about what you can do yourself. Some frauds are easy to uncover be- cause no one in the library was paying attention. That doesn’t mean all fraud schemes are simple. Nor does it mean that your initial discovery will uncover the full monetary extent of the damage. At some point you are likely to need the services of a professional.
RED FLAGS—WHAT ARE COMMON
creditors. Normally, not paying people to whom you owe money is self- correcting. The creditors start clamoring for what they’re owed and, given enough time without being paid, stop providing their goods and services. Indeed more than one fraud has come to light (so to speak) when the local utilities cut off gas and electricity.
Although the end may be inevitable, it is often postponed for long periods by the fraudster who intercepts the dunning phone calls and overdue notices. As we’ve seen earlier, rotating opening mail among em- ployees helps keep this situation from happening. However, the fraudster doesn’t always bear full responsibility for keeping the information quiet.
In many cases, board members or employees have received com- plaints and failed to follow up on them. It isn’t unusual, particularly in smaller communities, to know many of the people with whom the library does business and to receive complaints about slow payments. In many cases, the individual passes the complaint along to the appropriate li- brary employee and forgets about it. Only later does the individual ex- perience that sinking feeling of, “If only I’d checked into it more deeply.”
This isn’t quite as big an oversight as it may first appear, because it’s appropriate to refer library financial matters to the director or office manager or both. What is less understandable (or at least less forgivable) is that the individual receiving the complaint never follows it up with both the creditor and the library staff to see how it is resolved.
Significant Deviations from Budgets
The tacit assumptions underlying this red flag are that the library has a budget, that someone reviews it on a regular basis to compare actual with projected expenditures, and that the individual performing the re- view isn’t the fraudster. Assuming all this occurs, the budget can be a valuable tool for diagnosing fraud.
In general, frauds produce higher actual expenses than would be ex- pected from the budget. This may result from paying phantom invoices, overpaying for goods and services actually received, or hiding thefts of cash by making fictitious entries to cover the loss. This is not to say that budget variances are always evidence of fraud. Changes in programs or cost increases outside the control of the library (e.g., for fuel or insur- ance) may cause legitimate variances. However, large or consistent devi- ations should be a cause for investigating further.
Excessive Employee Lifestyles
No one expects library management to intrude into the privacy of em- ployees or board members. On the other hand, it’s equally bad to ignore
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the evidence of your own senses. If a minimum-wage bookkeeper comes to work in a new Cadillac Escalade and talks about a vacation to Paris, it’s legitimate to wonder how it all gets paid for. Winning the lottery is always possible as is marrying a rich spouse, but significant changes in an employee’s finances are worth keeping an eye on. This is an area where managers are uniquely qualified (as compared to auditors, for ex- ample) because they see the employees on a regular basis and have a more complete idea of those employees’ personal means.
Strange Employee Behavior
For most people who commit frauds, the experience is highly stressful. I assume this doesn’t require much explanation. Guilt and the fear of de- tection and subsequent punishment are common outcomes of commit- ting a crime. This is particularly the case with first-time offenders, as most fraudsters tend to be. These feelings, in turn, cause stress.
High stress levels often manifest themselves with significant changes in behavior such as increases in temper, bullying, withdrawal, or defen- siveness. There are, of course, no infallible symptoms of guilt. People suffer stress all the time for reasons that have nothing to do with work.
At the same time, as with excessive lifestyles, managers should not dis- count the evidence of their own observations.
Accounting Anomalies—Particularly Missing or Incomplete Records
Frauds and the subsequent actions to conceal them produce a number of characteristic accounting anomalies. Many of these are technical in na- ture and of great interest only to auditors, but some are easily observable by anyone in the library. Among these are the following.
Past-due bills or increasing periods before payments are made or both
Documents such as purchase orders with gaps in sequences Document sequence numbers that don’t make sense (e.g., items
ordered at a later date have sequence numbers that come be- fore earlier orders)
Documents that are photocopies rather than originals
Documents that are missing (particularly those that authorize purchases or certify that the goods and services were received) Missing bank statements
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Documents that always seem to be locked up or unavailable when the director, the auditor, or board members want to re- view them
Documents that are kept at an employee’s home Duplicate payments
The preceding list is by no means exhaustive, nor are the items nec- essarily indicative that a crime has been committed. It’s more common, for example, simply to have an employee doing a poor job of book- keeping than it is to have someone committing a crime. In any case, though, these situations should be cause for concern by the director or board members because they’re evidence of poor financial management even if nothing illegal is occurring.
These red flags may also be accompanied by unusual employee be- havior. It is common, for example, for employees who have been in- volved in making fraudulent accounting entries to be highly possessive of the records or unusually sensitive concerning anyone observing them on the job.
Weaknesses Uncovered in Previous Audits
This seems like a no-brainer. If an audit has been conducted in a library and it identified potential control problems (and possibly even suggested the means to correct them), you might expect that the library board and director would regard this as a weakness that needed to be corrected.
The truth, however, is that audit recommendations are often not heeded.
There are a number of reasons for this. In some cases, no one in the li- brary understands the audit findings or realizes someone needs to do anything about them. (If this sounds as though it could be you, please go back to chapter 2 and reread the section about getting auditors to help you.) In other cases, the advice is simply too difficult to follow. How many of us, for example, have been advised by a doctor to exercise more, eat better, drink less, and so on? We understand the value of the advice but still don’t do it for lack of time, lack of discipline, or orneriness. That being said, it can hardly come as a surprise when we have a heart attack or, to extend the example, when the library suffers a fraud.
Previous Fraud
This seems like an even bigger no-brainer, but consider what it means to make changes in the wake of a fraud. The director and board (assuming they aren’t the culprits) will be embarrassed. They may feel (perhaps with
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some reason) responsible. It’s natural, if not laudable, under those cir- cumstances to avoid scrutiny. Making changes not only draws attention to a situation they would rather avoid but is a tacit acknowledgment that there were problems to begin with.
New board members or directors should be particularly aware of this situation. Often there are no records kept of the fraud other than the collective memory of staff or other board members. I don’t recommend asking about previous frauds the first day you’re on the job or the board, but keep your eyes and ears open for hints and the appropriate time to ask the question.
Tips or Complaints of Fraud
A surprising number of frauds are uncovered as the result of tips. What’s even more surprising, unfortunately, is the number of organizations that have received tips and failed to follow up on them. We might expect that the receipt of a tip would trigger an immediate investigation, but the same problems are associated with tips as with auditor recommenda- tions—they may be too difficult to deal with or the recipient may not un- derstand what to do with the information.
Many organizations have instituted anonymous tip hotlines to deal with fraud. This may be more than your library needs, but at a minimum you should create an explicit procedure for dealing with tips so they don’t fall through the cracks or get ignored. (If you think it would be em- barrassing to have a fraud occur during your tenure as director or board member, imagine how much worse it would be if the fraud happened after someone had phoned in a tip that was ignored.)