Ten Ways to Detect and Prevent Fraud in Nonprofits
By Leigh Tucker
According to the Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nations, while only 2.4% of fraud found in 2016 was attributed to religious, charitable, and social services organizations, the median fraud loss for these groups was $82,000. For an organization already operating on a shoestring, such a loss could spell disaster.
According to the ACFE, the majority of at nonprofit fraud cases relates to billing, check tampering, corruption, and expense reimbursements.
Administrators, boards of directors, and financial managers need to be proactive in their approach to detecting and preventing fraud. Most of the actions that follow carry a price tag, so fraud prevention usually begins with the setting of goals, priorities, and budgets.
1. Hire the right people.
Although the majority of fraud perpetrators are first-time offenders, weeding out the criminally inclined is not impossible. A great deal can be learned from a candidates references, work history, credentials, pre-employment drug testing, and criminal background checks. If nothing else, background checks put job applicants on notice that the organization values integrity.
Put policies in writing and have all employees sign documents saying they will follow the rules. This is an area where you will probably want to work with an attorney to make sure youre staying within the law.
Cost and fear of notoriety keep some organizations from exposing fraud and taking legal action, but lax attitudes make it that much easier for the next person to commit fraud without fear of reprisal.
Controls can be preventive or detective. Preventive controls might include keeping blank check stocks under lock and key, setting authorization limits, and requiring multiple signatures on checks. Detective controls include having an independent employee reconcile bank statements, surprise inventory counts, and independent reviews of accounts payable lists.
When an employee stays in the same position for a long period, or never takes a vacation, there are ample opportunities for that person to design, commit, and conceal fraud. Mandatory vacations and job rotation make it difficult for an employee to continue concealing a crime.
Studies show that most frauds are initially detected through tips from employees, clients, and outside vendors. The reporting system should be anonymous, managed by a third party, and available 24/7. This service doesnt have to break the bank, either. Some vendors charge as little as $500 a year for a hotline.
Employees and volunteers are the eyes and ears of your organization, but they cant report fraud if they dont know what it is. For a moderate investment, you can locate self-training resources online. If the budget allows, send employees to training or conduct internal training on a regular basis.
Keep the organizations purpose and mission at the center of everything. Undue pressure to meet goals can lead employees to bend the rules, falsify records, or commit other offenses in order to meet expectations.
Employees might commit fraud because they have been passed over for a promotion, believe they have been underpaid, or are otherwise treated unfairly. Make sure that all policies are applied equally and fairly.
An employee assistance program or similar outreach initiative can help prevent fraud by providing professional help with personal problems such as alcoholism, drug abuse, marital problems, and gambling.