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Not-for-profit fraud isn’t worse, but it’s different

June 19, 2013

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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) 2012 Report to the Nations on Occupational Fraud and Abuse, surveyed not-for-profits lost a median amount of $100,000, compared with $200,000 for private for-profit companies.

But even $100,000 is more than most organizations can afford. To protect your organization, you need to be aware of fraud vulnerabilities specific to not-for-profits.

First things first

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, training staff, and performing regular audits.

According to the ACFE study, billing fraud, check tampering and expense reimbursement fraud are the three most common types of employee theft found in religious, charitable and social service organizations. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is a relatively easy and effective method of preventing such fraud.

For all types of organizations, strong management oversight, confidential fraud hotlines and other employee support services are associated with the greatest decreases in financial losses. Organizations in the study that lacked such controls experienced a 45% higher median loss.

Mind the gaps

Most not-for-profits have at least a rudimentary set of controls, but employees bent on fraud can usually find gaps in the fence. For example, charities tend to devote the lion’s share of their budgets to programming and can be stingy about allocating dollars to enforcing internal controls. This can be especially problematic when the “tone at the top” is lax and executive directors or board members indicate that preventing fraud is low on their priority list.

Not-for-profit boards may also 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, which means they may miss important warning signs that something is amiss.

Trust is an Achilles’ heel throughout many not-for-profits. Organizations 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.

Going public

How not-for-profits deal with perpetrators can also increase their fraud risk. A reputation for honesty and fiscal responsibility is any charity’s bedrock. So it’s not surprising that many organizations choose to quietly fire fraud perpetrators and sweep such incidents under the rug.

Unfortunately, such actions encourage fraud by telling potential thieves that the consequences of getting caught are relatively minor. Even if an incident is hushed up, it could fuel insidious rumors that do more reputational damage than publicly addressing the issue head-on would. It’s better, therefore, to file a police report, consult an attorney and inform major stakeholders about the incident and what you’re doing to prevent it from happening again.
For more information on this topic, please contact Matt Shroyer at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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