5 Ways to Protect Your Organization from Fraud
Nonprofit organizations are not exempt from dealing with issues of fraud. Since not-for-profit entities keep their focus on funding the organization’s purpose, resources are sometimes spread thin. Nonprofits tend to have a smaller staff than for-profit businesses, which can complicate fraud prevention tactics and make segregating duties and confidential reporting a challenge. However, even in organizations with the smallest staff, there are simple steps you can take to prevent fraud at your organization.
Identify risks
The employees and volunteers that allow nonprofits to operate tend to be a close-knit group, but it is the leadership’s responsibility to identify areas in the business that are most susceptible to fraud. 34.5% of nonprofit fraud cases are due to asset misappropriation, specifically the misuse of cash. Cash misappropriation may include larceny, manipulating registers, and using company credit cards for personal use. The other common types of fraud in nonprofits include:
Corruption – In nonprofits, corruption takes the form of accepting bribes or gifts, diverting funds, and laundering money.
Financial statement fraud – The intentional misrepresentation of financial position on Form 990s, balance sheets, and income statements.
Check tampering – Check tampering may occur when an employee or officer alters a check printed for a vendor, duplicates check stock, or forges signatures.
Increase internal controls
According to the Association of Certified Fraud Examiners (ACFE), the most common factor contributing to the fraud in nonprofits is a lack of internal controls. Internal controls describe the rules, processes, and procedures set in place to protect the integrity of the organization. In a nonprofit entity, internal controls may include segregation of duties and dual authorizations.
Segregation of duties – Whenever possible financial duties should be carried out by multiple individuals. For example, the same individual responsible for reconciling the bank accounts should not be the same person issuing payments to vendors or reviewing financial statements. Smaller nonprofits can accomplish segregation of duties by cross-training staff members outside of the finance team to perform certain accounting functions.
Dual authorizations – Organizations can set payment processes so that dual authorization is required to process all payments or those above a certain threshold. For paper payments, like checks, this may require one individual to cut the checks and one to sign and review support documentation. For electronic payments, a dual authorization may be as simple as requiring management approval before funds are released.
Create a whistleblowing policy
43% of discovered fraud cases in nonprofits are caught because of tips. It’s important to have a whistleblower policy in every company. The policy should be posted and distributed and should outline clear instructions for employees, volunteers, and community members on how to report suspected fraud and unethical behavior. There are third-party helplines and email addresses nonprofits can partner with to protect themselves.
Start an audit committee
Select a few key members of the Board or the staff to act as an audit committee and regularly review the financial procedures and statements of the organization. The audit committee can review monthly income statements and investigate any variances in actuals to the budget. The committee can also be responsible for maintaining internal controls as set by leadership.
Get help
Fraud is a real threat to nonprofit organizations. One of the most thorough ways to protect your organization is to partner with an expert. Working with an accounting expert can include:
Outsourcing all or some accounting functions
Upgrading accounting software
Contracting a third-party accounting firm to conduct a financial audit
Consulting with a nonprofit accounting expert about improving fraud protection policies
At Financially Tone, we specialize in nonprofit accounting processes. Schedule a chat today to learn about how we can help protect your nonprofit from fraud.
