The audit committee’s role in prevention and deterrence of fraud

An audit committee should take an active role in the prevention and deterrence of fraud, as well as an effective ethics and compliance program. The audit committee should constantly challenge management and the auditors to ensure that the organization has appropriate antifraud programs and controls in place to identify potential fraud and ensure that investigations are undertaken if fraud is detected. The audit committee should also take an interest in ensuring that appropriate action is taken against known perpetrators of fraud.[1]

Why should an audit committee worry about fraud?

• Approximately half of fraud victims do not recover any of their financial losses
• The cost of investigating fraud can be high
• Fraud can have a negative impact on staff morale
• Fraud creates a distraction from the organization’s core mission - educating students
• Fraud could potentially result in a loss of donors
• And most importantly, reputation risk associated with fraud is more impactful than the actual financial loss including loss of public confidence, impact of recruiting donors, and potential damage to existing relationships
• According to the Association of Certified Fraud Examiners (ACFE), the typical loss to an organization due to occupational fraud is five percent of its annual revenue[2]

What are the most common fraud schemes in not-for-profit organizations?

• Billing
• Expense reimbursements
• Corruption
• Skimming
• Payroll
• Check tampering
• Cash on hand

What should the audit committee do?

• Perform an assessment of fraud risks
• Provide effective monitoring
• Communicate with the external auditors
• Gain an understanding of the types of fraud that most likely could affect your organization
• Evaluate the control environment/processes in place by management
• Ensure a whistleblower hotline has been established
• Provide guidance in regards to significance of risks and prioritization for eliminating or mitigating those risks
• Reassess fraud risks often – avoid complacency
• Create a culture of accountability and integrity
• Ensure whistleblower complaints have been properly investigated and reviewed
• Consider corruption and regulatory issues as well as typical fraud related to financial reporting and misappropriation of assets
• Meet with the auditors before the start of the audit and at its conclusion
• Determine appropriate questions to ask of the auditors prior to the commencement of the audit
• Follow up on those questions/responses at the conclusion of the audit
• Hold a closed session with the auditors as a part of both meetings

[1] American Institute of Public Accountants, 2010 Fraud and the Responsibilities of the Audit Committee: An Overview, New York, NY

[2] Association of Certified Fraud Examiners (ACFE), 2012 Report to the Nation on Occupational Fraud and Abuse, Austin, TX. Page 27