When I hear about fraud in a nonprofit organization, I first think about why anyone would steal, rob, or deceive an entity or individual fighting for a good cause. Frankly, it’s something we really don’t want to think about or imagine. But, unfortunately, it’s reality.

Here’s what the Financial Dictionary says about the types of financial fraud:

  1. Intentional fraud: Punitive damages may be assessed for this type of fraud.
  2. Negligent fraud: As when one makes a statement recklessly but without any intention to deceive, and someone relies on that statement and is injured when it turns out to be false.
  3. Innocent fraud: As when one takes steps to confirm facts but is perhaps mistaken or given mistaken information, and then relays that information to someone else who relied on it and was injured.

Notice the word “injured” is included and consider the many ways an organization could be “injured” by any type of fraud. For example, the reputation of the organization could be injured, its brand equity could be injured, its ability to obtain additional grant funding could be injured … and well, you get the idea. The key here is about how a nonprofit organization can prevent permanent injuries and/or devastation from fraud.

When we look at the Community Brands whitepaper – “The Perfect Storm: Protecting Your Nonprofit from the Devastation of Fraud,” we find many nonprofit executives and board members rely on independent auditors as are their first line of defense when it comes to preventing and detecting fraud. Although auditors should be partners an organization can trust, they’re selected to provide support and oversight on financial statements and internal controls, share best practices, and provide reasonable assurances that your financial statements aren’t materially misrepresentative of your fiscal state. They can’t, don’t, and aren’t required to guarantee your nonprofit is fraud free.

This is the responsibility of the organization’s leadership and board members to steer in the direction of proactive and preventative fraud. Nonprofit Quarterly agrees that an anti-fraud environment has to be led and mandated from the top. The State of New York Attorney General’s Charities Bureau, in its guidance drafted to assist boards 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.”                                        – State of New York Attorney General’s Charities Bureau

To deter and detect fraud at your nonprofit, start by implementing these three best practices:

Board Composition

Step one is to ensure you have a mix of talent on your board, to include those who have a firm grasp of financial oversight. Your board should understand your operations, remain aware and skeptical, and continually ask the tough questions.

Internal Controls

Next, you should have internal controls in place that are well documented, well understood, widely distributed, and strongly enforced. In the ACFE’s 2016 Global Fraud Study, the presence of anti-fraud controls was correlated with both lower fraud losses and quicker detection. The study compared organizations that had specific anti-fraud controls in place against organizations lacking those controls, and found that where controls were present, fraud losses were 14.3 to 54 percent lower, and frauds were detected 33.3 to 50 percent more quickly.

Start simple with a few best practices from the experts at Greater Washington Society of CPAs who say, “The most effective procedures are those that have the greatest segregation of duties. The more people involved in the process, the less likely it is that an error or defalcation will occur. For example, the person who writes the checks should not be the person signing the checks. The person who orders the service or product should approve the invoice. The person with budget responsibility should also approve the expenditure and should code the invoice.”

For a comprehensive list of general internal controls visit the Greater Washington Society of CPAs 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.

Environment of Awareness

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 from being injured by fraud.