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A Brush with the Law


By Charity Council On 14 May 2019


This article was first published in the Charity Council’s Newsletter Issue 7.

The core motivation of charitable work is a noble and good one. However, with the number of high-profile scandals involving fraud and embezzlement surrounding non-profit organisations, charities may suffer from the negative backlash and face difficulties in earning and retaining ‘public trust’. This case study serves as a valuable lesson for all charities and provides insight into how to prevent such an incident from happening in your own organisation.

THE SCENARIO

Mr Pian Lui*, the president of a well-established local charity, had recently left the country, leaving many in the charity sector shocked by his sudden departure. Having served as a Board member of his charity for more than 30 years, he was a well-respected figure in the community and trusted by many. What nobody knew was that Mr Pian was a compulsive gambler who was heavily in debt. To finance his ‘hobbies’, he defrauded his charity of S$1 million, keeping his tracks covered for more than 15 years.

How did he do this?

SOLE AUTHORITY

As president of the charity and having former training in finance, Mr Pian was wholly entrusted with the task of handling his charity’s investments and had sole control over all aspects of the investment accounts. No other staff or Board member was authorised to handle the investment accounts. With inadequate controls and oversight on the part of the staff and Board members, Mr Pian was able to misappropriate S$1 million of the charity’s reserves by forging bank documents.

The Code of Governance states that charities should ensure that internal controls are in place with documented procedures – approved by the Board – for financial matters in key areas.

In Mr Pian’s case, there was an obvious lack of adequate controls in the operations of investment accounts. In short, internal controls should never be neglected simply because you trust someone. Some basic controls for investments are:

  • Inspection and independent checks of investment documents should be carried out periodically to detect any erroneous reporting, and to ensure that the investments indeed exist.

  • Duties of recording of transactions and custody of the investment documents should be segregated.

  • There should be proper recording of the investment funds, and all movement should be accounted for and disclosed in the accounts and financial statements of the charity.

AUDITORS’ NEGLIGENCE

Before the appointment of the new auditors, Mr Pian managed to maintain appearances, keeping his tracks hidden for more than 15 years. This was achieved in part due to the negligence of the former auditors, who failed to carry out their duties according to proper procedures. The auditors, in conducting their statutory audit, had sent requests for bank confirmations through Mr Pian, allowing him to intercept and forge the required documents, resulting in the crime being unnoticed for an extended period of time.

Audit work should be carried out independently and all bank confirmations should be obtained independently, not through the auditee. In this case, by seeking the bank confirmations through Mr Pian, the auditors unwittingly helped him to mask his crime for many years. Charities must put effort into selecting a good external auditor. The factors to consider when selecting auditors include:

  • The qualifications of the proposed audit staff including their prior auditing experience;

  • Whether the proposed staff have received continuing professional education in accounting and auditing over the last two years;

  • Whether they are independent, as defined by applicable auditing standards; and

  • Whether they have been the object of any disciplinary action or been suspended or debarred from performing government audits.

  

THE VERDICT

Due to the circumstances of the case, the charity was not able to recover the full amount and had no choice but to write off a significant portion of its reserves. Although the charity has implemented measures to prevent such an incidence from recurring, it will take many more years for it to recover from the severe blow dealt to its finances.

*Not his real name


  • This article was first published in Charity Council Newsletter 7. 

    Click here to read more.

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    Click here to read more.

  • This article was first published in Charity Council Newsletter 2. 

    Click here to read more.