FOR WHAT YOU GET
A friend of mine is a former all-American cross-country runner. We were discussing training, and he commented that running twenty miles per week would provide 50 percent of the benefit that any amount of run- ning would provide. I have no idea whether this is true (although I have no reason to doubt my friend), but it supplies a useful analogy for in- ternal controls and fraud prevention. That is, most of the benefit that a library gains from fraud prevention comes from relatively cheap and simple measures. Creating an atmosphere of trust and ethics, paying at- tention, segregating at least some duties, and, above all, creating and maintaining a timely and accurate set of financial records will net the li- brary a majority of the control and protection that any amount of in- ternal controls will provide.
An example closer to the hearts of many librarians is the 80/20 rule.
Most of us know from reference classes that a relatively small portion of a collection can supply the majority of all information needs. You could, in theory, run a library satisfactorily with a very small collection. The real questions, though, are how much more service do you need to supply to patrons and at what cost? The same is true for fraud prevention.
138 GETTINGWHATYOUPAYFOR
Complete protection is more than we can obtain and wouldn’t be worth the cost even if it were attainable. But the fact that perfection is unattain- able shouldn’t preclude looking for some protection at a reasonable price. A small investment in internal controls will yield a large return in protection at a price that’s lower than the alternative—a costly fraud.
GETTINGWHATYOUPAYFOR 139
141 ALA American Library Association. 2005. Crisis communication with the
media. http://www.ala.org/ala/oif/iftoolkits/toolkitsprivacy/privacy communication/crisiscommunication/crisiscommunication.htm.
Alliance for Nonprofit Management. 2005. Risk management in the nonprofit sector. http://www.allianceonline.org/FAQ/risk_management/
what_is_risk_management.faq.
Association of Certified Fraud Examiners. 2004. Report to the nation on occu- pational fraud and abuse. Austin, TX: ACFE.
COSO Committee of Sponsoring Organizations of the Treadway Commission.
2005. Internal control—Integrated framework. http://www.coso.org/
publications/executive_summary_integrated_framework.htm.
Cressey, Donald. 1953. Other people’s money: A study in the social psychol- ogy of embezzlement. New York: Free Press.
Hatlestad, Dan. 2002. No news is bad news. http://firechief.com/mag/
firefighting_no_news_bad/.
Hersberger, Julia, and Herbert Snyder. 2000. Internal control and financial misconduct in public libraries. Encyclopedia of Library and Information Science, vol. 66. New York and Basel: Marcel Dekker.
Mehren, Elizabeth. 2005. The nation: Alleged thefts disquieting for libraries; A noted researcher is charged with stealing $900,000 in rare maps from a Yale collection; The case is just one that has librarians on notice. Los Angeles Times, September 10.
NCNB National Center for Nonprofit Boards (now BoardSource). 2005.
http://www.ncnb.org/.
New York Times. 2003. Worker charged with stealing $77,000 from Floral Park Library. July 9.
Oder, Norman. 2005. Budget report 2005—Tipping point. http://www .libraryjournal.com/article/CA491143.html#table1.
Oder, Norman, and Michael Rogers. 2005. Library theft cases in GA, MI.
Library Journal130 (April): 24.
Ostrander, Kathleen. 2000. Former head librarian charged with stealing from library: She’s accused of taking $6,800 worth of books, CDs, tapes from Edgerton Library. Milwaukee Journal Sentinel, May 16.
References
Rogers, Michael. 2004. Ft. Worth library loses $73K. Library Journal129 (November): 24.
Snyder, Herbert, and Donna Dietz. 2006. Fraud in community health centers.
Journal of Forensic Accounting6 (December): 301.
Snyder, Herbert, and Julia Hersberger. 1997. Public libraries and embezzle- ment: An examination of internal control. Library Quarterly67 (January): 1.
South Bend Tribune. 2002. Ex-library worker sentenced in theft. September 11.
Squatriglia, Charles, and Julie Lynem. 1999. Burlingame library worker charged in $129,000 theft: $20 bills missing from overdue book fines. San Francisco Chronicle, December 9.
Summerford, Ralph, and Robin Taylor. 2003. Avoiding embezzlement embar- rassment or worse. Fraud Magazine(November–December): 38–41.
Tsao, Emily. 2005. Suspicious book leads to arrest in library theft. The Oregonian, March 25.
Wells, Joseph. 2005. Principles of fraud examination. Hoboken, NJ: John Wiley and Sons.
142 REFERENCES
143 A
abuses of position, 45, 98–101 accounting
board expertise in, 9 purchase order system and,
112–113
response to suspected fraud and, 128
warning signs of fraud, 120–121 accounting ledgers, 124
addresses, post office box, 66–68, 72 ALA Trustee Association, 36 amount schemes (check tampering),
87–88 anomalies
investigating fraud and, 108–111 in prenumbered documents,
111–115
warning signs of fraud, 120–121 asset misappropriation, 45–46 assets
financial management and, 7 identifying responsibility for, 20 independent checks, 29 internal controls for, 16–17 inventory and control of, 25–28,
34, 91–98 misuse of, 94
physical security of, 24–25 physically checking, 95 at-will inspections, 127 audits
acting on weaknesses uncovered in, 121
cash misappropriation and, 46–48 internal control and, 28–31 response to suspected fraud and,
128
risk for fraud and, 9 and segregation of duties, 15 warning signs of fraud, 120–121 See alsoindependent checks authorization
billing fraud and, 64
cash misappropriation and, 56 check-signing authority, 34–35, 37 of expenditures, 34–35, 38 expense reimbursement and, 80–81 fraudulent invoices and, 60–61 internal control and, 22–24 inventory and, 97
inventory fraud and, 95 payroll fraud and, 74 training on, 134
warning signs of fraud, 120 authorized vendor list, 66
B
balance sheets, 107–108 bank statements
reconciling deposits, 52–54, 115 response to suspected fraud and,
124, 128
warning signs of fraud, 120 billing
cash misappropriation and, 46 check tampering and, 83
detecting/preventing fraud, 63–69 investigating fraud, 103
pass-through schemes, 61–62 shell company schemes, 58–61 vendor collusion, 61
vendor overpayments, 63 warning signs of fraud, 118–120 bit stream copy, 124
Index
board of directors. Seegoverning boards
BoardSource, 36 bonding
of employees, 126–127 internal control and, 18–21 prosecution for fraud and, 130 response to suspected fraud and,
123 bookkeeping
internal control weaknesses, 33 MPL case study, 39–44
response to fraud and, 133–134 warning signs of fraud, 121 See alsorecord keeping bribery, 45, 99–100 budgets
governing boards and, 36 investigating fraud, 103–107 paying attention to, 102 payroll fraud and, 76 risk for fraud and, 7
warning signs of fraud, 118–119 C
cash collection managing, 25–28 monitoring, 56–58
warning signs of fraud, 118 cash counts, 55
cash larceny about, 48, 50–51 check tampering and, 84 detecting/preventing, 56 cash misappropriation
cash larceny, 50–51, 56, 84 detecting/preventing, 51–58 investigating, 103, 107–108 missing $20s, 46–47 skimming, 48–50 techniques for, 46
warning signs of fraud, 119 cash registers
false sales, 49
false voids and refunds, 50 as financial record, 53
management presence around, 54 reconciling with deposits, 51
stealing from other, 50 voiding transactions, 56
certified fraud examiner (CFE), 128 change management, 39–44, 132–134 check stock, 84–85, 89
check tampering
about, 46, 49–50, 83–84 anomalies in numbering and,
111–115
detecting/preventing fraud, 57 response to suspected fraud and, 124 schemes for, 84–88
check-signing authority, 34–35, 37 cleaning supplies, pass-through
schemes, 61–63 cloning, hard disk, 124 coercion, 128
collusion
cash counts and, 55
segregation of duties and, 16 vendor, 61
commissions, overpaying, 69 complaints, 118–119, 122 computers, suspected fraud and,
124–125 concealment
fraud and, 2 opportunity and, 6
segregation of duties and, 16 confidentiality, suspected fraud and,
123, 128–129 conflicts of interest, 45, 101 corruption, 45
creditors, complaints from, 118–119 Cressey, Donald, 3, 5
crisis communication, 131–132 D
damages from suspected fraud, 122–132
DBA (doing business as), 59 defamation, 122, 127–128
delegation, internal control and, 42 deposits
reconciling, 47, 51–54, 115 regular, 57
shorting, 50–51
stealing cash and, 47–48
144 INDEX
directors, library. Seelibrary directors documents
fraudulent invoices and, 60–61 inventory and, 97
investigating fraud and, 111–115 response to suspected fraud and,
123–125, 128 E
80/20 rule, 138
employee rights, 125, 127–128 employees
billing fraud and, 65, 68 bonding of, 126–127
change management and, 43–44 checking references, 13–14 expense reimbursement fraud, 78,
82–83
following up on complaints, 119 internal control and, 13–15 inventory control and, 91–92, 96 obligations of, 126
pay rates for, 10, 72–74 payroll fraud and, 73–75 response to suspected fraud,
122–129
searching desks of, 125 suspending, 126, 133 terminating, 125–130 training, 44, 134
warning signs of fraud, 119–120 employer rights, 125, 127–128 employment at will, 126
endorsement schemes (check tam- pering), 88
evidence of fraud, 123–126 expenditures. Seeexpenses expense reimbursement
cash misappropriation and, 46, 57, 77–78
detecting/preventing abuse, 80–83 expenses
approving, 34–35, 38 billing fraud and, 65, 68 duplicate, 79–80 fabricated, 79
identifying public service in, 134 improper classification of, 78–79
investigating fraud, 103–108 overstated, 79
payroll fraud and, 76
reviewing reasonableness of, 81–82 warning signs of fraud, 118 extortion, 45
F
false imprisonment, 128 false sales, 49, 107–108 false voids and refunds, 50, 56 fiduciary responsibility, 2 financial controls
depositing cash, 27 destroying records and, 87 governing boards and, 35–36 internal control weaknesses, 33 risk for fraud and, 7–8 stealing cash and, 48
financial need (fraud triangle), 3–4 financial records
internal control of, 33, 125 investigating fraud, 103, 115 response to fraud and, 124–125,
133–134
stealing cash and, 48, 50–51, 53 financial statements
investigating fraud, 45, 103 response to fraud and, 134 fines
cash misappropriation and, 46–48, 55
financial management and, 7–8 internal control and, 26
investigating fraud, 103, 108–111 fingerprint scanners, 102
forgery, 49
Fourth Amendment, 127 fraud
classification scheme for, 45–46 common warning signs, 118–122 defined, 1–2
MPL case study, 39–44 paying attention, 102 people who commit, 2–3 prosecution for, 129–130 response to suspected, 122–129 risk for, 7–11
INDEX 145
fraud (cont.)
why people commit, 3–6 See also specific types of fraud fraud examiners, 115–116, 128 fraud investigation
consulting with professionals, 115–116
first law of, 126
gaps/anomalies in prenumbered documents, 111–115 paying attention, 102–103 reconciliations, 115
vertical and horizontal analyses, 103–111
fraud triangle, 3–6
fundraising, governing boards and, 34, 36
fungible commodities, 26 G
GAAP (generally accepted accounting principles), 29
ghost employee schemes, 69–72, 76 governing boards
abuses-of-position fraud and, 101 bonding, 19
check tampering and, 88–89 check-signing authority, 34–35 educating, 36–37
financial management and, 7 following up on complaints, 119 internal control and, 34–38
oversight of expense reimbursement, 78
previous fraud and, 121–122 response to suspected fraud and,
128, 130–134 risk for fraud and, 8–9 segregation of duties and, 18 training, 36–37, 134 turnover in, 9 as volunteers, 8–9 gratuities, illegal, 45, 100 H
hard disk cloning, 124 hard disk imaging, 124 horizontal analysis, 103–111
I
imaging, hard disk, 124 income statements, 104–108 independent checks
internal control and, 28–31 segregation of duties and, 17 See alsoaudits
inspections, at-will, 127 insurance carriers
bonding and, 18–21, 126–127 response to suspected fraud and,
123, 126–127, 130 internal control (IC)
asset inventory and control, 25–28 bonding, 18–21
check tampering and, 89 common weaknesses, 32–36 correcting weaknesses, 36–38 defined, 12–13
employee selection, 13–15
expense reimbursement and, 80, 83 fraud examiners and, 116
fraud protection and, 134, 138 independent checks, 28–31 inventory fraud and, 91–93 job duties, 37
job rotation and enforced vacation, 18
MPL case study, 39–44 pass-through schemes and, 62 payroll fraud, 75–76
physical security, 24–25 proper authorization, 22–24 proper procedures, 21–22 reconciling cash and deposits, 47 segregation of duties, 15–18 warning signs of fraud, 121 interviews, suspected fraud and,
123–124, 128 inventory
detecting/preventing fraud, 94–98 disposal of, 97
internal control and, 25–28, 34 physically checking, 95 securing, 96
stealing, 91–94 invoices
anomalies in numbering, 111–115
146 INDEX
invoices (cont.)
billing fraud and, 66–69 consecutive numbers, 69 duplicate, 61, 63 fraudulent, 59–60, 119 identification numbers on, 69 pass-through schemes, 62
response to suspected fraud and, 124 J
job descriptions, 37
job history, checking, 13–14, 57 job rotation, 17–18
K
kiting scheme, 115 L
lapping scheme, 115 larceny, 50, 93
law of sympathetic magic, 42 legal action
for defamation, 122 employee rights and, 127 prosecution, 130
for suspected fraud, 126–128 terminated employees and, 129–130 library boards. Seegoverning boards library directors
corruption and, 45
following up on complaints, 119 internal control and, 33–34, 37–38 MPL case study, 39–44
previous fraud and, 121–122 response to suspected fraud and,
128, 130, 132–134 suspending, 133 Library Trends, 7 Linderfelt, Klas, v
login passwords, 50, 53, 56 M
mail, opening, 119
maker schemes (check tampering), 84–87
management
billing fraud and, 60 financial statement fraud, 45 inattentive, 60
noticing employee behavior, 120 overseeing cash handling, 54 payroll fraud and, 69–76 response to suspected fraud,
122–129, 134 risk for fraud and, 7–8 misappropriation of assets, 45–46 misuse of position, 45, 98–101 N
National Center for Nonprofit Boards (NCNB), 36
O
occupational fraud. Seefraud opportunity (fraud triangle), 5–6, 41 organizational culture, 9
Other People’s Money(Cressey), 3 oversight
of cash flow, 27–28, 47 check-signing authority and, 35 of expense reimbursement, 78, 80 following up on complaints, 119 governing boards and, 8–9, 18,
37–38
from internal controls, 15 MPL case study, 41–42 risk for fraud and, 8 P
pass-through schemes, 61–62, 65 passwords, login, 50, 53, 56 PATRIOT Act, 72
patterns, investigating fraud and, 108–111
pay rates, employee, 10, 72–74 payee schemes (check tampering), 87–88 payments
billing fraud and, 64–65 check tampering and, 90–91 warning signs of fraud, 121 payroll
cash misappropriation and, 46 detecting/preventing fraud, 73–77 ghost employee schemes, 69–72 incorrect wages and hours, 69,
72–73
overpaying commissions, 69
INDEX 147
petty cash, 81 phone numbers, 68 physical security
deposits in transit, 51 internal control and, 24–25 for inventory, 96–98
planning response to fraud, 123–124 policies and procedures
employee manual for, 126
internal control and, 21–22, 37–38 response to fraud and, 133 right-to-search policy, 127 position, abuses of, 45, 98–101 post office box addresses, 66–68, 72 pressure (fraud triangle), 3–4 Principles of Fraud Examination
(Wells), 45
privacy, workplace, 125, 127
procedures. Seepolicies and procedures prosecution for fraud, 129–130, 133 public service, 98–101, 134
public trust, 123, 137
publicity about fraud, 123, 130–132 purchase orders
anomalies in numbering, 111–115, 120
billing fraud and, 64–65 check-signing authority and, 35 expense reimbursement and, 80–81 internal control, 37, 57
inventory fraud and, 94–95 out-of-sequence, 102 purchase order system and,
112–114 vouchering and, 23 warning signs of fraud, 120 purchases
billing fraud and, 61–65 inventory fraud and, 94–95 investigating fraud, 114 overpayment for, 119 requiring receipts for, 55 R
rationalization (fraud triangle), 4–5 receipts
expense reimbursement and, 81 for fines, 55
investigating fraud, 103, 108–111 paying expenses from, 57 for purchases, 55
warning signs of fraud, 120 receiving, purchase order system and,
112–113 reconciliation
of cash and deposits, 47, 51–54 check tampering and, 86–87, 90 investigating fraud, 115 of payroll records, 76 record keeping
cash flow, 27–28 check tampering and, 89 of previous fraud, 122
warning signs of fraud, 120–121 See alsobookkeeping
refunds, false voids and, 50, 56 response to suspected fraud
acting quickly, 122–123 confidentiality and, 128–129 consulting with professionals, 128 dealing with suspect, 125–126 employer/employee rights, 127–128 making a plan, 123–124
notifying insurance carrier, 126–127 securing records, 124–125
restrictive endorsement, 57 right-to-search policy, 127 risk
defined, 137 for fraud, 7–10 managing, 137–138 MPL case study, 41–42 recognizing, 10–11
vertical and horizontal analyses, 103–111
S
Sarbanes-Oxley Act (2002), 37 searching employees’ desks, 125 security, physical. Seephysical security segregation of duties
billing fraud and, 63–64 bookkeepers and, 39–44 cash misappropriation and, 47,
51–55
check tampering and, 88
148 INDEX
segregation of duties (cont.) expense reimbursement and, 80 internal control and, 15–18, 33–34 inventory fraud and, 94–95 opening mail, 119
payroll fraud and, 73–75 self-approval of invoices, 60 services
billing fraud and, 65 charging for, 48 investigating fraud, 107 overpayment for, 119 shelf reading, 95
shell company schemes, 58–61, 66–69 shipments
falsifying, 93
processing quickly, 95–96 purchase order system and,
112–113
signatures (check tampering), 86 skimming
check tampering and, 84 defined, 48–49
detecting, 56
voiding transactions and, 56 Social Security numbers, 75 stealing, 45–46
supervisors. Seemanagement
surveillance equipment, 54–55, 97–98 suspending employees, 126, 133 sympathetic magic, law of, 42 T
tax returns, 128
termination, employee, 125–130 time sheets, payroll fraud and, 71–72,
76–77
tips about fraud, 122 training
employees and, 44, 134 governing boards, 36–37, 134
transaction records, 56, 124–125 Treadway Commission, 12 trust
internal controls and, 43 limitations of, 14–15 public trust, 123, 137 turnover in governing boards, 9 U
United Way, 29–30
unlawful search and seizure, 127 The Usual Suspects(film), 10 V
vacations, enforced, 17–18 vendor collusion, 61 vendors
billing fraud and, 65–68 expense reimbursement and, 81 overpayments by, 63
purchase order system and, 112–113
vertical analysis, 103–111 voiding
investigating fraud and, 107–111 monitoring trends in, 58
register transactions, 56
volunteers, governing boards as, 8–9 vouchers, 23, 111–115
W
wages, payroll fraud and, 69 warning signs for fraud, 118–122 Wells, Joseph, 45
withdrawals, reconciling, 115 workplace privacy, 125, 127 wrongful termination, 126–127
INDEX 149