Did you know that the typical nonprofit organization loses nearly 5% of revenues in a given year due to fraud? Or that the average loss per incident is $150,000?
These and other facts are included in the Report to the Nations in the global fraud examiners’ study. Deterring fraud should be a priority of nonprofit financial management. Ongoing fraud saps an organization’s finances and can harm its reputation among donors and other constituents. To prevent fraud, the following guidelines may be of assistance. Understanding and enacting each of these guidelines can go a long way towards preventing fraud.
Fraud Risk Governance
Fraud risk governance refers to a set of policies or procedures put in place to communicate the expectations of the nonprofit financial management team, the Board of Directors, and others. It is a system by which risks are controlled, and in which the process that organizations use to respond to fraud is outlined and shared with others. A written fraud risk governance policy is an essential first step to preventing fraud.
Fraud Risk Assessment
A fraud risk assessment conducted by your nonprofit financial management team can provide you with a broad overview of the potential risks and remedies available. As part of a fraud risk assessment, teams create a list of potential fraud schemes and risks. Then, they outline the likelihood and significance of each risk. Current fraud control methods are analyzed, and recommendations are given to mitigating potential risks.
Fraud Investigation – and Correction
Next on the list of best practices is fraud investigation and correction. Steps must be taken to ensure that anyone who is aware of potential fraud reports it and that those receiving the reports act quickly upon the information received. A coordinated investigation should be conducted in a timely manner to address, correct, and remedy any fraud situations.
Monitoring Future Activities
Lastly, steps should be taken as part of good nonprofit financial management to monitor future activities and prevent potential fraud. Learning from the past is a good way to prevent future problems. Close any loopholes, remedy poor procedures, segregate duties, and put into place strong internal controls to prevent future fraud occurrences. Consistent, ongoing monitoring is the best way to prevent and correct fraud once it occurs.
Common Fraud Schemes
Can you recognize some of the more common fraud opportunities and schemes? This list is derived from the findings found in a Report to the Nations previously cited above.
- Misappropriation of an organization’s resources such as stealing office supplies, taking petty cash, using the copy machine for personal needs, etc.
- Billing schemes that pad bills so that the person enacting the fraud keeps the difference between billed and owed amounts.
- Check tampering schemes.
- Financial statement fraud.
- Ongoing, small thefts that add up to large amounts.
Your Best Defense: A Good Offense
Your best defense against fraud at a nonprofit organization is always vigilance. Good internal controls, consistent monitoring of financial information, and providing employees with a hotline or anonymous tip line to report fraud are all good ways to defend against fraud.
Nonprofit Accounting with Beck & Company
Beck & Company is a Washington D.C. area nonprofit accounting firm with a team of expert auditors, accountants, and advisors available to help nonprofits of all sizes. We provide a variety of consulting, auditing, and accounting services and blend knowledge from the accounting and nonprofit worlds to help you improve operations and efficiency. For more information, please contact us at 703-834-0776 x 8001.