From feeding the hungry to educating the severely handicapped to providing educational opportunities to the disadvantaged, non-profit organizations (NPOs) are essential components of our society that fulfill missions that cannot simply be quantified in dollars and cents. Oftentimes, the threat of fraud to an NPO is an afterthought to those charged with governance, as leaders think, “Who would steal from us?” When fraud is discovered at NPOs, the first reaction of management of affected organizations is usually one of utter shock.
Furthermore, when an NPO is the victim of fraud, the consequences can be extremely severe and could possibly threaten the financial survival of the organization itself. Therefore, it is very important that NPO leaders be aware of the root causes of typical NPO fraud schemes and take necessary steps to minimize their organizations’ exposure to fraud.
Types of Non-Profit Fraud
The most common types of fraud perpetrated against NPOs involve the misappropriation of assets by organizational insiders, including both employees and volunteers. Such misappropriation schemes include:
- Diversion of cash prior to entry in accounting systems
- Forged or converted checks
- Fictitious employees or vendors
- Expense account abuse
- Misuse of organizational purchasing cards
Obviously, any misappropriation of assets directly reduces an NPO’s ability to fulfill its mission. Besides direct financial implications, fraud perpetrated against NPOs can also result in adverse publicity, funding cuts and a decline in employee morale, especially in instances where NPO leaders participate in a fraud. In the event that fraud is discovered within an NPO, it is very important to handle the situation in a forthright manner to minimize collateral damage.
Although not as common or well-publicized, the potential for financial reporting fraud should be considered by those in NPO leadership positions.
Several root causes of fraud cases that are unique to NPOs include the following:
- Misguided Trust
The mission of most NPOs is to serve as a vehicle to promote the “public good.” As such, NPOs often attract individuals with altruistic motives to serve in their organizations. Unfortunately, NPO leaders sometimes falsely believe that since their employees and volunteers are “good” people who presumably put others’ interests and welfare ahead of their own, their organizations do not need to be concerned with fraud risks. This misguided trust can result in the lack of the establishment of a robust control environment.
- Focus on Mission
NPO managers and board members can sometimes develop tunnel vision with respect to serving their constituents. In their desire to achieve results quickly and cost-effectively, NPO management sometimes neglects or ignores internal controls, resulting in opportunities for fraudsters.
- Accounting and Finance Resources
Typically, NPOs are very lean organizations, and sometimes management does not devote adequate resources to the accounting function. This can be “penny-wise and pound-foolish.” In the numerous frauds that I have investigated, both in NPOs and private enterprises, a common denominator for many of them has been either an understaffed or incompetent accounting department.
The first step in preventing fraud is for those in NPO leadership to recognize that their organization can, indeed, be victimized by fraud. Next, management should ensure that its accounting staff is competent and capable, which might require paying more to attract talent and to adequately staff the accounting department.
Another tack that should be considered is the performance of a thorough fraud risk assessment, where members of an organization identify the population of fraud risks, summarize current relevant controls in place and take corrective action to implement new controls in instances where controls are lacking to address fraud risks.
If you would like more information about fraud prevention or investigation, contact Marc Brdar of Schneider Downs Business Advisors at (412) 697-5425 or firstname.lastname@example.org.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.