Abstract: Charities and other not-for-profit organizations typically receive most of their donations at year end. It’s critical for these organizations to be on the lookout for fraud during the busy season. This article explains the schemes that are most common to not-for-profit organizations and suggests ways they can beef up internal controls to prevent fraud. An incident can ruin an organization’s reputation, so it’s important to have strong internal controls in place to prevent fraud from happening in the first place.
’Tis the season for donations
How not-for-profits can detect and prevent common fraud schemes
Charities and other not-for-profit organizations typically receive most of their donations at year end. Although fraud is generally less common among not-for-profits than at for-profit businesses, it’s critical for these organizations to be on the lookout for fraud during the busy season. Here are examples of fraud schemes that are most common to not-for-profit organizations, along with some ideas to help beef up internal controls to prevent fraud.
Many not-for-profits are staffed by people who believe strongly in their missions, which contributes to a culture of trust. Unfortunately, such trust makes nonprofits vulnerable to certain types of fraud. For example, if managers don’t supervise staffers who accept cash donations, it provides an opportunity for them to skim (keep a donation for themselves without recording its existence in the books). Skimming is even more likely to occur if a not-for-profit doesn’t perform background checks on new employees and volunteers who’ll be handling money.
However, skimming isn’t the most common type of fraud scheme in the not-for-profit sector. According to the 2016 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners, religious, charitable and social services entities are most likely to fall prey to corruption schemes — where a staffer abuses his or her influence to gain direct or indirect economic benefit, such as a bribe or a contract for a for-profit business that he or she invests in.
Other top schemes among not-for-profits include check tampering, phony expense reimbursement claims and billing schemes. For example, nonprofit staffers might invent and submit invoices on behalf of fictitious vendors or collude with actual vendors who are willing to submit false or inflated invoices.
Reinforce internal controls
Preventing such crimes begins with strong internal controls. Even small nonprofits that consider their employees and volunteers “family” need to establish and follow procedures that limit access to funds. Dishonest staffers who are paid modest salaries or who volunteer may justify their wrongdoing because they would earn more if they provided the same services to a for-profit business.
Possibly the most important internal control to prevent insider fraud is segregation of duties. To reduce opportunities for any one person to steal, multiple employees should be involved in processing payables. For example, every incoming invoice should be reviewed by the staffer who instigated it to confirm the amount and that the goods or services were received, and a different employee should be responsible for writing the check. For large expenditures, not-for-profits should require the approval of more than one person.
Similar guidelines apply to receivables. The staffer who deposits checks shouldn’t also open the monthly bank statement. And the employee who opens mailed donations needs to be different from the person who makes bookkeeping entries and deposits checks.
And don’t forget to protect electronic records that include financial data on donors, vendors, employees and others. Staff members should be given access only to the information and programs required for their job responsibilities. All sensitive information should be password-protected, and users should be required to change their passwords periodically.
Many nonprofits depend on money raised during a big annual gala or other special event at year end. During crowded, chaotic fundraisers, not-for-profits should generally discourage supporters from making cash payments. Instead, they can presell or preregister event participants to limit access to cash on the day of the event. If cash is accepted at the door, not-for-profits should try to assign cash-related duties to paid employees or board members, rather than unsupervised volunteers.
Consult a forensic accountant
A fraud incident can ruin a not-for-profit organization’s reputation, so it’s important to have strong internal controls in place to prevent fraud from happening in the first place. But internal controls can never be 100% fraud-proof. We understand how fraud happens in this unique sector and can help not-for-profits reinforce internal controls, as well as investigate suspicious behavior.
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