Not-for-profit fraud on the rise
“Local Accounts Payable Manager Steals Thousands.”
“National Charity Loses Millions.”
“University Funds Disappear.”
We’ve all seen the headlines. Stories about not-for-profit fraud have been popping up in the news, and the statistics confirm what you might have suspected: fraud in the not-for-profit sector is on the rise.
The Ethics Resource Center published a study showing that rates of fraud and misconduct at not-for-profits have reached or surpassed their for-profit counterparts, where they have historically been below private sector rates.1 This increasing fraud means a potential loss of almost $40 billion a year – or 5% of not-for-profit revenues in the United States.2
What does fraud look like at a not-for-profit? And how can you prevent fraud in your organization?
How and why fraud occurs
A 2016 report from the Association of Certified Fraud Examiners showed that approximately 95% of the perpetrators had never been convicted of a fraud-related offense before. Of all the fraud schemes revealed, 47% involve more than one person.3
The possibility of fraud occurring is difficult for many organizations to accept, especially not-for-profits, which often have fewer employees than their commercial counterparts, and are founded on trust and altruism.
But all fraud is committed by employees – or volunteers – who both identify an opportunity and have motivation to steal. The motivation is typically a personal financial pressure, such as a spouse who lost a job or a spending addiction. Employees must also rationalize their actions to commit fraud – “I’m just going to borrow money now, and I’ll pay it back later.” Or, “I need money badly right now, the organization is doing fine and won’t miss the funds.”
Once a scheme begins, it can fall into one of a few categories.
Common types of fraud
More than 83% of fraud schemes fall under asset misappropriation.4 There are two groups of assets that can be misappropriated: cash and inventory/other assets. Money can be taken from a not-for-profit before it is recorded on the books (skimming) or after it is recorded (larceny).
Skimming occurs when someone intercepts cash before it reaches its appropriate destination. For instance, an employee could intercept checks from donors and deposit them in an alternative bank account. Without separation of duties or other appropriate controls, the not-for-profit might never know that the donation existed. With a simple thank you note from the fraudster, the donor would assume that their check was properly received.
Larceny occurs when someone steals money on the books. Petty cash is a vulnerable target, as are weakly controlled debit and credit cards, which could be charged for personal expenses. An employee could also write checks to a “vendor” which doesn’t actually exist, pocketing the funds for personal use. Reimbursement expense schemes are also common and should be watched for closely. These types of schemes often include a number of people working both on the inside, and on the outside of the organization.
Inventory or physical assets could be misused in many ways. For instance, if a not-for-profit receives gifts of tangible goods – such as sporting equipment, furniture or computers – an employee could divert some of the assets before recording them and sell the goods, keeping the revenue.
The other 17% of fraud falls under the categories of corruption and financial statement fraud. Although less common, they can occur at nonprofits just as they take place at larger, for-profit corporations.
Learn more and prevent fraud
A fraud risk assessment – whether performed internally or with the help of an external auditor—is a crucial first step in identifying organizational weaknesses and opportunities for fraud. When identifying risks, nonprofits should examine existing internal controls and add additional measures where necessary.
The ACFE study also found that 39% of fraud schemes were discovered by a tip, and the majority of tips came from employees through a tip hotline.5 Having a clear whistleblower policy in place can help employees feel comfortable reporting suspicious activities.
In general, a clear anti-fraud policy is crucial for any not-for-profit. Sharing policies with employees and board members, and having them all sign a code of conduct, allows the entire organization to take an active role in preventing fraud.
These are just a few of the tactics you can use when assessing fraud risk. Our free white paper recommends specific strategies to combat potential misappropriations and provides guidance on action if and when fraud has taken place.
Take a deeper look at the kinds of fraud risks and associated pitfalls affecting not-for-profits and learn how all organizations—even small ones—can put internal controls in place to reduce the risk of fraud.
Make sure your organization isn’t the next morning headline.
Download
Impact and Prevention: An Examination of Fraud in the Not-for-Profit Sector.
1 Bradley, John M., "Empowering Employees to Prevent Fraud in Nonprofit Organizations" (2015). Faculty Scholarship. Paper 1446, p 721
2 An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents. The Hauser Center for Nonprofit Organizations, Harvard University, p 5.
3 Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, The Association of Certified Fraud Examiners
4 Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, The Association of Certified Fraud Examiners, p 4
5 Ibid, p. 21
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