Nonprofit fraud isn’t worse — but it’s different

It’s a myth that not-for-profits as a group suffer disproportionately high losses due to occupational fraud. According to the Association of Certified Fraud Examiners’ (ACFE’s) 2016 Report to the Nations on Occupational Fraud and Abuse, surveyed nonprofits lost a median amount of $100,000, compared with $150,000 for all organizations.

Yet nonprofits have special vulnerabilities to fraud. Knowing such weaknesses can help you take action to prevent crooked employees from exploiting them.

Mind the gaps

The core of any organization’s fraud-prevention program is strong internal controls. These are policies that govern everything from accepting cash to signing checks to training staff to performing regular audits.

But internal controls aren’t always a priority with nonprofits. Charities tend to devote most of their budgets to programming and have fewer dollars available to enforce internal controls.

This can be especially problematic when the “tone at the top” is lax. Nonprofit boards may inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike for-profit companies, nonprofit boards may lack members with financial oversight experience who might notice when something is amiss.

Trust is another potential Achilles’ heel. Nonprofits often regard their staff members as family and skip such important fraud-prevention measures as conducting background checks. In some cases, managers are allowed to override internal controls without recourse and volunteers are trusted to accept cash donations or keep the books without the oversight of a staff member — both very risky activities.

Positive action

Proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is essential. Strong management oversight and confidential hotlines also help reduce fraud. If you catch a fraud perpetrator, don’t sweep the incident under the rug. File a police report, contact your attorney and, if an investigation shows that the employee did commit fraud, fire him or her. Punitive action sends a strong message to other would-be cheats.

© 2016