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Preventing Fraud at Your Non-Profit

Frauds are committed within non-profit organizations every year, ranging from employee embezzlement and asset misappropriation to misstatements of financial reporting.  These frauds can cause both financial and reputational damage, which leads to support from donors, grantors and other public sources most likely suffering.

Common asset misappropriation schemes include:

  • Skimming and theft of donated merchandise
  • Credit card abuse
  • Submission of fictitious expenditures
  • Fictitious vendors
  • Payroll schemes such as “ghost” employees or overstatement of hours worked

Common financial reporting fraud includes:

  • Failing to disclose significant related party transactions
  • Failing to report trade payables in the correct period to understate expenses
  • Misclassifying restricted donations to mislead donors or charity watchdogs
  • Holding records open beyond the period-end to inflate revenues

Contributory factors leading to fraud at non-profits include having an atmosphere of trust, limited resources, weaker internal controls, large amounts of cash flow from various sources, high staff turnover, lack of business and financial expertise and reliance on volunteer boards, among other factors.

The first step to preventing fraud at your non-profit is to determine which contributory factors exist at your organization.  The first factor that is typically addressed is internal controls.  Organizations should ask themselves the following questions:

  • Who is in the position to defraud the organization or manipulate the financials?
  • Are there any weaknesses in the internal control system that can be exploited?
  • How could a perpetrator override or circumvent controls?
  • What could a perpetrator do to conceal the fraud?
  • Is a process in place to screen new vendors and employees?

Other steps management should take to reduce exposure to fraud include remaining alert to changes in lifestyle of management, periodically reviewing travel and other expenses and incorporating fraud questions in process or day-to-day discussions.  Sitting down as a management group or board of directors and reviewing the above factors will go a long way in helping prevent fraud at your non-profit.

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