I once worked at a big box home store during a Christmas season. My biggest surprise was how many people steal and how clever they can be with their deception.
Fraud for nonprofits is even more devastating. Bad publicity and possible loss of funding are consequences of nonprofit fraud. In 40 percent of fraud cases, the victim organization chose not to refer the incident to law enforcement for fear of bad publicity.
All organizations that have assets are at risk for fraud, and, sadly, much of the fraud is performed by those hired to carry out the organization’s mission.
The (Cold, Hard) Facts
Let’s start with the facts. Knowing the top categories of fraud is a good start for creating sound anti-fraud policies for your organization. The data presented here has been gleaned from the most current fraud study by the Association of Certified Fraud Examiners (ACFE): Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study.
Nonprofits are generally established for beneficial purposes and assume their employees, especially senior management, share the organization’s philanthropic mission. As such, nonprofits tend to be more trusting of their employees and have less stringent financial controls than their for-profit counterparts. They fall prey to embezzlement and other forms of employee fraud at an alarming rate.
The study illuminates several notable trends in how occupational fraud – fraud perpetrated by employees – is committed and detected, and how organizations rise to combat the threat.
The 2,400-plus cases of fraud studied revealed several notable trends in how fraud is committed. By organizing the cases by these patterns, the ACFE discovered that all fraud schemes fall into specific categories.
At the top of the fraud tree are three categories: Misappropriation of assets, corruption, and financial statement fraud. Cash was by far the largest misappropriation at 34.5% of the total, probably because cash is easy to “misplace.” Cash includes skimming, cash larceny, cash on hand, and register disbursements.
The total amount of money lost in fraud is astronomical. Over $168,000 was the reported annual median loss to cash fraud – skimming, larceny, and cash on hand that was stolen. Who wouldn’t like $168k added back to your budget?
Check tampering follow cash with a median annual loss reported of $158,000. With today’s scanning technology, forging check stock, signatures, and endorsements is easy. Treat your check stock like cash. Lock it up and restrict those who have access to it.
It Goes On and On and On
Let’s pause for a quiz.
The median duration of fraud reported by the study is:
a. 12 months
b. 18 months
c. 24 months
Did you guess b? That’s correct! Remember median is the middle. Much fraud lasts longer – and the longer it lasts, the greater the loss. One-third of fraud lasted two years before detection.
Register disbursement schemes were discovered most quickly at around 13 months. In contrast, payroll, check tampering, financial statement fraud, expenses reimbursements, and billing schemes all lasted a median of two years before being detected.
What Does this Mean to You?
Since misappropriate of funds is at the top of the list, organizations should take steps to protect those assets. Cash and check tampering top the list with a combined loss of more than $400,000 annually.
- Lock it up! This includes cash and check stock. Have more than one person present when cash is counted.
- Cash functions such as deposits, check writing, and bank reconciliations should be handled by different people.
- Bank reconciliations should be up to date. Consider hiring temporary help to bring your bank reconciliations current if you’re behind.
- Don’t pre-sign checks.
- Don’t be too trusting!
Finally, use your technology, your accounting software, to monitor cash balances, send alerts to more than one senior staff member, and review your audit trails regularly. Have policies in place and make sure employees understand the policies will be enforced. Prevention is easier than detection. For more, check out this infographic. Then read “The Perfect Storm: Protecting Your Nonprofit From the Devastation of Fraud.”