Nonprofit Financial Management and the Need for Security – Even for People You Trust

“Trust, but verify.” That adage is quite true, especially in nonprofit financial management. Even among the best-managed nonprofit organizations, people can be tempted to commit fraud.

It’s important to trust your employees. No one likes to work in an environment of suspicion and doubt. However, trusting employees is one thing—never checking on their work is another.

Many tasks in nonprofit financial management can provide an opportunity for embezzlement, workplace fraud, theft, check forgery, and other financial crimes. Fraud prevention is an important task that many nonprofits leave until it is too late. Then, the proverbial barn door is wide open, the horse is out, and he’s nowhere in sight. Closing the barn door or protecting your systems by putting into place strong checks, balances, and fraud prevention tips is an important part of nonprofit financial management.

Don’t panic! Setting up internal controls for your nonprofit can be easy with Beck & Company’s nonprofit services. Get fast answers when you contact Beck & Company.

Too Much Trust Leads to Temptation

Nonprofit leaders may be completely unaware that theft is taking place. A little money knocked off the top here and there, a dollar or two skimmed from a charity event … it all adds up, even if you can’t see it.

Too much trust can lead to temptation. Take the hypothetical example of Mary Money. Mary is the bookkeeper for a small nonprofit organization. She has two employees working with her, an accounts payable clerk and an assistant she shares with the donation and fundraising person.

Mary has been with the nonprofit for over 17 years, since it was founded. She volunteered with the organization for a year, then became a paid staffer. Today, volunteers and employees alike know they go to Mary with any question or issue and she has the answer.

Mary is so trusted, in fact, that she can sign checks on her own, without the president’s signature. The present travels often on fundraising trips and isn’t in the office every week to sign checks, so she thinks it expedient that Mary can sign off on checks. The president rarely asks to see the accounts.

Auditors, however, find problems. They discover that Mary has embezzled more than $600,000 in dribs and drabs throughout the years. In the past several months, temptation has gotten the better of her, and she has made out several checks to cash which were easy to spot. With a little probing into the company’s security arrangements, it becomes clear that Mary has been using the nonprofit association as her personal piggybank for several years.

Loss Control Methods

No one likes to work in an organization that doesn’t trust its employees. When it comes to nonprofit financial management, however, loss control methods should be in place to deter fraud. It isn’t a sign that you don’t trust your employees. It’s a sign that you care about your organization and the trust that donors and others have placed in it through their financial contributions.

Loss control methods for nonprofit financial management include:

  • Employee background screening: While screening would not have picked up anything in Mary’s case since she was a long-time employee, it might pick up applicants who have financial woes that could lead them to succumb to temptation.
  • Financial oversight: Review your organization’s finances on a regular basis. In Mary’s example, the president didn’t review finances regularly enough, leaving plenty of time for Mary to cover her tracks. Both scheduled and spontaneous reviews can help you catch any errors or fraud attempts early.
  • Anonymous reporting: Set up an anonymous tip line or email box for employees to voice their suspicions. Perhaps the two people who worked with Mary had noticed something amiss but hesitated to “tell” on their supervisor. An anonymous program makes it easier for people to share any problems or issues.
  • Quick follow up: Any items reported through the tip line should be followed up on promptly. This ensures early detection of fraud.
  • Two-fer: Always have two people sign checks or have one person sign with the other giving written approval, and two people present when counting out cash or checks.

These are just some steps to take for fraud deterrence and detection. A comprehensive program and policy, along with a process to follow to both detect and report fraud, can save your organization a great deal of headache and heartache later. We can provide services for both accounting and auditing to assist you.

Although it is admirable to create a corporate culture that inspires trust, it is not always wise to trust blindly. Following simple fraud deterrence procedures isn’t a mark of lack of trust, but rather, a simple step that can prevent good people from making bad mistakes.

Nonprofit Financial Management and Consulting from Beck & Company

If you need help planning, preventing, and formulating a response to potential fraud, Beck & Company can help. We are Washington DC area nonprofit advisors and are Virginia certified nonprofit accountants. We work with nonprofits of all sizes, serving many different constituents nationwide, providing a variety of consulting, auditing, and accounting services. For more information, please contact us at 703-834-0776 x 8001.

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