Non-profit risk management: 5 steps for fraud deterrence

December 21, 2016

Another holiday season is in full swing, and that means nonprofits around the country are working overtime. It’s a crucial time for them – many get a sizeable percentage of their donations this time of year. At the same time, the need for their services can be greatest during the holidays.

Unfortunately, when donations rise, temptation and criminal activity do too. It’s heartbreaking to think about, but it happens all too often – an employee or volunteer steals or embezzles money, often getting away with it simply because of a lack of oversight. In fact, the most common weakness contributing to fraud in an organization is a lack of internal controls. According to The Association of Certified Fraud Examiners’ 2016 Global Fraud Study, a typical organization loses 5 percent of its total revenue to fraud. Ten percent of those losses are suffered by nonprofits, with a median loss of $100,000.

No organization can afford to lose that kind of money. If you want to continue providing your crucial services, you have to operate efficiently and protect your financial health – and it’s especially important to have strong fraud controls in place this time of year.

How can you protect your organization?

The Global Fraud Study notes that when fraud is uncovered by detective methods such as account monitoring and reconciliation, organizations suffer smaller losses than when fraud is discovered through more passive measures such as an outside party notifying the organization. The most common way fraud is detected is through tip-offs. Bottom line: it pays to be internally vigilant.

Here are five steps your nonprofit should be taking to protect its financial health and ensure that the contributions you get this holiday season go to support your mission, not fraudsters:

  1. Regularly assess your risks. Conduct periodic risk assessments and consider any processes and situations that might contribute to theft or embezzlement. Fraud is often a crime of opportunity, and knowing your vulnerabilities gives you a leg up on preventing it.
  2. Divide up banking duties. Fraud perpetrators often turn out to be someone in the organization that receives donations, makes deposits, writes checks, reviews bank statements, and reconciles the account. Putting that much financial responsibility in the hands of one person – especially if there’s little or no oversight – can leave your organization vulnerable. Segregating duties can provide crucial checks and balances.
  3. Put payment controls in place. Fraud is often perpetrated when one department or person is able to hide payments from other departments or people. Consider putting controls in place such as requiring two signatures on checks to control payments, keep track of inventory, and review reimbursements for travel and other expenses.
  4. Protect your cash. Have a designated and secure place to keep cash, and limit access. You may also want to set up an approved vendor list, limit the use of wire transfers, and require secondary approval for certain types of expenditures.
  5. Provide an anonymous tip line that individuals can use to report their concerns without fear of retaliation.

Want more tips?

The American Institute of CPAs (AICPA) offers a number of resources for nonprofits related to financial reporting, assurance, tax compliance, and governance.

Finally, don’t forget insurance protection. It’s one of the most important financial controls you can have in place for your organization. Heffernan's Nonprofit Practice offers a wide range of products to fit your needs and budget, so give us a call today.