Risk Awareness and Red Flags
The university faces many risks in the course of its financial operations. Generally, it is the responsibility of each department head to manage a department's financial operations, including the system of internal control. Good internal control reduces the risk of irregularities and improper activities in addition to reducing the risk of undetected errors.
When internal controls are poor, or are circumvented, the resulting errors can risk the university's reputation as well as the reputation of the department head. Poor internal control can result in fines and other avoidable costs. Some of the risks are listed here:
- Noncompliance with laws and regulations
- Noncompliance with contract requirements
- Inefficiency - wasted time and effort
- Undetected errors
- Unauthorized transactions
- Inadequate documentation
- Misappropriation of funds or equipment
Fraud & Other Illegal Acts
Department managers can reduce the risks by paying attention to internal control in their department. The principle mechanism for deterring fraud is strong internal controls. Department managers should be aware of the risks and should be on the look out for "red flags" that signal danger.
Fraud is characterized by intentional deception. Some common forms of fraud to watch for follow:
- Pilfering stamps and office supplies
- Falsifying time sheets
- Failing to complete a leave form when required
- Forging someone else's signature
- Stealing cash receipts
- Paying for personal expenses with university funds
- Recording fictitious transactions in order to cover up theft
- Taking university equipment for personal use
- Purchases in excess of needs, resulting in kickbacks
Generally, fraud occurs when there is opportunity, pressure and rationalization. Opportunity is provided by weaknesses in internal controls, such as inadequate supervision, review, separation of duties and management approval. Opportunity can also be created by collusion. Opportunity is often created when a manager relies on trust instead of proper procedures, as trust can lead to circumventing the system of internal control.
Pressure can come from personal financial problems or personal vices such as gambling and drugs, or from poor management such as unrealistic deadlines and performance goals. Rationalization occurs when individuals develop a justification for their fraudulent activities.
Managers should be aware of circumstances that create pressure on employees who handle cash, receipts and deposits, purchasing cards, and purchasing transactions. Relatively few employees will succumb to the pressure and opportunity. But those who do can damage reputations and resources.
Embezzlement "Red Flags" include:
- Providing unreasonable responses to questions
- Rewriting records under the guise of neatness
- Easily annoyed at reasonable questioning
- Bragging about significant new purchases
- Refusing to let someone else do duties
- Carrying unusually large sums of money
- Increased customer or staff complaints
- Lack of timeliness in job performance
- Rumors or conflict of interest
- Shopping for supplies in person vs. online ordering
- Frequent use of sole-source procurement contracts
- Using copies because original documentation is missing
- Borrowing money from co-workers
- Excessive debts
- Gambling beyond the ability to stand the loss
- Excessive drinking or other personal habits
Managers should recognize that the existence of a "red flag" does not automatically indicate a fraud. Managers should, however, note any "red flags" and keep a careful watch on department financial operations.