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How to Avoid Nonprofit Fraud

Updated: Sep 16

Fraud in the nonprofit sector is one of those dirty secrets that we don’t like to discuss. We are the good guys. We don’t cheat or steal, right? Fortunately, the majority of nonprofit professionals and volunteers are honorable trustworthy people. But, as with any part of our society, there are those who take advantage of their position, power, and authority.

According to the Association of Certified Fraud Examiner’s (ACFE) 2018 Report to the Nations, nine percent of occupational fraud cases took place at charitable organizations, resulting in a median loss of $75,000.

The three most common types of occupational fraud are:

  • Asset misappropriation

  • Corruption

  • Financial statement fraud

Financial statement fraud occurs only about 10% of the time, but results in the greatest median loss at $800,000. The real effect of fraud is the impact on the clients and services when funds are misappropriated.

An interesting point is that nonprofit fraud is rarely uncovered through an audit, but more often through a whistle blower. This illustrates the importance of having a whistle blower policy in place so that people will understand the commitment of the organization to resolving this issue and protecting the person who reports suspected fraud.

Here are some questions every senior staff person and board member should be able to answer:

  • How is money handled at the office or offsite at special events?

  • Who has access to the agency’s accounts, checks and credit cards?

  • How often are financial statements run and reviewed by the board or other outside professionals?

Sometimes, we trust our staff, volunteers, and board members too much but, here are some ways we can protect or organization and avoid fraud:

  • Do background checks on staff and key volunteers; make this part of your hiring process

  • Create strong policies

  • Have a whistle blower policy and confidential hotline for complaints

  • Develop a fraud policy

  • Adopt the AFP Code of Ethical Standards

  • Develop a code of conduct

  • Establish strong internal procedures

  • Outline gift processing responsibilities. Identify who opens the mail, who processes the payments, and who makes the deposit. The Executive Director should not be the only one handling the money.

  • Have an annual audit or other review of financial records

  • Board members must understand their fiduciary responsibilities

  • An annual review of financial policies and procedures for board and staff is critical

Here is a link to recent story that illustrates the need for strong financial oversight. Don’t be this nonprofit in the news. Click HERE.

Cheers,

Michelle Crim, CFRE

Dynamic Development Strategies can help. We offer coaching and fundraising services for our nonprofit clients. We specialize in startup and smaller nonprofits because we understand your challenges. Please contact us for more information.

https://www.dynamicdevelopmentstrategies.com/

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