Protect Your Nonprofit from Fraud
When the economy struggles, everyone is on high alert for fraud. One sweep through any social media app points it out--neighbors reporting children wandering around, delivery vans being called in for suspicious activity. Of course, the cause for concern doesn’t come from nowhere--when people face fear of joblessness or loss of homes, there can be an increase in all types of fraud.
Though nonprofit organizations may feel as though they’re exempt because of the nature of the service they perform, they’re at risk for fraud too. And, because many nonprofit employees wear many hats, it isn’t always easy to notice or even prevent fraud.
How does nonprofit fraud occur?
The Association of Certified Fraud Examiners identifies three frequent types of fraud in workplaces, which include misappropriation, corruption, and financial statement fraud. Although asset misappropriate accounts for only $114,000, it occurs in 89% of cases.
Nonprofits can be especially at risk of fraud because of the way they’re structured. They may have inadequate resources for financial oversight, offer a high amount of control or oversight to one person, or rely too little on their volunteer board for oversight. Nonprofits also frequently give volunteers access to confidential information out of necessity, which heightens their risk. Combine all of that with a structure that relies on nonreciprocal donations, and nonprofits prove themselves especially at risk for fraudulent activity.
What fraud costs your nonprofit
Nonprofit fraud can cost much more than just the actual money or assets that disappear. In reality, much of nonprofit fraud goes undetected, which means we never really know how much is lost to fraud. For some organizations, reporting fraud can seem scary, and so it may go unreported to save face.
Fraud can seriously damage a nonprofit’s reputation or even their tax-exempt status, and those costs are difficult to measure.
What fraudsters look like
Though fraud can be and is committed by people across many walks of life, there is a profile that can be helpful. Those who commit fraud don’t necessarily have a criminal history or any warning signs. They’re often married, educated, in their 30s or 40s, first-time offenders, and hard workers. Often, they’re working with another employee or vendor. Sometimes they’re executives, but often not. They may have worked for the organization for any length of time, though most have been employed there or involved with the nonprofit for at least a year.
Of course, you should be careful to avoid stereotyping, jumping to conclusions, and accusing people because they may fit a certain type. Be vigilant in eliminating fraud from the getgo--it is always better to work toward prevention rather than focus on reaction later.
Nonprofit fraud prevention
Though fraud is somewhat common, there are a number of steps nonprofits can take to prevent criminal activity. These steps include:
Having the right tools
Especially now, we’ve got technology at our fingertips. This is helpful in many ways, but one of them is in the prevention of nonprofit fraud. Find tools and technology that make your nonprofit a safer place to conduct business. Look for a nonprofit accountant or nonprofit accounting software that helps identify an approval path for financial documents, including expense reports and donation slips. Make sure there’s a visible and documented system in place that maximizes visibility, which should be easy with the right tools.
Look for systems that allow you to grant certain permissions to certain people, limiting access to your financial setup. You should be able to dictate who can view, edit, or assign tasks or documentation, as well as keep a record of when things are accessed. You may even be able to find a system that integrates bank or credit/debit card information into one place, providing a register of transactions, etc. as they happen. Shop around for the right accountant or software that meets your needs.
Working from within
The best way to prevent nonprofit fraud is by getting a handle on what’s happening within your organization, which can stop things altogether. By instituting a series of internal controls, you discourage fraud or stop it, should it begin. Your organization can easily set up a few practices that help things function more smoothly in good times and offer fraud protection as necessary.
First, make sure that you’re reviewing bank transactions regularly, to catch any discrepancies as they happen. Separate responsibilities so nobody is responsible for everything--if someone writes a check, they probably shouldn’t be the one to sign it as well. Give various people roles to increase oversight, but assign with some discretion too.
To prevent nonprofit fraud, your organization should also set up rules for things like petty cash amounts, who can use it, who dispenses it, how it must be documented. Set up approvals for purchases, enforce a policy of turning over receipts, and keep records in case there are any issues.
Remember that people committing fraud against nonprofits are committed to hiding it, so it may be tricky to spot. Careful review by people that are trained to look for abnormalities or red flags that happens consistently and with accuracy is your best bet for fraud protection.
The right training
Your employees can be your biggest asset in preventing nonprofit fraud. With proper training, they can help spot potential fraud and are subject to the practices that prevent it. Make sure your employees know what constitutes fraud (sometimes it happens by accident!), how fraud impacts your nonprofit organization, and how and why fraud might happen. Ensure that everyone knows the consequences, both personally and for the organization, and other policies surrounding fraud. Finally, make sure that employees know how they can report fraud if they suspect that something is amiss. When fraud is stopped, it is most often the result of an observant employee taking note of something that didn’t feel quite right.
Enlisting your board
One of the great things about nonprofits is that they have nonprofit boards, which often provide a great service to the greater organization. In cases of fraud prevention, this is certainly true. Your board can help with oversight, enforce consequences, and help with reputation management if the worst happens. Their help and expertise is invaluable, and taking advantage of their potential is always a good idea.
What to do if your organization is the victim of fraud
Even if you’ve done everything right, you may find your nonprofit organization in the midst of a scandal. It happens to even the most careful, but identifying a clear course of action early can help mitigate the damage.
If you suspect something
No matter your role in an organization, you should always feel free to contact leadership if you suspect that fraud may be occurring. Don’t feel like you have to have absolute proof of fraud occurring--a suspicion based on observations is also worth reporting.
Your leadership will likely complete an internal investigation, which will include a look at your organization’s financials that identifies how and what was taken. There will likely be employee and volunteer interviews, external investigations, and eventually legal proceedings.
If it is revealed that fraud has occurred within your organization, you’ll need to engage in some reputation management. This is perhaps especially important to nonprofit organizations, which rely on trust, service, and a greater feeling of safety within the community. Fraud undoes a lot of this goodwill, which means your nonprofit may have to undertake some serious measures to rebuild all that fraud destroys.
For serious cases in large organizations, you may be able to hire a public relations firm to help rebuild your reputation. For smaller organizations, a lot of this work can be done inhouse. Focus on creating policies that prevent whatever fraud has happened, and make these policies public. Be as transparent as you can be with your board, donors, staff, and volunteers. Let them know what happened, how it happened, the result of what happened, and how (in detail) you will prevent such occurrences in the future.
Engage in a campaign to rebuild your reputation, overwhelming your community with positives that counter the negative thing that just happened. Run a social media contest, hold a volunteer event, or publish old photos that create positive associations with your nonprofit. Attempt to make the news with the great things you’re doing instead of creating buzz around the struggles you’ve had.
Don’t sweep anything under the rug, but also don’t dwell if you can help it. Hold visible volunteer and staff training, communicate openly with your community, and put steps in place to make sure you’re never the victims of nonprofit fraud again.
The best bet for protecting your organization against nonprofit scams and fraudulent activity is to be vigilant and thorough early in the game. Don’t wait until you’ve got a reason to suspect fraud--stop it from happening before it even occurs to anyone. Good policies, tools, and leadership can help ensure that your nonprofit runs smoothly, effectively, and safely for the employees and community you serve for years to come.