Financial Reports as Fraud Detection
The financial reports to your committee or board each month have two main purposes. Firstly, of course, they keep the Board up to date with where the organisation stands financially, where the money came from and where it went recently. But, importantly, financial reports to the Board are also a fraud control mechanism.
You can’t always prevent fraud from happening, and in a small organisation especially it is not always realistic to put extensive fraud prevention mechanisms in place. The emphasis then shifts onto detection.
The ability of a board or committee to ask questions concerning financial reports, and to query specific lines and categories when something appears unusual, is one such detective mechanism. Simple questions like ‘Why is this figure so low’, or that one so high, should get a satisfactory answer, and a board member, any board member, should not hesitate to ask for a detailed account of a line item they don’t understand.
For this to work, the board or committee needs to understand what they are looking at. Board members in community organisations are accounting laypeople, and if financial reports are based on complex accounting techniques such board members will not feel confident enough to ask such questions. For this reason I usually advocate to focus on cash-based income/expenditure reports for board meetings – people understand cash, that’s how they run their own household finances, and fraud requires cash to change hands.
Chances are that some board members are occasionally hands-on involved in certain activities of the organisation, such as fundraisers or events. This gives them a ‘feel’ for how much money would have been collected from, or spent on, that activity, and they would expect the financial reports to reflect this. They will also have a particular interest in this activity and maybe certain financial expectations. Motivations like this can add up to quite effective financial control, provided that board member feels they can ask such questions. And they will understand the answer.
Too often all this financial monitoring is left to the treasurer only (who, incidentally, is the most likely fraudster in any organisation). If that treasurer is an accountant by trade, there may also be an intimidation factor for anyone else, who may not want to ask a ‘stupid’ question.
I can only encourage every board or committee member to read the financial reports, and to not hesitate querying items that do not make sense.