Selma Della Santina
Director, Forensic Services, PwC Switzerland
Andreas Schnellmann
Manager, Forensic Services, PwC Switzerland
Local associations form an important part of the social fabric that holds Switzerland together, from the historic guilds (“Zünfte”) of the major cities to the local clubs (“Vereine”) which organise sporting and other non-profit activities. Unfortunately, as demonstrated by several recent cases, their frequently informal and trust-based finance processes, the concentration of responsibility in a small number of hands and their limited resources make them inherently vulnerable to fraud.
Emphasis on prevention
Research conducted by a team of fraud researchers led by Dr Steve Albrecht[1] revealed that the two most significant fraud risk factors are “Placing too much trust in key employees” and “Lack of proper procedures for the authorisation of transactions”. With this in mind, an association’s finance processes should ensure a segregation of duties and four-eye checks to avoid errors and a dependency risk on key individuals.
For example, movements of cash could be accounted for by a separate individual, increasing the potential for detecting errors. Four-eye signoffs could be introduced for all payments. Additionally, discrepancies may also be detected through independent checks such as the periodic reconciliation of bank statements with the books and records.
Cash transactions should occur on an exception-only basis – where they occur, there should be an insistence on maintaining receipts/invoices based against which cash payments can be approved and evidenced.
Reducing the use of cash payments in favour of e-Banking does not itself reduce the risk of embezzlement if there is no adequate authorisation control in place before releasing payments (ideally in the form of mandatory joint signing, “Kollektivunterschrift”). Associations should ensure that online payments are subject to a four-eye review prior to the release of payment.
For the control to function correctly, only the reviewer should have the ability to release the payment. This is of particular importance for group payment orders (“Sammelaufträge”), where a fraudster could otherwise add additional payments following the review.
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Limitations of a detection focus
Given that frauds start small and then grow as the perpetrator becomes increasingly emboldened, the opportunities for detection may prove limited until losses have reached significant levels. Financial pressures, visible lifestyle changes of the fraudster or unexplained changes in standard processes may indicate a heighted risk of wrongdoing. Such signals often only arise once it is too late.
A simple preventive control of rotating roles (e.g. through regular committee elections or maximum term limits with regard to financial roles) could have an immediate effect in terms of stopping the fraud. The presence of this rotating roles control in a single company has been associated with a 54% lower median fraud loss and a 50% reduction in the median duration of a fraud[2].
Many clubs/associations involve an internal audit, where members independent of the treasurer/finance team review the finances and the preparation of the accounts. In doing so, it is critical that the audit team obtains documents directly from third-party sources to mitigate the risk of falsified documents (i.e. they should have direct contact with banks and third-party vendors).
Conclusion
Clubs/associations are particularly exposed to fraud risk, both in relation to the likelihood of occurrence (reliance on trusted individuals and basic procedures) and impact (a single fraud event could result in operational collapse). In order to mitigate this risk and to continue to deliver value to society, associations’ payment and accounting activities should be segregated insofar as possible to minimise the dependency on single individuals.
The transparency of finances can be enhanced further by making the books and records available to all members of the association on a periodic basis and by providing several members with read-only access to bank accounts. By strengthening their controls, associations can pro-actively reduce the risk of fraud.
[1] “Ten environmental factors that result in fraud” – Dr. Steve Albrecht, Keith R. Howe and Marshall B. Romney
[2] “Occupational Fraud 2022: A Report to the Nations” – Association of Certified Fraud Examiners
Thanks go to Alister Smith and Sabrina Gorgoni for their contributions to this article.
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