Last year at this time, I wrote a blog and shared the definitions of fraud, and whether incidences were unintentional and/or intentional. My observations here are similar; however, what has changed is the uptick in fraud incidences, due to the increase in nationally-based nonprofit organizations. In this blog about fraud, let’s look at the latest trends, the top three impacts from fraud, the fraud prevention and detection checklist, and a few helpful resources to bookmark. 

Fraud Trends and Impact to Nonprofit Organizations

In a journal article April 2018 edition of Nonprofit Management and Leadership, researchers from the University of Dayton, Deborah S. Archambeault and Sarah Webber, uncovered some interesting findings about what fraud does to nonprofits of different sizes.

The biggest surprise of their findings was the number of organizations that had suffered a publicized incidence of fraud and closed their doors within three years of the incident. And, the incidents were in the smaller and newer organizations.

Chart 1: Nonprofit Management and Leadership, April 2018

Fraud graphic trend 1

25 percent of 115 nonprofit professionals surveyed experienced fraud.

When we look at the typical organization’s losses, according to the 2018 global fraud study by the Association of Certified Fraud Examiners (ACFE), they found:

  • Nonprofit organizations had the smallest median loss of $75,000, compared to private companies suffering the greatest media loss at $164,000.
  • For smaller organizations with shorter longevity, $75,000 can have a significant impact.

On a yearly basis, according to a study by researchers at Harvard, and published in Non-profit and Voluntary Sector Quarterly, nonprofit organizations lose an estimated 6 percent of their annual revenues to fraud each year for a total loss that is estimated at $40 billion.

More difficult to measure, is the non-monetary impact on a nonprofit, such as their brand reputation, their leaders’ standing in a community, potential investigations and just overall staff morale.

The obvious key to preventing these impacts from happening at your organization is to have an anti-fraud plan of detection and prevention. 

Detect Fraud Flags

First, before you start sleuthing around to detect potential fraud, think about the areas where fraud could occur.

Assess internal controls:

  • From the top down, does your organization have an anti-fraud plan or training?
  • Which tools and processes are in place to monitor controls related to potential fraud areas?
  • Are there adequate delegations of financial tasks for approval levels?
  • How are transactions processed and managed – for cash collections particularly?
  • Is there a cadence for reconciling accounts in a timely manner or even real-time?
  • Does your organization tightly manage legal documents (i.e., signatures, originals, or altered documents)?

The following are several common warning signals or red flags of potential billing fraud and organized into four general categories:

  • Transactions conducted outside of traditional time periods – weekends instead of weekdays, holidays, or out-of-season.
    • Internal control deficiencies, such as allowing a person who processes payments to approve new vendors
  • Transactions that occur more frequently than expected — or not frequently enough.
    • Vendor billings issued more often than once a month
    • Invoices for unspecified or poorly defined services
  • Transactions with large amounts, round numbers, when it’s typically small and/or is rarely round numbers.
    • Sudden increases in purchases from one vendor
    • Large billings that are broken into multiple smaller invoices that will not attract attention
  • Transactions with questionable parties, including related parties or unrecognized vendors:
    • Unfamiliar vendors
    • Vendors with company names consisting only of initials (many such companies are legitimate, of course, but fraudsters commonly use this naming convention)
    • Vendor addresses that match employee addresses
    • Vendors that have only a post-office-box address 

Fraud Prevention

For building blocks to mitigate fraud, it must start from the top. The leadership, board of directors, and grant providers should expect to adhere to compliance if they want to ensure a successful charity with longevity.

The State of New York Attorney General’s Charities Bureau, in its guidance drafted to assist current and future boards of directors of nonprofit corporations and trustees of charitable trusts states:

“A primary responsibility of directors is to ensure that the organization is accountable for its programs and finances to its contributors, members, the public, and government regulators.”

For a comprehensive list of general internal controls visit the Greater Washington Society of CPA’s site.

The development of proper internal controls will help your nonprofit ensure accountability. But, not if they’re buried in a file cabinet or on someone’s hard drive. They should be reviewed, updated, distributed, and discussed on a regular basis. Stay alert especially during times of change – in operations, programs, systems, or employees – that might impact the necessary process or controls.

Finally, nonprofit leaders and board members should work every day to foster an environment of awareness and a culture of open communications and transparency. Get your fraud radars up! Check those operational gauges at times of increased pressure, and always be ready to react.

Your team members are your first line of defense and should be given the tools and the permission to act when necessary, so equip them with policies, procedures, and passion to support your mission and keep it safe from dangers and devastation.

If your organization is seeking an automated solution to support your anti-fraud plan, learn more here. If you’re already an MIP Fund Accounting customer, we invite you to join our next User Group webinar, register here.