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I once worked at a big-box store during the Christmas season. My biggest surprise was how many people steal and how clever they can be with their deception.
Fraud for nonprofits is even more devastating. Negative publicity and possible loss of funding are consequences of nonprofit fraud. In 40 percent of fraud cases, the victim organization chose not to refer the incident to law enforcement for fear of bad publicity.
All nonprofit organizations with assets are at risk for fraud, and sadly, most of the fraud is performed by people hired to carry out the organizations’ missions.
The Cold, Hard Facts about Nonprofit Fraud
Knowing the top categories of fraud is a good starting place for creating sound anti-fraud policies for your nonprofit organization. The data presented here has been gleaned from the Report to the Nations on Occupational Fraud and Abuse, a definitive study by the Association of Certified Fraud Examiners (ACFE).
Nonprofits are generally established for beneficial purposes and assume their employees, especially senior management, share the organization’s philanthropic mission. As such, nonprofits tend to be more trusting of their employees and have less stringent financial controls than their for-profit counterparts. For that reason, nonprofit embezzlement cases and other forms of employee fraud occur at an alarming rate.
The ACFE study illuminates several notable trends in how occupational fraud is committed and detected, and how organizations can rise to combat the threat.
The 2,400-plus fraud cases studied reveal several trends. By organizing the cases around these patterns, the ACFE discovered that all fraud schemes fall into specific categories.
At the top of the fraud tree are three categories: misappropriation of assets, corruption, and financial statement fraud. Cash was by far the largest misappropriation at 34.5 percent of the total, probably because cash is easy to “misplace.” Cash includes skimming, larceny, cash on hand, and register disbursements.
- Asset misappropriation can be described as using a nonprofit’s credit card for personal items.
- Corruption can include giving or accepting bribes or inappropriate gifts, under-the-table transactions, diverting funds, and laundering money.
- Financial statement fraud is the deliberate misrepresentation of the financial condition of the company through falsifying balance sheets, income statements and cash-flow statements to fool people.
The total amount of money lost in fraud is astronomical. Over $168,000 was the reported annual median loss to cash fraud. Who wouldn’t like $168,000 added back to their budget?
Check tampering and embezzlement follow cash fraud with a median annual loss of $158,000. With today’s scanning technology, forging check stock, signatures, and endorsements is easier than ever before. Treat your check stock like cash — lock up them both and restrict access.
Length of Nonprofit Fraud Cases
Let’s pause for a quiz.
The median duration of fraud reported by the ACFE study is:
A. 12 months
B. 18 months
C. 24 months
Did you guess b? That’s correct! Remember, the median is the middle. Some frauds last much longer – the longer they last, the higher the losses. One-third of fraud lasts two years before it is detected.
Register disbursement schemes were discovered the soonest at around 13 months. In contrast, payroll, check tampering, financial statement fraud, expense reimbursements, and billing schemes all last a median of two years before being detected.
How to Prevent Nonprofit Fraud
Since the misappropriation of funds is at the top of the list of nonprofit fraud cases, organizations should take proper steps to protect their assets. Cash and check tampering top the list with a combined loss of more than $400,000 annually. Here are the ways to help prevent fraud:
- Lock it up! This includes cash and check stock. Have more than one person present when money is counted.
- Cash functions such as deposits, check writing, and bank reconciliations should be handled by different people.
- Bank reconciliations should be up-to-date. Consider hiring temporary help to bring your bank reconciliations current if you’re behind.
- Don’t pre-sign checks.
- Don’t be too trusting!
Finally, use your fund accounting software to monitor cash balances, send alerts to more than one senior staff member, and review your audit trails regularly. Have policies in place and make sure employees understand they will be enforced. Prevention is easier than detection, but if you need to report nonprofit fraud, contact local law enforcement. For more useful information, check out resources from MIP.