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Proactive measures are a powerful deterrent

Many nonprofits have few, if any, protocols in place to deter fraud. Unfortunately, this sets the stage for potentially devastating damage.

In an example from 2002, the former chief executive of the United Way National Capital Area was charged with defrauding the charity of hundreds of thousands of dollars during his 27-year tenure — all under the noses of a 45-member board. Publicity caused credibility and donations to plummet.

While most nonprofit fraud isn't on that scale, it remains a real concern. According to the Association of Certified Fraud Examiners (ACFE), in 2014 alone U.S. nonprofits reported a median loss of $108,000 due to fraud.

A few facts about fraud

Statistics about fraud make it clear just how commonplace and damaging it is. According to a 2014 report from the ACFE, the typical business loses 5 percent of annual revenue to fraud — with the smallest organizations suffering disproportionately large losses. The median loss committed by a single person is $80,000, with an average of 18 months between the onset and detection of fraud. When two or more people are involved, losses range from $200,000 to more than $500,000.

If you think you're safe because your nonprofit is staffed by people you know and trust, consider the ACFE's 2005 findings on who commits fraud at nonprofits:

  • The typical perpetrator is female with no criminal record and earnings of less than $50,000 a year
  • More than 25 percent of fraud events are conducted by managers
  • People who have been with a nonprofit the longest generate the greatest losses

Proactive measures are critical

The good news is that proactive measures are a powerful deterrent against fraud. Some require an investment of money as well as time, so conversations with your board about budgets and priorities are critical.

Consider these best practices for preventing fraud:

Seek expert advice and assess risks

An independent fraud consultant can help you assess risks, make recommendations and establish policies appropriate for your nonprofit.

Establish an anti-fraud policy and code of conduct

Put policies in writing and have employees sign documents saying they'll abide by the rules. Guidance from a legal adviser is recommended to ensure compliance with the law.

Set up internal controls

Internal financial controls can include practices such as segregation of duties, tracking and reporting of transactions, setting authorization limits, requiring multiple signatures on checks, and having an independent party reconcile statements and conduct unscheduled reviews.

Provide training

ACFE research indicates that organizations with anti-fraud training programs experience lower losses and fraud events of shorter duration. Topics to cover include defining what constitutes fraud and how to report suspicious activity. Leaders should encourage staff members to report suspicious activity, as well as enforce an anti-retaliation policy so no one is reluctant to speak up.

Set up a fraud hotline

More than 40 percent of fraud cases are detected from tips — more than twice the rate of any other detection method. To encourage speaking up, consider setting up a fraud hotline. Often available for a nominal monthly or yearly fee, a fraud hotline should be anonymous, available 24/7 and managed by a third party.

Screen prospective employees

Conduct background checks before hiring. While they're not foolproof, background checks can reveal potential areas of concern.

Don't make assumptions

Most perpetrators of fraud have no previous criminal record. Many are trusted, long-tenured employees motivated by financial pressure due to various reasons, such as gambling, substance abuse, illness or living beyond their means.

Watch for red flags

Employees who commit fraud may exhibit certain signs, such as refusal to take a vacation, reluctance to share records or development of unusually close associations with vendors. Mandatory vacations and job rotation or cross-training are helpful here, making it more difficult to conceal fraud.

Prosecute offenders

Cost and fear keep some organizations from taking legal action, but that may only pave the way for someone else to commit fraud. If an employee commits fraud, pursue criminal action.

Finally, as you begin to think through anti-fraud measures, remember that you don't have to do it all at once. Determine what makes the most sense for your nonprofit, allocate resources and start there.

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Disclaimer

MissionBox editorial content is offered as guidance only, and is not meant, nor should it be construed as, a replacement for certified, professional expertise.

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References

National Council of Nonprofits: Myth: Audits uncover fraud

Nonprofit Quarterly: Nonprofit fraud: It's a people problem, so combat it with governance by Gerry Zack and Laurie de Armond (2015)

Peoria Magazines: Ten ways to detect and prevent fraud in nonprofits by Timothy Warren and Rusty Gibson (2015)

Aldrich: Nonprofit fraud prevention techniques you need to implement (2016)

Nonprofit Quarterly: How to steal from a nonprofit: Who does it and how to prevent it by Elizabeth K. Keating, Janet Greenlee, Mary Fischer and Teresa P. Gordon (2007)

Earney & Company: Nonprofit organizations: Prevent fraud within your organization (2016)

Association of Certified Fraud Examiners: Nonprofit governance: Why donate to a fraudster? by Catherine Lofland

Association of Certified Fraud Examiners: Report to the nation on occupational fraud and abuse (2014)

References

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