Armanino Blog

Is your Nonprofit Vulnerable to Fraud?

by Paul O Grady
June 15, 2012

Recently, an Idaho woman was sentenced to prison for embezzling $1.3 million from the nonprofit drug and alcohol treatment organization where she had worked as a bookkeeper. A New York man pled guilty to siphoning more than $200,000 from three separate veterans organizations, and the treasurer of a North Carolina performing arts group was found guilty of embezzling $300,000 from the nonprofit.

These represent only a snapshot of the many financial crimes committed against nonprofits by their employees and volunteers in 2011. Nonprofits experience lower rates of occupational fraud than their corporate counterparts, but that’s cold comfort to the organizations that fall victim. Address your vulnerabilities before fraud happens to you.

The Perils of Trust
Many nonprofits are staffed by people who believe strongly in their mission, which contributes to a culture of trust. Unfortunately, such trust makes nonprofits vulnerable to certain types of fraud. For example, if you don’t supervise staffers who accept cash donations, you make it easy for them to skim (keep a donation for themselves without recording its existence in the books). Skimming is even more likely to occur if you fail to perform background checks on new employees and volunteers who’ll be handling money.

Billing schemes are also common. Staffers might invent and submit invoices on behalf of fictitious vendors or collude with actual vendors who are willing to submit false or inflated invoices. If your nonprofit has only a small staff, with one person handling most accounting duties, you may also be vulnerable to ghost payroll schemes and expense account fraud, among other scams.

Internal Controls Work
Preventing such crimes begins with strong internal controls. Even small nonprofits that consider their staff and volunteers “family” need to establish and follow procedures that limit access to funds.

Possibly the most important of these is the segregation of duties. To reduce opportunities for any one person to steal, multiple employees should be involved in processing payables. For example, every incoming invoice should be reviewed by the staffer who instigated it to confirm the amount and that the goods or services were received, and a different employee should be responsible for writing the check. For large expenditures, require the approval of more than one person.

Similar guidelines apply to receivables. The staffer who deposits checks shouldn’t also open your monthly bank statement. And the employee who opens mailed donations needs to be different from the person who makes bookkeeping entries and deposits checks.

And don’t forget to protect electronic records that include financial data on donors, vendors, employees and others. Give employees access only to the information and programs required for their job responsibilities. All sensitive information should be password-protected, and users should be required to change their passwords periodically.

What’s my Motivation?
Of course, opportunity alone doesn’t lead to fraud — motivation also is required. In economically challenging times, even a staffer who normally is honest may be tempted to steal. And because nonprofit employees tend to earn less than their for-profit counterparts, guilty employees may use their lower salaries to justify fraud to themselves.

Be on the lookout for staff members whose financial fortunes seem to change overnight. An accounting department employee may have an inheritance to thank for his new car or lottery winnings for her expensive jewelry, but it pays to investigate. Also be suspicious of employees who avoid taking vacations or even single sick days. They may be concerned that someone will find fraud in their absence.

Follow up with Audits
Recognizing the potential for fraud and establishing controls to prevent it is only the beginning. You also need to conduct periodic audits. Your auditor can help identify weaknesses and ways to fix them so that your organization doesn’t become the victim in another sad story about a defrauded charity.

Special precautions for special events
Many nonprofits depend on money raised during a big annual gala or other special event. But because crowded and chaotic fundraisers where cash changes hands are fertile grounds for thieves, you need to take precautions. 

To ensure the money raised at your fundraiser actually makes it to the bank, discourage supporters from making cash payments. As much as possible, presell or preregister event participants to limit access to cash on the day of the event. And if you do accept cash, double-check the money raised with prenumbered tickets that must be accounted for at the end of your event.

Also, try to assign cash-related duties to paid employees or board members. If you need to use volunteers, make sure they’re closely supervised at all times.

June 15, 2012

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