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June 25, 2022
Nonprofit Leaders Need to Know Financials, How to Avert Fraud
Book - Understanding Financials, Prevent Fraud

Understanding nonprofit financial statements and knowing how to protect their nonprofit from fraud are, arguably, two of the most important responsibilities of the people leading those organizations, which means there's always more to learn.

Thomas Ittelson, a financial management consultant to nonprofits, amply addresses this need with his recent publication of two slim volumes. Understanding Nonprofit Financial Statements in 30 Pages and Protecting Your Nonprofit from Fraud (in 30 Pages).

First, understanding nonprofit financial statements.

In some ways, running a for-profit company is easier than a nonprofit, because everything can be assessed in terms of how they contribute to profits. For nonprofits, the relevant questions are: How healthy is our organization? Are we sustainable? Can we generate the resources we need to meet current needs without jeopardizing our future.

Mastering the details of financial statements is what enables nonprofit leaders to fully lead. A useful place to start, especially for new leaders, is to read Understanding Nonprofit Financial Statements in 30 Pages.

"Board members and non-financial managers do not need to be accountants or financial experts," Ittelson writes. But they need to understand financial statements and reports in order to document mission success.

Just because nonprofits are not organized to make a profit, they have specialized accounting procedures for gifts, grants, contracts, and program services revenue and expenses, all of which needs to be handled properly. And that'd what Ittelson does – in a clear, no-nonsense way that educates.

Nonprofit leaders need to understand what is conveyed in a statements of activities, financial position, cash flow, and functional expenses if they are to have a handle on the organization's financial position. Like many things, these are only mysterious entities only if one doesn't know about them and understand the details.

Second, preventing fraud.

Fraud, unfortunately, hits nonprofits of all sizes and, truth is, the higher up in the organization the fraudster is, the larger the loss often is.

Pulling no punches, Ittelson proclaims that nonprofit fraud mostly occurs because board and senior management are "asleep at the switch. They do not ensure adequate financial checks and balances in the organization, nor implement the proper financial systems and controls necessary to prevent fraud."

The solution, then, is to implement the right systems and controls – for which Ittelson, again, provides clear guidance.

The need to prevent fraud is clear: Nonprofits are custodians of their organization and have a responsibility to protect its assets, and fraud, if it occurs, can threaten future donations and revenue.

The culture created by nonprofit managers can go a long way to prevent fraud. For example, according to Ittelson, if employees see senior management exaggerate how much the organization has done or buy themselves expensive dinners on the organization's tab, then they are more likely to feel such behavior is acceptable.

Still, culture is not enough. Nonprofits need to institute best practices to prevent fraud, which include. Minimal actions include segregating financial duties, as well as information technology duties, to make sure different staffers perform critical complementary tasks, instituting good accounting practices, and conducting a variety of regular financial audits. Ittelson provides detailed suggestions in each of these areas, which alone makes the book a valuable read.

He follows up with a list of "red flags" that, if detected, could signal potentially fraudulent activity. For example, employees who decline promotions or don't take vacations could be indicators of fraud. Ittelson explains why.

The brevity of these two handbooks is part of their value: they respect the time of nonprofit leaders by conveying a rich vein of information in what could well be record short time.

Understanding Nonprofit Financial Statements in 30 Pages and Protecting Your Nonprofit from Fraud (in 30 Pages) are available from Mercury Group Press.

Reviewed by Peter Lowy

July 2020

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