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Fraud: Four Common Factors Facing Nonprofit Organizations

Posted by DeAnna Alger, CPA on Apr 25, 2016 4:40:54 PM
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Following the recent news of fraud at a small, local community-based nonprofit organization, some of our clients called with concerns as to how a trusted organization landed in this situation and why this seems to be happening quite often.   
While clients were surprised at the news of the recent scandal, I regrettably informed them that many small not-for-profit organizations can be vulnerable to fraud.  
In communities across the country, it is easy to find a variety of clubs, associations, or other entities to which people pay dues or fees, or raise funds as part of their participation.   Many of these organizations are filled with volunteers who manage the operations.  

The Board of Directors, no matter how properly or loosely structured, may not be aware of some basic internal controls to have in place to reduce the risk of fraud, embezzlement or misuse of funds. Fortunately, it may only take a handful of action items to protect your organization.  

Below are some of the more common threats and what you can do to reduce fraud exposure:

Threat: Organization Size Small organizations may be run by just a few Board members, with little or sometimes no staff members. This size limits the financial and accounting experience to draw from, so the organization’s financial information may only be monitored by one person or sometimes no one at all.

Solution: Having a second person review transactions, even if they have limited financial experience can help to both prevent and identify fraud or questionable transactions.

Threat: Single Point for Cash Flow When the entire checkbook and credit card for the organization are trusted to one person, with no other members reviewing the transactions, this opens the organization up to an increased risk of fraudulent activity.

Solution: To ensure protection at the financial level, ensure that two or three members are charged with fiscal oversight, documenting and approving purchases, reviewing expenses and tracking funds coming into the entity.

Threat: Common Goods Many times, we see that goods purchased for the organization can be similar purchases an individual might make for his or her personal use.  For example, is $81.37 spent at Wal-Mart related to groceries for the treasurer or supplies for a fundraising event at the organization?  
Solution: If someone is asked to purchase supplies, require they provide a line item receipt for event goods. 

Threat: Boundaries Not-for-profit organizations are made up of caring, trusting individuals who are passionate about the organization’s mission.  It can be difficult to separate the “position from the person” when setting rules and guidelines to monitor the organization. 

Solution:  Having a clear set of position responsibilities in writing will help to ensure that the roles and responsibilities are proper and sufficient. This is where an entity can specify, for example, that all checks must have two signatures or purchases require the review of two members.  

These are some of the more common conditions within not-for-profits that may lead to fraud that can occur in a short period.  Whether it is taking coins from the church offering, charging hundreds of dollars on the company credit card until payday or directly funneling funds into a personal account, no organization should take a passive approach.  

Additional reading: Fundraise Now, Report Later?  
Frauds can be devastating to small not-for-profit organizations especially since funds are so precious and needed for them to carry out their mission and activities. While the dollar amounts can seem minor on the surface, even if restitution is ordered, the reality of recouping funds promptly to prevent the operations from being adversely affected, are slim.   
Simply, prevention makes much better sense than resolving problems after they have already occurred.   

 Our team has experience with setting up internal controls within not-for-profit organizations, even those with limited resources.  These controls help to prevent and deter fraud from occurring, as well as to detect fraud that has already occurred or is potentially ongoing.  

 If you have any questions about nonprofit fraud or to learn how to ensure your organization can reduce its risk, contact me at cvalponi@zinnerco.com or any of the Zinner & Co. professionals at 216.831.0733. We’re happy to help and ready to start the conversation. 

Topics: fraud, non-profit reporting, Chris Valponi


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