Archive for July, 2011

Let´s talk about fraud!

Thursday, July 21st, 2011

Invitation “Fraud Detection and Fraud Prevention”, Berlin, 5 and 6 October 2011 

It is very easy to talk about fraud in general terms. This makes for nice dinner conversation on a Sunday, in which we can denounce fraudulent practices in very general terms, talking about how fraud happens everywhere, but not in our organization. However, on Monday, the world looks different.

It is very difficult to talk about fraud in one’s own non-profit organization. I think the reason for this is founded in two words: “IMAGE DAMAGE”. Image damage is the loss of credibility, that is supposed to result in less inflows of donations. The financial damage caused by image damage might easily outnumber the real loss caused by the fraudulent person. Of course, we can blame the general public for this irrational attitude. 

My father, a doctor, had the habit of buying meat in big quantities, while there was a meat scandal in the media, or to buy fish, while there was a fish scandal. His argument was very simple: now, prices are low AND controllers are alerted, so quality would be good. That means, now is the time for a barbecue party! The same would be true for donations: the best time for donations would be after a fraud scandal. Then, the probability that your money is abused should be lower.

However, the general public is the general public, and the general public acts like all swarms and all crowds – the public panics. This is why it is so difficult to talk about fraud, and this is also why fraud should be handled professionally.

It is a good communication tool that all stakeholders of your non-profit organization understand that fraud is a fact of live. It exists, and no force in the world can exclude this 100 percent. However, responsible management can reduce the probability. It is this due care, together with the fact that all our attempts might be in vain when faced with criminal energy, which has to be communicated to donors, beneficiaries, employees and members.

I think we all understand what fraud is. Fraud is any misrepresentation, made with the intent to deceive that has caused some damage. This is the definition in the accounting profession, which we have learned in our lessons. The legal definition in the individual legal environment might be different. Especially, the materiality level causes problems. In Germany, for instance, employees were fired because they took away a sandwich from a bakery (what is more, courts affirmed the decision). Thus, in legal terms, the employees betrayed the employer, although the damage was only measured in cents. But what about a private email, sent from the company computer? Or a pen taken from the office? Many jurisdictions tend to establish a zero tolerance line. But this is not the perspective of Wall Street, of course.

Moreover, the legal definition is changing in time. For instance, the Italian parliament changed its opinion of what fraudulent financial representation is in 2002 (and some say that this was done in favor of the executive power). In other countries, the standards were tightened. In other words, a practice that was customary ten years ago might be now a crime or vice versa.

There are not only differences in time and space. Moreover, fraud in commercial organizations is different from fraud in non-profit organizations.

·        For instance, if the general director of a non-profit organization drives the latest model of an expensive sports car as a company car (as it happened in Berlin in 2010), the general public would be alarmed; however, the general director of a hedge fund is almost required to drive a Maserati or the like – the expensive car is a trust generating sign in his business surrounding. In other words, the same Maserati can have a different symbolic value – once as a sign of trust, once as a sign of distrust, depending on the environment in which it is used – either in the profit sphere or in the non-profit sphere.

·        In the profit sphere, the owners have a direct material interest in good internal control. Fraud would take away their property. It is this direct damage that makes owners so furious.

·        In the non-profit sphere, there is no such direct link. If there is damage, it is no direct material damage to the members or the board. A financial damage would be first felt by the beneficiaries. Probably, this is the reason why many boards and members of non-profit organizations are so reluctant and sometimes careless when it comes to the question of what they can do against fraud.

It would be good to have the same furor against fraud in non-profit organizations, as we know it from the profit world. However, unfortunately this is not the case. In the last decade, there was the big clean up in the wake of the ENRON scandal in the profit world. Nothing similar happened in the non-profit world.

Yes, it is difficult to talk about fraud experiences in the non-profit world. This taboo zone creates many negative side effects:


·        Many directors do not know which kinds of fraud there are in general.

·        Frequently, management does not know what could be done against fraud.

·        There is very little exchange in experience.

·        Employees might conclude that there is a grey zone in which small fraud is tolerated.

·        It might be that anti-fraud measures are not communicated.

·        The taboo might result in missing feed back on anti-fraud measures.


As auditors we can compare and analyze fraud cases from different countries, without lifting the veil of anonymity. We can compare the different anti-fraud-techniques. We would like to share this broad experience in fraud with others at a two-day seminar in Berlin this autumn.


Participants will learn the different detection methods, starting with financial analysis and ending with specific interview techniques. We will discuss the consequences of fraud, examine case studies and learn about adequate measures for prevention and deterrence of fraud. We will also explore the legal environment of fraud – which measures against fraud are allowed and which measures are not.


Thus, we would like to invite you to our seminar “Fraud Detection and Fraud Prevention” on 5 and 6 October 2011. The seminar is designed for directors, controllers, project managers of international charities. Information requests should be sent to


With best regards,


Frank Fabel, CPA, MA