No organization is immune from fraud, and nonprofit organizations can be particularly vulnerable.
Nonprofit employees who are passionate about their organization and their mission are naturally trusting of others who share their interest. Nonprofit management and board members who are dedicated and excel in their personal areas of expertise may not be well acquainted with financial issues and internal controls. Other nonprofit struggles include working with limited resources, experiencing staff turnover, and depending on volunteers to help operate the organization.
When fraud occurs in an organization there is a monetary loss. However, for a nonprofit organization, the reputational loss can be much greater than any monetary loss. Attracting and retaining donors and grantors is critical for a nonprofit, and with competition for donor dollars so intense, avoiding fraud is good way to keep your donors and potential donors confident in your nonprofit organization.
Let’s look at 3 common risk areas that can lead to fraud.
1. Not Taking Vacation Time
Employees that do not take vacation as allowed should be seen as a potential red flag. What appears to be a dedicated employee could instead be a dishonest employee. Dishonest employees avoid taking vacation so they can continue to hide their illegal or unethical conduct. Fraud experts recommend employees be required to take at least one full week off from work and that their work activities be covered by someone else while they are gone. This simple step prevents an employee from being able to cover their tracks. The knowledge that a person’s job will be under scrutiny during time away may serve as a preventative measure as well. Employees may be less likely to engage in fraud if they have a reasonable fear of detection.
2. Having Volunteers or Non-Accounting Staff Perform Bookkeeping
Some nonprofit organizations seek the help of volunteers or assign bookkeeping tasks to any employee who has time available regardless of their background or experience, believing this is a cost-effective way to address their bookkeeping needs. Unfortunately, this typically leads to more problems and costs in the long run. In addition to the time consuming task of fixing mistakes once they are discovered, accounting errors lead to an incorrect picture of the organization’s real-time financial health, and that leads to poor decision making or having the wrong strategic focus.
3. Failing to Have a Culture that Encourages Reporting Suspicions of Fraud
The opportunity for fraud is also affected by a nonprofit organization’s culture. The most effective means of detecting fraud has been from tips, so develop a process for reporting suspicious behavior. While some nonprofits use a third-party hotline service for reporting suspicions about fraud, creating a culture where employees know that the nonprofit’s reputation and mission depend on their willingness to report suspicions of fraud is less costly and may be equally effective.
