Fraud in the not-for-profit environment
Learning to detect and prevent fraud is crucial to protecting the mandate and reputation of any not-for-profit organization.
According to the ACFE Report to the Nations on Occupational Fraud and Abuse, fraud cost not-for-profit organizations (NPOs) a median financial loss of $108,000 in 2014. While this is already a significant loss, the number could be higher as most cases of fraud are either hidden or unreported.
In addition to the immediate financial loss, other long-term costs of fraud include negative publicity and damage to the organization’s reputation. This results in a loss of trust among donors and grantors, and disrupts the NPO’s business operations and ability to perform its mission.
The not-for-profit sector’s high susceptibility to fraud is frequently due to its reliance on volunteers and community members. In many instances, charities also give a vast amount of power to their founder and executive director. With insufficient to no internal controls in place, NPOs become tempting targets for fraud.
In addition to the immediate financial loss, other long-term costs of fraud include negative publicity and damage to the organization’s reputation. This results in a loss of trust among donors and grantors, and disrupts the NPO’s business operations and ability to perform its mission.
The not-for-profit sector’s high susceptibility to fraud is frequently due to its reliance on volunteers and community members. In many instances, charities also give a vast amount of power to their founder and executive director. With insufficient to no internal controls in place, NPOs become tempting targets for fraud.
DETECTING FRAUD
In a paper entitled Safeguarding Non-Profit Organizations from Fraud, KPMG LLP states that the first line of defence is to recognize the signs:
- reconciliations are not being performed or reviewed on a timely basis and cash is not being deposited in the bank in a timely manner
- employees, particularly those with access to assets and/or financial accounting records, appear to be living beyond their means
- key records go missing when you are looking for them
- the financial results suggest that the NPO is doing well but the organization is suffering from a lack of cash flow, or the cash flow is not commensurate with what one would expect
- costs are escalating at a rate that is unexpected and inconsistent with the budget
- if it is an employee committing the fraud, they tend to work longer hours when others are not around to observe their activities
PREVENTING FRAUD
As important as it is to recognize the signs of fraud, the more desirable strategy is to reduce the risk of it happening. It is critical for board members and management to create strong internal controls in their organization to prevent the exploitation of any loopholes. In the paper Preventing Fraud in Not for Profit Organizations, RBC recommends some of the following:
- separate cash handling duties
- implement rigorous cash handling procedures
- set up policies to prevent cheque and mail fraud
- safeguard your information technology infrastructure
- establish sound business practices, especially in protecting confidential data