Oversight and controls are key to limiting fraud in nonprofits

Recently, the Association of Certified Fraud Examiners (ACFE) published its biannual Report to the Nations: 2022 Global Study on Occupational Fraud and Abuse. Of all the types of organizations surveyed by the ACFE, not-for-profits were the least likely to experience occupational fraud. However, nonprofits also are generally the least likely to be able to afford fraud losses. So, it’s important for your organization’s leaders to understand the risks and take steps to prevent criminal activity.

Provide adequate oversight

According to the ACFE report, the median loss for defrauded nonprofits is $60,000, considerably less than the $120,000 median for all organizations and the $138,000 median for government agencies. However, nonprofits generally have much less to lose than, say, the average bank, manufacturer or taxpayer-supported agency. Indeed, it’s a general lack of financial and staff resources — in addition to less vigorous oversight and enforcement of internal controls — that may make nonprofits fertile ground for fraud. Although many try to foster a trusting, familial culture, this can lead to risky lapses. Managers may, for example, rubber-stamp expense reimbursement reports, neglect to segregate accounting duties or allow unproven staffers or volunteers to accept cash donations.

Implement internal controls

The ACFE has found that nonprofits adhere at lower rates than for-profit companies to internal controls such as surprise audits, formal fraud risk assessments, management review and internal audits. In fact, nonprofits are the most likely type of organization to override or ignore internal controls. Some of these controls can be costly, of course. But not all effective antifraud measures are expensive. Adopting a code of conduct is closely associated with lower fraud losses in all types of organizations. Other inexpensive initiatives associated with lower fraud losses include employee fraud training, mandatory vacations and strong management oversight.

Launch a fraud hotline

If you decide to spend on fraud detection and prevention, confidential hotlines have consistently proven their weight in gold. According to the ACFE, organizations of all types with anonymous hotlines or web forms made available to staffers and other stakeholders cut fraud losses by 50% or more. It’s particularly important to communicate the private nature of a hotline to employees so they feel free to report suspicions without fear of reprisal. To help ensure anonymity and enable whistleblowers to report from home, contract with an outside service that can provide 24/7 monitoring. Commit to enforce Although you can’t control the thoughts of criminally minded employees, you can make occupational fraud difficult to commit. This requires a commitment from executives and managers to enforce controls and provide reasonable oversight. Contact us for help evaluating your controls and for recommendation of effective fraud-prevention tools.

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