Nonprofit organizations – like their for-profit counterparts – have experienced many changes in the past few years. From the recession to the slow economic recovery, nonprofits have experienced cuts in funding, loss of programs and resources, and staff reductions. Many nonprofit organizations have worked to streamline their processes and have been forced to rely on their reserves just to survive the economic challenges.
With so many nonprofit organizations struggling to simply maintain, many organizations have become lax in their routine efforts, putting them at great risk for fraud. Nonprofit organizations need to operate smoothly and efficiently, and part of that effectiveness must include having sufficient safeguards so that organizations have the proper internal controls to prevent fraud. Nonprofit management and the Board must be aware of the vulnerabilities in a nonprofit organization’s structure so that the proper measures can be taken to fill those gaps. Nonprofit staff members should also be educated about the threat for fraud and trained on ways to go about preventing fraud (such as whistle blower policies, the appropriate ethical behavior, and conflicts of interest). Regular communication about the topic heightens awareness of fraudulent activity within the organization and even discourages potential perpetrators from acting.
Staff reductions can also put your organization at risk for fraud. When an organization’s staff is reduced, the internal controls that were once sufficient may be weakened, putting the organization at great risk. In order to safeguard the organization, nonprofits need to re-evaluate their internal controls every time a large-scale change has been made.
Regular check-ups and evaluations of an organization’s processes and documents is critical in fraud prevention. Schedule routine evaluations of your organizations processes and procedures, including the routine reconciliation of asset and liability accounts and their review and approval. Train employees on organizational policies regarding document submissions (such as requirements to submit receipts and disbursements to upper management). Nonprofit organizations should also develop strict credit policies and ensure that employees are adhering to those policies. Supervisors should regularly review employees’ credit card statements, and board members should be responsible for reviewing the charges submitted by nonprofit executives.
Finally, it is important for nonprofit organizations to not forget back-end vulnerabilities that can occur in their technology systems. Organizations need to maintain internal controls in their IT departments and ensure that their computers and network are secure. Software should always be up-to-date, passwords should be changed regularly. Proper security policies and procedures should be followed by all employees. To further prevent fraud, nonprofit organizations should invest in virus and malware protection to safeguard their most valuable data and information.
Identifying all potential areas of risk for fraud should be part of a nonprofit organization’s risk assessment program. Fraud is not limited to financial loss; it can cause damage to an organization’s public image that could last for years (long after the financial impact has been absolved). Misappropriated assets can be publicly disclosed on the IRS Form 990, causing potential embarrassment to the organization if irregularities are discovered. Upper management needs to fully understand their protection under the organization’s insurance policies so that in the event of fraud, the full extent of financial damage may be covered.
While thinking about fraud may not be appealing, it is a necessary to safeguarding your organization. When there is a breach in your organization’s financials or when fraud is discovered, upper management must take immediate action. Knowing the vulnerabilities of your organization and responding to those vulnerabilities as best as you can will make all the difference. Your organization will be protected from financial loss, and your reputation will be upheld in the eyes of your supporters and contributors.