Preventing Not-For-Profit Fraud: 5 Warning Signs

Posted by Amanda Nieweler

on June 23, 2016

NPO's are tempting targets for fraudNPO’s are tempting targets for fraud

With insufficient to no internal controls in place, NPOs become tempting targets for fraud.

Communities rely on the hard work produced by not-for-profit organizations. Unfortunately, not-for-profits are susceptible to fraud. According to the ACFE’s Report to the Nations, non-profits see a median financial loss of just over $100,000. This takes away from providing needed programs to communities.

Coupled with 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 disrupts the NPO’s business operations and ability to perform its mission.

The following are 5 warning signs that are worth investigating that could indicate fraud in a not-for-profit organization:

Little or no segregation of duties
Many not-for-profit organizations rely on the collecting and recording of cash, but the ACFE’s report sees over 75% of fraud involving the mishandling of cash. It’s a great idea to review internal controls and, if appropriate, assign different people to handle the cash – record collections, receive cash payments, deposit cash, reconcile accounts. It can be easy for employees or volunteers to walk out the front door with the organization’s hard earned donations.

Questionable bank statement items
It’s important to review monthly bank statements for transactions that look strange or unfamiliar, or perhaps don’t have supporting documents. Have a look at the monthly cheques to ensure that none were altered in any way – payment to a false vendor – and were indeed used to pay intended vendors.

Unexplained cash adjustments
Mishandled cash will eventually show up in your financial statements, often as a cash adjustment. It’s important to review the account reconciliations for large or unusual adjustments.

Vendor complaints
If vendors are complaining about outstanding payments but your records show that payment was already made, or if donors complain that they are still receiving invoices when they claim they’ve paid their donation, it’s definitely worth a second look to see where the discrepancy is.

Employee or volunteer hints
According to the ACFE’s Report to the Nations, employee tips are consistently responsible for uncovering nearly half of fraud instances. So take notice when employees or volunteers voice concerns or make comments at the organization. It might be unfounded, but it could also mean fraud might be taking place.

It’s important to recognize the signs of fraud.

The best strategy is to reduce the risk of it happening altogether. This is why it’s critical for board members and management to create strong internal controls in their organization to prevent the exploitation of any loopholes.

We help many not-for-profits strengthen their internal controls. In fact we’ve been doing it for nearly 10 years. Incorporating ethics reporting into their fraud prevention strategies has enabled many not-for-profits gain a deeper insight into their internal controls, and increased staff confidence!

Contact us today to learn more!