Preventing pilfering: fear of capture is best deterrent. (Fraud).

Fear. It's a common, yet unrecognized, emotion nonprofit supervisors can use to stop fraud before potentially crooked employees' scam money.

Think how drivers react to a policeman brandishing a radar gun at oncoming traffic - they slow down.

John J. Hall, North American Practice Director, internal audit for Jefferson Wells International, gave these and other tips about fraud prevention at an American Institute of Certified Public Accountants Not-for-Profit Industry conference in Washington, D.C., earlier this year.

"Part of your job ... is to create fear," Hall said. "The fear aspect of this is you as the reviewer, you as an auditor. You have to make people think you're going to get them. It's the only one that works."

Workers stay honest for a variety of reasons, such as fear, beliefs, culture, and lack of opportunities to steal, Hall said. Accordingly, the best deterrent to fraud is a belief that management will catch and punish employees.

Simple steps are often the most effective. For example, Hall suggested reconciling bank account statements and delving into their specific details. "The purpose of reconciliation is to look for fraud," he said. A second purpose is accurate information.

Search a bank statement for activity that doesn't make sense, such as a check that hasn't cleared for months, Hall said. That's one indicator that someone is stealing.

Supervisors should ask to see the cancelled check. "If something clears after three months, I want to see that check," Hall said. Trace the check's paper trail, beginning by confirming that vendor exists. Usually a quick telephone call will satisfy this curiosity, Hall said.

Supervisors may find a check is payable to a false vendor set up by an individual, which could cost an organization thousands of dollars. Renewed activity after a vendor's address change is a red flag, he said.

Another place to question is unusual charges, such as a law firm that requests an excessive out-of-pocket expenses, Hall said. Check for proof and look at receipts, he said.

The travel expense report is one more place where fraud opportunities lurk. When employees travel, ask them to save boarding passes, Hall said.

Sometimes repetitive searching leads to an expensive discovery. Hall, who does internal audits for clients, recalled finding one woman who created three fake vendors and netted hundreds of thousands of dollars using the company's credit card at those three fake vendors.

When she was first found out, she said she made a mistake and had used the wrong card. She put it in writing. Hot on a trail, Hall checked if any vendors had her home address. "It's not rocket science, but it works, and we found one," Hall said. Additional indicators were the fake vendor provided a service, (designing forms and advertisements), and invoices lacked a telephone number, Hall said. This woman left a trail.

Her boyfriend's address was the second fake vendor and his business address was the third. In the last interview, they had substantial evidence against her and had listed several disclaimers to stay within legal limits. Hall then asked her who else was stealing, and she tipped them to five other people.

An interview with the woman's immediate supervisor revealed another problem. He wasn't trained to track expenses, Hall said. This lapse in oversight created a culture in which the woman could defraud the organization. A fear factor didn't exist.

Running a background check on a potential employee is an efficient way to prevent fraud, Hall said. Screen employees, volunteers, and even people who will drive vehicles for the organization. Check driving records.

After hires, check records a year later. It may reveal a conviction that happened after the hire date. But when screening, adhere to existing laws and regulations, Hall said.

Researching first-time vendors is a good idea, Hall warned. Write down first-time payments to individuals or vendors. Screening the first transaction is a good way to nip them. Begin with a yes or no question: Is this a first time payment to this vendor? This maintains the integrity of payments, and informs employees that managers are checking them, which instills a subtle fear.

Assess fraud exposure

A good place to start a fraud exposure assessment is to brainstorm about what can go wrong. Take a specific look at functional areas, positions and relationships. Stop thinking nice and think like a thief, Hall said.

The person most likely to set up a scam is the approver of transactions, according to Hall. He told of a New Jersey pharmaceutical company that had an information technology manager set up a fake vendor to upgrade software. An invoice named a dummy software program and charged for installation. In a construction invoice, the person listed computer repairs to a nonexistent "water regeneration system."

"It was just weird enough that nobody knew," Hall said.

Go down the list of decision-makers job by job. Then think what a paper trail would look like.

Accumulate indicators of fraud. For cancelled checks it could be handwritten check endorsements, multiple endorsements, unsigned checks, or altered checks, Hall said.

Begin a pattern of prevention and detection. Let workers know they're expected to periodically review transactions and bank statements line by line.

Overall, "Think like a thief, teach others what they need to know to be effective, look for fraud indicators, when in doubt, doubt, and follow up and formally refer all suspicions," Hall said.