Across the United States, fraud remains a major issue among nonprofits. In fact, one 2020 study found that nonprofits represented 9% of reported fraud cases globally, with an average loss of $639,000 per case. Due to reputational concerns, there’s a good chance that many other cases go unreported.
Many nonprofit leaders believe that fraud could never happen within their organizations. In reality, all nonprofits need to have fraud prevention and mitigation programs in place to protect themselves, their stakeholders, and their mission.
What Is Fraud, Anyway?
According to the Association of Certified Fraud Examiners (ACFE), fraud is defined as “any activity that relies on deception in order to achieve a gain.” Acts of fraud are carried out intentionally, with perpetrators purposefully misleading and deceiving others for their own gain.
There are two primary types of fraud:
- External fraud – Committed by individuals outside the organization, with examples including vendor fraud and customer fraud.
- Internal fraud – Committed by individuals within the organization, with examples including payroll fraud and embezzlement.
Why Are Nonprofits Susceptible to Fraud?
Detecting fraud in a nonprofit can be especially challenging because these organizations are rarely equipped with the internal controls needed to prevent fraud. Combine this with the complexity of operations in a nonprofit, and it’s easy to see how fraudulent activities can often fly under the radar, going undetected for months or even years at a time.
In many nonprofit organizations, resources are also limited. These organizations may simply not have the budgets and/or technology needed to implement robust fraud prevention programs. This may be especially true for organizations that rely on volunteers to operate, as these volunteers may come and go with minimal oversight.
Watching Out for Signs of Fraud
Despite the inherent challenges that can make fraud such a widespread problem among nonprofits, there are some signs that organizational members should watch out for that could be “red flags” for internal fraud.
Complaints from Vendors
If you’ve noticed that vendors have been calling in with complaints about their invoices or payments, this should be seen as more than just a coincidence. This is especially true if vendors are complaining that they have received bills or invoices for services/goods they have already paid for — or if they are claiming they haven’t received payment for something when your records show otherwise.
Financial Statement Irregularities
When was the last time you scrutinized your organization’s financial statements? Be on the lookout for red flags that may include unexplained cash withdrawals or large, unexpected expenses that may or may not be documented.
Suspicious Cash Adjustments
When reviewing financial statements, be especially vigilant about any cash adjustments. While some cash adjustments may be perfectly normal in a nonprofit operation, frequent cash adjustments may be a sign of fraud, especially when coupled with sudden changes in asset values or missing inventory.
Sudden Lifestyle Changes
Finally, be on the lookout for sudden lifestyle changes among your nonprofit’s members. Is there somebody who has recently started living a more lavish lifestyle with no increase in pay? While not always a telltale sign of fraudulent behavior, these individuals should be looked at closely if they have been displaying other potential signs of fraudulent behavior.
Practical Fraud Mitigation Strategies
Ultimately, the best line of defense against fraud in a nonprofit organization is a strong fraud prevention program that includes internal controls, regular audits, whistleblower protections, and plenty of oversight to deter criminal activity.
Robust Internal Controls
If not already in place, organizations are encouraged to implement strong internal controls that can make it more difficult for fraudulent activities to take place without others noticing. This may include segregating financial duties to ensure that no one employee has too much control over transactions. Likewise, nonprofits should have specific rules in place when it comes to documenting all transactions transparently and accurately.
Regular Auditing
Another excellent way to deter fraud in the nonprofit sector is to perform regular audits of financial data. Ideally, these audits should be completed by independent auditors who otherwise have no affiliation with the organization. An annual audit can go a long way in detecting signs of fraud while deterring dishonest activity.
Whistleblower Policies
Last but not least, be sure that staff and volunteers alike are trained to report any and all suspicious activity that could be indicative of fraud. Organizations should have robust whistleblower policies in place to protect those who make reports and allow them to remain anonymous.
Don’t Let Your Organization Fall Victim to Fraud
Across the globe, fraud remains a very real problem within nonprofit organizations. Unfortunately, the costs of both internal and external fraud can be devastating for organizations, not just from a financial standpoint, but in terms of public image as well. Fortunately, with the right prevention and detection strategies in place, nonprofits can mitigate fraud while continuing their mission. If your organization could use more assistance when it comes to implementing a fraud prevention program, reach out to a professional advisor for further guidance. These experts may also be able to assist with forensic accounting services in the event that you detect signs of fraud, as well as assistance in recovering from fraud.