1
Internal Control Project
For the following case you will identify the internal control issue(s), and then
write an internal control policy for this nonprofit clinic that would make it much
more difficult for the situation to occur. Use good writing style (proofread
carefully). You can look up policy & procedures on the internet to see how they
are formatted.
According to published reports, what happened at the non-profit HAFC free
clinic is typical of the types of employee fraud that happens day in and day
out at many organizations. It was nothing overly sophisticated and
demonstrated how insiders who know the peculiarities of differing
requirements use their knowledge for their own enrichment.
A former CFO of the clinic took advantage his knowledge that requires
nonprofits receiving federal grants to return any unspent money. This money
is supposed to go directly to a federal office. However, at the free clinic,
authorities claim the CFO created an account at a California bank under a
name similar to the federal office. For over two years he had clinic workers
return these checks, which he deposited into this account that he actually
owned.
He allegedly set up several accounts with names similar to legitimate
vendors. The CFO had payments intended for these legitimate vendors be
sent to his dummy corporations and later cashed the same checks.
These schemes began in mid-2001 and went on for over two years. After the
irregularities were uncovered and investigated, the CFO was fired and the
case was turned over to prosecutors, who miraculously prosecuted and got a
conviction. We say miraculously because white-collar crime was rarely
prosecuted at that time. Even more amazing is the fact that he was
convicted. He was sentenced on in 2008 to serve four years in prison, make
restitution and pay back taxes and fines.
For more than two years, starting in June 2001, clinic workers gave the checks to Gill,
who deposited them into his account, authorities said.
Is the issue having to do with the CFO having knowledge of the federal grants unused money?
Internal controls:
• A periodic review by an objective person of the list of all vendors receiving
fees/checks from the nonprofit (because a common scheme involves creating
a fictitious vendor).
Answer
2
Internal controls are a very important part of an organization as they help to prevent or detect
fraudulent activity within the organization. Therefore, it is important for management to establish and
maintain strong internal controls at all times. The fraudulent activity that occurred at the non-profit
HAFC free clinic by a, now, former CFO is a good example of what can happen when proper internal
controls are not put in place. The CFO of the clinic engaged in fraudulent activity by having clinic
workers send checks to him that consisted of the clinic’s unspent money from federal grants. He then
deposited the checks into a bank account that he created and owned with a similar name to the federal
office that they were supposed to directly go to. In other words, he set up accounts with names almost
identical to real vendors and then had the checks for those vendors sent to these fake accounts that he
later cashed. This occurred for more than two years before it was noticed and investigated. The clinic
would not have had internal control issues that led to this fraudulent activity if it had the proper internal
