This scenario takes place in the country office of an international NGO with a staff of approximately sixty people and a typical organizational structure: the staff includes a country director, senior program managers and their staff, and a finance team of six people. As part of its regular financial oversight, the headquarters office of the NGO conducts routine reviews of each country office's finance systems.

Ellen, a senior finance manager, visits the country office to carry out a review. Initially, everything seems fine with the finance system. The program and management staff express no concerns other than a few complaints about timeliness. 

But as Ellen reviews the systems in more detail, she notes patterns that cause her concern—things such as poor filing of documents, disagreements among the finance team members, and delays in completing some basic finance functions, such as monthly reconciliations. Also, no one can produce a copy of the finance manual when asked, and some of the systems appear to be poorly maintained. 

During a routine spot-check for documentation, Ellen requests to see the backup documentation required to reconcile cash advances. 

A cash advance is used when an organization needs to provide cash to an employee to pay bills in the field that can only be paid with cash. When Ellen asks to see the backup documentation, the finance team is unable to provide it, saying it must be filed improperly. Ellen then asks to see the backup records for several other cash advances, and, again, the team is unable to produce the required documents. 

Ellen discusses her concerns about the missing documentation with the Finance Director, and she is told that the Finance Assistant, whose job it is to process and file such documents, is not doing his job well. When Ellen pursues this issue further, she finds out that he is the relative of a senior manager in the office, so the Finance Director feels there is nothing she can do about his poor performance. 

Ellen brings her concerns to the Country Director, as well as to the Director of Finance at Headquarters. Together, they agree that the failure to have appropriate documentation for cash advances is a significant concern and agree to bring in an external audit firm for a review. 

The external audit firm sends a team to conduct a review of the organization's books and to interview the staff of the country office. They examine invoices, documentation, and the timing within which certain processes were completed. They check these against the organization's financial policies. 

One policy, for example, states that cash advances should be reconciled within three days of the completion of the activity for which the cash was intended. The purpose of this policy is to maintain financial controls by requiring that information be gathered in a timely manner—soon after the activity when documentation is most readily available. 

The investigators found multiple policy violations in the country office during their investigation. While these are not acts of fraud in and of themselves, they are a bad sign about the health of the organisation's Financial Management. Poor adherence to policy and procedures can form an enabling environment for fraud and can also mask the occurrence of fraud, making it more difficult to detect. 

The firm identifies poor record-keeping practices and confirms that cash is missing based on the absence of backup documentation for expenses.

When confronted, several employees— finance assistants, program assistants, and a program lead—eventually admit that keeping part of the cash advances for personal use is a common practice. They confirm that they played a part in or benefited from the fraud. Based on these conversations and evidence, it is also clear that the finance assistants were active participants in the fraud and that the Finance Manager had either actively participated in the fraud or was grossly negligent in her oversight. This created an environment where fraud could take place.

With careful investigation, the auditors were able to identify the fraudulent transactions and link them to individuals who received cash advances. The missing funds totalled US$15,000.

After the audit, the individuals responsible for each missing cash advance paid back the funds they took. Several members of the staff, including the Finance Manager and the other program and finance staff who participated in the fraud, were removed from their positions.

Questions

1. Which of the four building blocks of Financial Control (Accounting Records, Financial Planning, Financial Monitoring, and Internal Control) were lacking in this example? How were they lacking? 

2. Of the four building blocks of Financial Control (Accounting Records, Financial Planning, Financial Monitoring, and Internal Control), which were in evidence and helpful in resolving this issue? How were they helpful? 

3. When auditors reviewed the historical accounting data, it turned out that fraudulent transactions had been going on for nearly a year. One of their findings was that this went on for a long time without anyone in the organization asking questions or calling attention. Why?

4. In this case study, how does the issue of perceived nepotism come into play in relation to the goals of Financial Control and Financial Management? What impact do you imagine it had on this organization besides losing money?