When one thinks of the not-for-profit sector, fraud is not a typical thought. Who among the general population would think to steal from a not-for-profit organization that helps those less fortunate. In addition, not-for-profit organizations do not operate to make money; therefore, the general population is not aware of excess funds existing to steal. However, fraud can occur in any organization, even a nonprofit, and can be perpetrated by anyone in any part of the country, as demonstrated in the following headlines:
- A former employee of the Wisconsin Conference of a large denomination was sentenced to two years in prison for embezzling more than $158,000.
- The president of a national convention stole millions from the organization to finance a lifestyle of waterfront homes, expensive cars and jewelry.
- Fictitious invoices resulted in an organization losing approximately half a million dollars due to weak internal controls.
Fraud is typically defined as the misappropriation of assets and fraudulent financial reporting. Some examples of asset misappropriations are as follows:
- Revenue and cash receipt schemes, such as skimming and theft of donated merchandise.
- Purchasing and cash disbursement schemes, such as credit card abuse and fictitious vendor schemes.
- Payroll and employee expense reporting schemes, such as ghost employees, overstatement of hours worked and fictitious expenditures.
- Non-cash asset misappropriations, such as theft of property and equipment and personal use of assets and other resources.
Fraudulent financial reporting is defined as making false assertions relating to financial statements or false statements regarding compliance with specific requirements of funding sources, charging of unallowable costs to grants and other false statements to government agencies. Misrepresentations such as the following are examples of fraudulent financial reporting:
- Failing to disclose significant related-party transactions.
- Misclassifying restricted donations to mislead donors or charity watchdogs.
- Misclassifying expenses to mislead donors and others regarding the funds used for programs.
- Failing to correctly value receivables, inventory, donated assets, and liabilities under split-interest or gift annuity obligations.
- Failing to report trade payables in the correct period in order to understate expenses.
- Failing to correctly report obligations for deferred compensation or retirement benefits.
Fraud committed by not-for-profit organizations may often be related to fundraising. Fraudulent fundraising practices include the following:
- Charging fundraising costs to programs to improve expense ratios.
- Misrepresenting the portion of donations to be used in charitable programs.
- Failing to comply with donor-imposed restrictions pertaining to the use of a gift.
In order to lessen the chance of fraud, organizations should consider the following:
- Identify situations that possess the three elements of the fraud triangle: perceived pressures/incentive, opportunity and rationalization.
- Have management set “the tone at the top” for ethical behavior.
- Be proactive in reducing the opportunity for fraud by doing the following:
- Identifying and measuring fraud risks.
- Taking steps to mitigate identified risks.
- Implementing and monitoring appropriate internal controls.
- Implement financial controls as follows to detect and prevent fraud:
- Reconcile accounts.
- Perform ratio analysis.
- Review general ledger adjustments.
- Institute job rotation and mandatory vacations.
- Use non-financial controls, such as the following:
- Pre-screen potential employees.
- Implement a whistleblower policy.
- Communicate the consequences.
- Conduct anti-fraud training.
Fraud can affect any business or organization in any type of industry. Be aware of the types of fraud and measures that can be taken to help prevent it, and do not let your organization be the next one in the news.
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