I have served on a few audit committees for non-profit entities and each of these terms of service has seen me pick up interesting learning points from each of these committees.
An audit committee is like any other committee, they are made up of individuals who have are willing and able to volunteer their time to lend their expertise in the governance and oversight over the entity’s financial stewardship, corporate governance and compliance to regulatory provisions and the entity’s own policies.
One of the more interesting “adventures” is to encounter fraud cases. This has happened to entities I have been on the board simply because the larger the organization’s size, the higher the change that occupational fraud may occur in that entity.
The more common fraud that I have encountered is revenue fraud. In terms of the fraud typology promulgated by the Association of Certified Fraud Examiners, this is what is know as asset misappropriation.
Fraud is actually less uncommon or more common than we would like to think. The simplest act of taking an entity’s assets for personal use e.g. taking back some A4 paper for home use is technically misappropriation of the entity’s assets. This is considered fairly mundane and happens all the time for items such as consumables and stationery items.
The frauds that I encountered while serving on boards were typically fairly straightforward ones, where there was no collusion.
#1 Misappropriation of Venue Rental Fees
This was a case where the staff who was in charge of renting out venues of the entity kept the transaction off the books by informing the customer to liaise and pay him directly the venue rental deposit and booking fees. This was only detected because the staff from the facilities department noted that the venue was used by a vendor when based on their booking records, there was no record of any booking or reservation done for that customer.
The key control to mitigate against the risk of such occurrences is to have proper reconciliation between the venue booking schedule against the revenue collections for those venues.
#2 Misappropriation of Subscription Fees
Another case I encountered was a bit similar to the first case. This was where the counter staff of a facility collected the subscription fees for use of the facility direct from the customer using manual receipts instead of directing the customer to pay either online or via the customer service officers who operated the point-of-sale system. This was detected only because the customer later had some query on his subscription details and approached the counter staff to clarify. When the customer was at the counter, it was a different staff who served him and discovered the unusual case of the customer claiming he had paid to the counter to another staff with the manual receipt. This new counter staff then checked if the subscription fees were recorded in the system and found that the money was never recorded nor handed over to Finance nor deposited into the organization’s bank account.
Manual receipt books are increasingly obsolete in today’s digitalised payment environment but some companies still retain it as a backup in case their point-of-sale systems are down due to technical issues. Having manual receipt books is fine so long as controls are in place to review the manual receipt books on a regular basis to ascertain the completeness of receipts issued, to reconcile receipts collected (in cash) and banked and to detect possible missing receipts due to staff who misappropriate receipts, removing the counterfoil in the receipt book to cover up their misappropriation.
If you have an interest on the various fraud typologies, do download the Occupational Fraud Report 2024 as they do describe the breakdown of occupational fraud between asset misappropriation, corruption and fraudulent financial statements.
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