Most associations are pressured to contain costs. One important but often overlooked method to reduce expenses is to prevent occupational fraud.

"Employee theft is booming," says Michael Santocki, managing director in Crystal & Company's Management & Professional Risk Group. The prevention of financial fraud in an association requires clear policies and procedures relating to controls, checks and balances, and oversight, but it also entails a significant human element. A single worker with ill motives or poor training can lead to big problems.

Business-related fraud can occur in a number of ways. Asset misappropriations are the most common type of occupational fraud, accounting for approximately 85 percent, according to the "Report to the Nations on Occupational Fraud and Abuse," published by the Association of Certified Fraud Examiners (ACFE). Financial statement fraud and corruption schemes also account for a significant portion of occupational fraud.

Most fraud is conducted by long-standing employees who have been at an organization for a long time and understand how the organization's processes work.—Michael Santocki, Crystal & Company

Organizations with fewer than 100 employees—a category that many associations fall into—face different fraud risks than larger organizations. For example, check tampering schemes occurred in 22 percent of small-business cases but only 7 percent of larger organizations, according to ACFE. What's more, payroll and cash larceny schemes were found to occur twice as often in small businesses. The smallest organizations tend to suffer disproportionately large losses due to occupational fraud, says the ACFE report.

Santocki cites a number of fraud schemes that may be common in the association world. For example, vendor theft or kickback schemes are common: "A staff member may instruct a vendor to bring 900 water bottles for an association event instead of the documented 1,000 and agree to split the difference," he says. Other illegal activities that organizations should look out for include billing schemes, in which invoices are submitted for work that was not completed; payroll fraud, in which improper hours or overtime are documented; and illegal expense-reimbursement activities.

Most association HR departments are diligent in conducting background checks when hiring new employees. However, 87 percent of employees who commit theft have never been charged with a crime, says Santocki. "And most fraud is conducted by long-standing employees who have been at an organization for a long time and understand how the organization's processes work."

While associations have much to lose if an employee engages in fraudulent activity, implementing anti-fraud controls is associated with reduced fraud losses and shorter fraud duration, according to the ACFE report. Associations can take some simple steps to reduce the risk of theft and misappropriations, says Santocki. He offers the following suggestions for preventing and minimizing losses associated with fraud:

• Task someone in the organization with responsibility for fraud prevention. While all staff should be educated on the types of fraud that may occur, at least one staff member should be given the responsibility of oversight and prevention.
• Implement a system of checks and balances in the accounting department. Santocki suggests segregating accounting staff duties so that different individuals are responsible for intake versus output of funds. In addition, be sure there are counter-signatures for all checks that are written; two people should authorize each payment on behalf of the association. And consider implementing a system of job rotations and mandatory vacations in the accounting department to ensure no single employee is continuously responsible for invoicing and payments.
• Implement a regular auditing process. Task a third party with reviewing the books and flagging any question marks.
• Establish and post an anonymous hotline number for association staff to call in tips about possible illegal activity. "Tips" are the most common detection method used to uncover fraud in companies: "Forty percent of all frauds are detected from within," says Santocki.
• Consider purchasing fraud insurance. Regardless of the number of processes you put in place to minimize the chance of employee fraud, you cannot completely eliminate the risk. "But you can transfer the risk by investing in a crime insurance policy," says Santocki.

Putting measures in place to prevent and detect fraud in your association can be a challenge—particularly since those staff members involved in illicit activities are often acting out of greed or desperation and may be hard to identify. But taking simple steps to ensure your staff is staying alert to potential fraudulent behaviors and knows how to report such activities will move your organization one step closer to reducing expenses and improving its bottom line.