the budget they proposed and not create negative press for funders to deal with during that process.
- Grant recipients can go along ways towards keeping funders happy by ensuring the organization has strong systems of internal controls that prevent good grants from going bad.
Grant fraud along with waste and abuse of taxpayer funds takes place when these three key elements align:
#1: Opportunity (Can I get away with it?)
#2: Motivation (Do I want it?)
#3: Rationalization (Do I “deserve” to have it?)
These three elements are called the “Fraud Triangle”
Here are some common grant management mistakes that provide the opportunity for grant fraud to happen and some examples of what should alert you to dig deeper into what is going on at your organization.
10 Grant Mistakes That Can Cost You Big!
In any organization where bad things happen, there are often warning signs.
Grant funded organizations are no different.
How many of these ten common mistakes have you run into?
Mistake #1: Un-Ethical Leadership
Here are some examples of when management does not place a high value on ethical practice:
- Lacking clear policies
- No clearly defined lines of authority
- Limited separation of duties
- Little individual accountability
- Missing mechanisms to report fraud
Mistake #2: Tolerance of Risky Behaviors
Risky behavior can happen at the highest levels.
Here are some examples of a management that engages in and demonstrates a value for high-risk behavior:
- Aggressive accounting
- Poor oversight in the preparation of financial statements
- Inadequate comparison of budgets with performance
- Lack of Human Resources oversight in hiring, pay scales and bonuses
- Missing or substandard personnel appraisals and reviews
Mistake #3: Inadequate Technology Security
Information technology (IT) is an area that has historically been far removed from the grant management function.
The Uniform Guidance changes by requiring additional reviews, certifications, and controls around protected personally identifiable information.
Here are just a few of the ways that substandard IT security can put your organization and grants at risk:
- Easy access, and lack of restrictions on computer usage
- Missing record retention policies for electronic records
- Lack of formal data backup and recovery plans
Mistake #4: Poor Protection of Assets
Assets include cash, equipment and a wide variety of other types of property from office supplies to electronics. Missing robust protection for assets certainly increases the opportunity for these types of assets to walk out the door.
Here are some common ways assets go MIA:
- 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
- Weak monitoring of asset movement between locations, and people
Mistake #5: Weak Accounting Controls
Substandard inadequate accounting controls and security also can play a role in the opportunity for frauds to blossom.
Here are a few examples of weak accounting controls:
- Inadequate separation of duties
- Ineffective monitoring of duplicate payments and vendors
- Incomplete or late reporting
- Missing review of journal entries, new vendors, and account reconciliations
Mistake #6: Insufficient Project Monitoring
While managing funded projects can be a busy, even chaotic time, it should be recognized that the period of performance is where opportunity is created for potential fraud.
Here are some common examples of increased risk for insufficient project monitoring:
- Unusually large reliance on students or volunteers
- Multiple sources of governmental funding
- Special requirement projects (i.e. eligibility requirements)
- Projects that demonstrate little or no results
- Slow or no project reporting
Mistake #7: Incomplete Cash Controls
Because cash is the most easily converted type of asset, incomplete cash controls create a huge opportunity for fraud to occur.
Here are just a few examples:
- Separate accounts for things like cost share or matching, other donations, or departmental expenses exist without adequate controls
- Linked infrastructure between nonprofit and for-profit counterparts make it difficult to separate and audit transactions
- Use of cash or wire transfers for payments
- Lax monitoring of cash deposits
Mistake #8: Lack of Monitoring
The best-written process in the world is meaningless if no one is actually doing it.
The role of monitoring is to determine if what you think is happening is really happening…or NOT!
Without monitoring the opportunity for frauds to go on, undetected is increased.
Here are some common signs of a lack of monitoring:
- Unusual, complex, or new transactions at end-of-year or reporting period without sufficient review and approval
- Inadequate credit card or expense report oversight
- Unexplained discrepancies between budget and the actual costs
- Shifting expense line items or accounts without proper justification
Mistake #9: Conflicts of Interest
Conflict of interest can happen with any organization, but missing a clear process for dealing with them often leads expensive cost disallowance for federal grant recipients and a public relations nightmare for many types of organizations.
Here are a few examples of how poor processes can create the opportunity for conflict of interest to continue:
- Principal Investigators (PI) or Program Director with one or more outside businesses not required to disclose interests
- Inadequate formal oversight by boards of management relationships
- Unclear reporting process
- Untrained staff on how to handle potential conflicts of interest
- Lack of multiple reporting paths for whistle-blowers
Mistake #10: Ignoring Staffing and Payroll Difficulties
Finally, the opportunity for fraud is accelerated by staffing and payroll problems.
These examples often exist when payroll frauds take place:
- Inadequate payroll system
- Lack of monitoring of payroll discrepancies
- Vague consultant or subcontractor agreements
- High staff turnover
Watch for Warning Signs!
While these types of mistakes have historically been associated with the occurrence of fraud, they do not “prove” fraud is taking place.
But like the old saying “Where there is smoke, there can be fire!”
Treat these common missteps like an “early warning system” that alerts you to the need for a careful investigation of the circumstances to reduce the risk of fraud occurring at your organization.
Learn More About Grant Management
Want to learn more about how to be a better grant manager?
We offer two-day grant management training online, on-site and at our live training seminars called “Grant Management Boot Camp.”
Lucy Morgan CPA, MBA
CEO, Compliance Warrior