How Nonprofits Can Avoid Becoming Fraud Victims
Fraud can occur almost anywhere people and money interact. Although the for-profit business world bears the brunt of fraud losses, occupational theft can rob not-for-profit organizations, too. But to prevent illicit financial activities, nonprofits must strike a balance between a culture that values trust and inclusion with the need for strong internal controls. Here's how to detect and prevent fraud without alienating your charity's stakeholders.
Think Like a Perp
One of the biggest challenges for nonprofits to overcome is the belief that employees and volunteers are above committing fraud. It's probably true that most of these dedicated “true believers” would never steal from your organization. However, it takes only one rogue to orchestrate a scheme that costs you thousands of dollars.
To mitigate this threat, look at your nonprofit through the eyes of a fraudster. If you intended to steal, where would you focus your efforts? For example, you probably receive some donations in the mail. If one person is responsible for opening envelopes, recording contribution amounts, and depositing cash or checks, how easy would it be for that person to commit fraud? (The answer: Pretty easy.)
Then consider what mechanisms could prevent a staffer or volunteer from skimming donations. A common fraud control stipulates that two or more people be involved in the process of collecting, recording and depositing checks. It's also recommended that you perform background checks on anyone who'll be handling money and that a paid employee closely supervises volunteers assigned to such sensitive tasks.
Review every aspect of your operation through a fraud perpetrator's lenses. If you uncover security gaps, devise a control that will close them. If you're starting from scratch (as opposed to revising an existing internal controls system), work with forensic accounting professionals to ensure the controls you come up with are comprehensive.
Enforce Internal Controls
Unfortunately, the existence of controls doesn't guarantee they're being followed. Nonprofits, by their nature, are geared toward “doing good,” not making money. So staffers may not be as attentive to financial irregularities. And in non-hierarchical or “flat” organizations, managers may not prioritize enforcing controls, which means staffers who want to bypass them usually can.
To help ensure this doesn't occur in your organization, perform regular control compliance checks. You'll probably find that some rules are followed religiously while others are routinely ignored. Concentrate on this second group and determine why they aren't being followed. Say, for instance, that expense reimbursement requests typically lack the two levels of approval specified in your employee handbook. You can enforce compliance by requiring the accounting department to refuse to process requests that lack proper authorization.
In nonprofits, staff shortages often make compliance difficult. Consider asking board members to step in when a second signature is required to make a large disbursement. And if you don't have a big enough accounting staff to segregate duties properly, look at the possibility of outsourcing some accounting functions.
Educate Employees and Volunteers
Another perennial challenge for nonprofits is the lack of financial resources to prevent and fight fraud. However, most controls don't cost much. And if you compare the expense of implementing and enforcing controls with the cost of an occupational fraud scheme (a median loss of $130,000, according to the Association of Certified Fraud Examiners), it makes sense to invest in controls.
One simple and inexpensive way to attack fraud is to include fraud prevention in your employee and volunteer orientations. Provide examples of the types of schemes that could occur and the red flags they might send up. Instruct your audience to report any suspicious activity to someone in a position of trust, such as a human resources director. To ensure your message doesn't seem overly negative or clash with the culture you're trying to foster, make sure everyone understands that the ultimate goal is to protect the organization and its assets. If nothing else, fraud prevents your nonprofit from fulfilling its mission.