15 Tips for Avoiding Fraud in Your Nonprofit

15 Tips for Avoiding Fraud in Your Nonprofit

June 9, 2016 Lynette Garet Business Basics 0 Comment

Nonprofit fraud: No respecter of missions


Many nonprofits seek redress for the human condition, whether matters of religious faith, health or poverty. Others dedicate themselves to environmental concerns, while still others are politically motivated. Regardless of their espoused causes, the cultural climate within these organizations is one of trust. There is a general assumption that everyone in the organization is equally committed to the same goal.

It would be incorrect to make such an assumption; every year nonprofits lose millions to fraud, embezzlement and outright theft. Some fraud is insidious—a regularly padded expense report or cash skimmed from event receipts. Other forms are systemic: ghost employees and fraudulent vendors. In many cases, the fraud has been going on for at least two years, often at the hands of a long-serving manager. Independent financial statement audits detect less than 4 percent of frauds; co-worker suspicions uncover nearly half of all fraud; tips from customers or vendors also account for fraud exposure.

15 tips to prevent or detect fraud

Like any business, executive managers and boards of directors must take steps to deter and detect fraud. These 15 precautions can help protect against fraudulent practices.

Fraud training – If managers and executives know what to look for, it’s easier to spot.

Anti-fraud policy – Simple awareness of a fraud policy tells anyone who might be tempted that the organization is not clueless and naïve.

Formal fraud risk assessment – A CPA or other financial expert can review accounting procedures to assess weaknesses in the system.

Job rotation – It’s axiomatic that no one’s irreplaceable and nonprofits should ensure cross-training, not only to discourage fraud, but also to cover staff absences.

Mandatory vacation – One of the most common employee profiles for fraud is the employee who heroically works long hours, rarely takes a vacation and shuns assistance from colleagues. It may be that assistance will reveal the scheme.

Segregation of duties – No single person should have unchecked access to all accounting procedures, a basic tenet of generally accepted accounting principles everywhere.

Employee background checks – Sadly, financial and criminal background checks can expose applicants who are repeat offenders or even existing staff. As much as 15 percent of employees who have been caught are repeat offenders.

Robust internal controls – Require two signatories for checks, institute strict authorization and oversight procedures for all accounting systems, especially cash, purchasing, payroll and payables, as well as expense reporting.

Computer security – Conduct regular reviews of access to administrative and accounting systems.

Periodic inventory – Regularly inventory fixed assets to guard against theft.

Independent audit committee – The burden of financial oversight rests with the board; an independent committee can review policies, procedures and controls, as well as verify financial statements.

Internal audits – A forensic CPA can also review internal controls periodically, in addition to interim financial statements.

Secure the premises – It may seem obvious but nonprofits often do not restrict after hours access to the physical plant and computer systems.

Create an alert system – Work with software programmers and/or the bank to set up a system of alerts based on account activity, balance threshold or wire notifications.

Set up a fraud hotline – Make it easy for your best fraud detectors, other staff members, to report fraud.

An ounce of prevention

There are few ironclad protections against fraud; no single one of the suggestions above will be enough to prevent malfeasance. Nonprofits can do themselves a favor by cultivating a climate of transparency and openness concerning fraud.

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