Mitigating Fraud Risks in Nonprofit Organizations

The Association of Certified Fraud Examiners’ (ACFE) Occupational Fraud 2024: A Report to the Nations reveals a noteworthy trend: Nonprofit entities experience a significantly lower median loss per fraud incident compared to their for-profit and governmental counterparts — $76,000 for nonprofits versus $150,000 for governments. While this discrepancy may initially seem reassuring, nonprofits must remain vigilant against potential losses. To effectively safeguard against fraud, nonprofits must proactively design and implement robust internal controls tailored to their unique operational risks.

Stakeholder Education and Training

A concerning revelation from the 2024 ACFE report is the comparatively low implementation rate of fraud awareness training within nonprofit organizations. Only 52% of staff and 49% of management receive such training, in stark contrast to the substantially higher rates observed in for-profit entities. Research indicates organizations that lack comprehensive fraud awareness training endure twice the financial losses. Therefore, it is crucial for nonprofits to integrate fraud prevention and reporting protocols into the onboarding process for new hires, executives, and staff with financial responsibilities. Regular refresher courses should also be provided. Instituting anonymous reporting hotlines or web portals has resulted in reductions of cost and duration of fraud schemes by up to 50%.

Financial Oversight and Review

Prolonged detection of fraudulent activities can exacerbate financial losses. To minimize this risk, organizational leaders should review internal financial reports at least quarterly, if not monthly. Budget reports highlighting discrepancies between projected and actual activity may serve as early indicators of potential fraud. Detailed management reviews has been shown to reduce financial losses from fraud by an average of 60%, according to the ACFE.

Segregation of Duties

Segregation of duties ensures no individual maintains control over multiple aspects of a financial transaction or function. Key practices include preventing individuals with access to assets from overseeing the accounting, separating transaction initiation from approval processes, and prohibiting bank reconciliations by individuals who have access to prepare and sign checks. While a proper segregation of duties may be challenging for nonprofits with limited staff or remote work arrangements, solutions such as outsourcing certain functions or using cloud-based platforms may help overcome logistical barriers.

Additional Controls and Measures

Nonprofit organizations should exercise caution when using credit cards by limiting access, requiring approval prior to purchase and detailed documentation for each transaction. A mandatory vacation policy, which has been associated with a 23% reduction in losses, may also serve as an effective deterrent against fraud by preventing individuals from concealing illicit activities during their absence. It is imperative for nonprofits to remain vigilant against evolving threats, particularly during periods of organizational transition or heightened activity such as workforce reductions or fundraising events.

In Conclusion

Given the diverse nature of nonprofit organizations, it is essential to tailor internal controls to address specific risks and operational realities. By prioritizing education, enhanced financial oversight, segregation of duties, and additional control measures, nonprofits may effectively mitigate the risk of financial fraud and safeguarded resources. For personalized guidance on bolstering your organization's fraud prevention efforts, we invite you to reach out to discuss your specific needs.