Archive for September, 2011

Wednesday, September 21st, 2011

Question: The charity A sents cash to another grant distributing unit B. This unit has the task to send these funds to other units (C) and to control the funds. What would be an acceptable  accounting approach for B in your country? What would you prefer?

Suggestions:

1. The “Mailman approach”:

Debit Cash / Credit Liabilities to Grantees (in order to indicate that cash dedicated for the grantee was received from A)

Debit Liabilities to Grantees  (when cash is disbursed to grantees C)

2.  The “Full Control Approach”:

Debit Cash / Credit Liabilities (when cash for grantees is received from A)

Debit Advances given to grantees / Credit Cash (when cash is disbursed to grantees C)

Debit Expenses / Credit Advances given (when grantees C account for their projects)

and a compensating booking:

Debit Liabllities to Grantees / Credit Revenue (thus revenue is always equal to expense)

3. The “American approach”

Debit Receivables from Donors / Credit Restricted Net Assets (when contract is concluded between A and B)

Debit Cash / Credit Receivables from Donors (when cash is received from A)

Debit Advances to Grantees / Credit Cash (when disbursed to Grantees C)

Debit Unrestricted Net Assets / Credit Advances to Grantees (when Grantees C report to B)

This booking is very practical: first, all expenses are registered as a decrease in Unrestricted Net Assets!

Then, on the base of a project report of B to the Grantor A, a reclassification is done:

Debit Restricted Net Assets / Credit Unrestricted Net Assets.

What do you prefer?

Frank Fabel, CPA

Theater and Fraud

Tuesday, September 6th, 2011

Our fraud conference in Berlin (“Fraud Detection and Fraud Prevention”), in October, is approaching fast. For our office this means: even more e-mail turnover, hectic last minute arrangements for hotels, the printing of materials. Maybe we should – like airlines do – announce how many seats there are still left in the seminar room? On Wednesday morning, it was seven. Thus, late bookers hurry up and contact Ms. Diana Mallek at mallek@fws-audit.com to book yourself a seat for this popular event!

Comedies need a fraud scheme. If you see a comedy – either in the theater or in the cinema – there should always be some kind of fraud. You know: all these things about false and truthful allegations, swindlers and scoundrels, camouflage and the discovery of well-hidden secrets, oaths and lies, tricks and traps, impostors and detectives! The theater loves fraud, because, in a fraud, there is something to hide behind the mask that the audience would like to discover – and that is theater!

Actors love to play the role of a fraud. This is understandable: it is fun to play as if you play! Illustrious examples are Matt Damon as “The Informant”, Leonardo DiCaprio in “Catch me if you can”, and George Clooneys “Confessions of a dangerous mind”.

However, that is only one side of the coin. If I look back on the financial fraud cases that I have seen in the last 15 years, I would say: It is not only that the theater loves fraud; it is also that the fraud loves theater.

For instance:

There was an NGO director who created an image of himself as a saint. He preferred white clothes. He had a very ascetic appearance – strict diet, a suntan from the tanning studio. He loved to tell everyone that he sacrificed his life to the mission. The only problem was that –because he was fully at the service for the organisation – the organisation had to be at the full service to him. It was probably his weakness for expensive watches, fast cars, first-class restaurants – all paid from the accounts of the charity – that were his downfall.

The close relationship between fraud and theater is the reason why we will train fraud detection and fraud prevention in role plays during our seminar. Donors have to act like auditors, and auditors have to act like impostors. Having read the lines before, you will already guess with which emphasis the auditors will play the role of tricksters (and hopefully, nobody will decide to change the fronts).

The deeper we investigate the internal logics of fraud, the play of justifications and incentives, of opportunities and stimuli, the more we will see that the reason of fraud is not only to be sought in the criminal character of the offender. It will be also visible, how “opportunity creates thieves”. First, there must be a weakness in internal control, before a person starts to think about fraud.

Moreover, I have not seen one crook who had not developed a theory, in which he or she justified the fraudulent actions. Sometimes it is the subjective feeling of injustice that justifies fraud; sometimes it is a past insult that requires revenge. People do not steal, because they are bad – in their perspective what they do is not more than settling a misbalanced account.

The investigation of fraud is in itself a theater play that all participants play in full earnest. Many participants in this play usually feel a pressure to simulate indignation. Others would love to play the role of the prosecutor general. Everybody feels the need to distract the public eye from their person, and everybody would love to talk about the latest developments. And then, we should also play the play of false allegations of fraud. Thus, there is a full panopticum of characters in the play “Theater and Financial Fraud”.

Probably, it is my duty to warn you on one effect of these in-depth role plays. The more we learn about the fraudulent characters, the less we are able to hate them.

Potential last minute participants should take this in account when making their bookings.

Frank Fabel, CPA