It is hard to believe that an organization dedicated to improving society and filled with well-meaning, hard-working people would be susceptible to fraud. However, even the most well-meaning nonprofits can find themselves in financial hot water.
All too often, when financial issues arise, there is a temptation to mask them. This can be particularly tempting for nonprofit managers. One reason for this is that federal law only requires nonprofits to report financial inconsistencies which are over $250,000, or five percent of the organization’s annual gross receipts.
Sometimes, by the time a nonprofit realizes their misappropriation of funds, they find themselves at risk for losing significant amounts of money should they choose to come clean. Here are two things to look for that could indicate you may be experiencing some financial irregularities.
1. Financial statements are difficult to obtain. Most healthy nonprofit organizations are financially transparent. Stakeholders and constituents should have unfettered access to financial numbers. In fact, certain documents should be available at all times for review such as:
• Bank Statements including all cash balances
• Accounts Payable reports showing money owed to vendors. You will want to ensure vendors are being paid in full and on-time. Any issue here could mean financial fraud.
• A report showing credit lines with the amounts borrowed.
• Accounts receivables reports.
• A list of fixed expenses.
2. Income and cash flow statements as well as balance sheets should be automatically sent to stakeholders on a monthly basis. It is important to read these reports and have an open line of communication should anything seem out of place.
One of the best tools you have is to be proactive in mitigating financial fraud risk. You can conduct a fraud risk assessment by creating a risk map and linking it to your internal controls. Ensure your internal controls are being followed, and test their functionality. Arm your staff with training so that they can become aware of things to look for that may be fraudulent activities.
Organizations with fewer employees oftentimes have less segregation of duties with fewer internal controls. Having a smaller staff often leads to closer relationships and trust, which can create a false sense of security. There are ways to protect a small organization to mitigate their risk. Creating a fraud prevention environment with the following tools is a great start.
1. Use an accounting software solution. Utilizing accounting software can mitigate fraud risk as it automates transactions, provides user security levels, and creates an audit trail and Internal Accounting Review.
2. Conduct employee background checks.
3. Ensure the senior leadership reviews the monthly bank statements. This provides a level of accountability as well as mitigating check tampering.
4. Look for missing or altered checks–anything signed by an unauthorized individual or other inconsistencies.
5. Payroll oversight. Centralize the payroll program in order to eliminate “ghost” employees, which could be fictitious persons on the payroll.
6. Ensure compliance to internal controls.
7. Offer fraud prevention training. Remember, by nature, fraud is hidden. There are no 100% solutions to avoiding fraud. Research has shown that one of the most important deterrents to fraud is “tone at the top.” Management’s stance on ethics has a direct effect on employee behavior. The first goal is to prevent fraud, and the second is to catch it as quickly as possible.
Beck and Company Certified Public Accountants and Business Advisors are here to help. We are passionate about helping nonprofits get their financial reporting in order so that they can reduce the risk of fraud. Learn more about all of the nonprofit services we offer in addition to auditing services. Contact us to lo let us know how we can help your organization with financial services, internal audits, and other services to keep your finances in check and to prevent fraud.