Do you know how to spot fraud before it occurs? Most nonprofit professionals think it can’t happen at their organization. So, unfortunately, when it does occur, they aren’t prepared and don’t know what to do in the aftermath.
It happens time and time again – from both internal or external sources. Someone notices a misappropriation of assets, like check tampering or false expenses reimbursement. Or, financial statement fraud is discovered by an employee who finds an overstatement of revenue or misclassification of restricted donations. Or, maybe the cash intake at a charity event isn’t adding up, and it’s discovered that an outside volunteer skimmed cash off the top before it was ever recorded.
We see cases like this all the time. Preparing for – and watching out for – fraud isn’t just the responsibility of a select few in the finance department. From the top down, everyone should understand and communicate fraud risks and work to strengthen internal financial controls.
So what should you look out for? There are several common red flags that are easy to spot. According to a 2016 global study by the Association of Certified Fraud Examiners, 91 percent of fraud cases were marked by at least one of the following red flags raised by an employee or volunteer:
- Living beyond his or her means
- Unusually close associations with vendors and customers
- A “wheeler-dealer” attitude involving shrewd or unscrupulous behavior
- Control issues marked by an unwillingness to share his/her duties
There are also some basic safeguards you and your organization can take to prevent fraud:
- Lock it up – cash, valuable assets, and stock
- Don’t pre-sign checks
- Have multiple people present when cash is counted
- Employ checks and balances – different people should handle different cash functions, including deposits, check writing, and bank reconciliations
- Don’t be too trusting – we all want to believe the best in people, but don’t let that cloud your judgement
This is just the tip of the iceberg. Find out more in our latest ebook, “Follow the Clues: A Nonprofit Finance Sleuth Uncovers Fraud,” where you can follow the “story” that weaves several tales of fictitious examples and characters, but covers real – and surprisingly common – nonprofit fraud scenarios. We’ve also included an “Anti Cheat Sheet for Preventing Nonprofit Fraud.” And, be sure to check back with us, because next month we’ll be hosting a live webinar covering fraud prevention, detection, and how to respond once fraud occurs.