Nonprofit Fraud: Yes, It Could Happen to You

Angie-Murdo-100By Angela Murdo, CPA, CFE, Senior Manager, Anderson ZurMuehlen

Most small nonprofits, especially in Montana, run with a lean staff. Working with donor funds and toward a “greater good,” they go to considerable lengths to stretch their dollars. Staff more closely aligned with the nonprofit’s mission tend to have greater job security during economic downturns, while the ranks of administrative support staff get thinner.

Small staffs make nonprofits ripe for fraud. Often, they don’t have the personnel to adequately segregate duties and maintain appropriate controls over cash and other assets susceptible to theft.

The 2008 recession forced many nonprofits to tighten their belts even more. Contributions and grants decreased, causing nonprofits to reduce staff. Existing controls were diminished, making organizations even more susceptible to fraud. Now that many nonprofits are seeing an upswing in donations and grants, this is also increasing their funds susceptible to theft, which seems to be causing an increase in fraud. According to the “Report to the Nations on Occupational Fraud and Abuse 2014 Global Fraud Study” issued by the Association of Certified Fraud Examiners, both the number of cases and median loss in each case have increased steadily from 2010 through 2014 for nonprofits.

Why are we seeing more fraud now? There are many theories. Many believe it’s because there’s more money flowing into nonprofits, and organizations that became accustomed to operating with reduced administrative personnel have not brought their staff back up. They feel they have adequate staffing and are not adding any employees to ramp their controls back up. Sadly, some employees who made it through the downturn—often with reduced salaries—are now seeing large funds flowing back into the organization, and are feeling they deserve a piece of the pie.

Here are some great ways to segregate duties and mitigate your risk of fraud:

  • Proper review of bank reconciliations. Make sure there are always two individuals with adequate financial knowledge reviewing the bank statements and looking at the monthly reconciliations.
  • Mandatory vacations. Annual vacations required by the organization can help flush out any possible lapping or kiting schemes that may be occurring. Mandatory time off may even deter the employee from starting the fraud in the first place.
  • Communication. Be sure to inform all employees that you will be looking at every area of the organization, possibly on a surprise basis. The knowledge that someone may be looking over your shoulder is a great deterrent.
  • External reviews. A small staff can make it difficult to properly segregate duties or perform all tasks that would help prevent or detect fraud. Another way to perform these functions—without having to hire another employee—is to utilize outside help.

Many nonprofits are starting to see issues crop up, and some have already experienced fraud. Now is the time to reevaluate controls and determine if your organization is susceptible. When addressing controls in your organization, it’s always better to be proactive than reactive. We can help. We can explain the options available and help you determine the controls you may need to put in place. We can also help you identify areas where you may have weaknesses and consult with you on potential solutions.

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