Not-for-Profit Fraud Prevention | MAXIS | Freed Maxick

Written by Holly Hejmowski, CPA | Wed, Jan 08, 2025 @ 03:00 PM

Tips for preventing fraud at smaller not-for-profit organizations

Recently, there have been several news accounts of smaller not-for-profit organizations that have fallen victim to internal theft. In many cases, an unscrupulous individual who had motive and opportunity stole funds generated as the result of work done by countless volunteers, committed development professionals, and loyal donors.

Nonprofit fraud awareness: Size matters

Fraud in smaller not-for-profits can be particularly damaging due to their limited resources and smaller operating budgets. Nonprofit organizations are often easy victims of fraud due to the lack of internal controls and financial oversight. Executives and board members are too busy to get involved in providing internal controls or any additional oversight. Many nonprofit organizations struggle to find qualified professionals, let alone identifying those willing to assume responsibility for creating a financial oversight committee, instituting internal controls, and implementing policies and procedures. So the individual accountable for the financials is left to their own devices and is afforded ample opportunity(ies) to misappropriate funds.

Common methods of nonprofit fraud

Because not-for-profit organizations have limited resources available to address internal controls, they are particularly vulnerable making it easy to commit fraud. Though many types of fraud exist, the most common include:

1. Embezzlement: Diverting funds intended for the organization to personal accounts
2. False Expense Reimbursements: Submitting fictitious or inflated expense claims
3. Payroll Fraud: Creating ghost employees or inflating hours worked
4. Theft of Cash: Taking cash donations before they are recorded
5. Billing Schemes: Creating fake vendors or inflating invoices
6. Financial Statement Fraud: Manipulating financial reports to conceal theft or misuse of funds

Nonprofit theft by disbursements

In any business, institution, or organization, fraud can occur when the person(s) charged with overseeing funds steals them after they’ve already been deposited into the organization’s checking account. This fraud occurs by what is known as ‘theft by disbursements’. This method refers to unauthorized disbursements of funds, which can occur in several ways:

Check Tampering: Forging or altering/washing checks
Invoice Schemes: Submitting fraudulent invoices for goods or services not provided
Payroll Schemes: Paying wages to fictitious employees or inflating payroll amounts
Expense Reimbursement Schemes: Submitting false or inflated claims for reimbursement

Common disbursement schemes typically involve the organization checkbook being used to pay unauthorized personal expenses – such as credit cards or car payments, writing checks payable to “cash” or issuing checks payable to themselves.

Simple strategies for preventing nonprofit fraud

Preventing fraud in a small not-for-profit organization requires a multifaceted approach that emphasizes strong internal controls, transparency, and vigilance.

1. Segregation of Duties - Ensure no single individual has control over all aspects of financial transactions. Separate responsibilities for authorization, record-keeping, and custody of assets.
2. Background Checks - Perform thorough background checks on employees and volunteers handling finances.
3. Whistleblower Policies - Establish clear channels for reporting suspicious activities anonymously.
4. Board Oversight - Ensure the board of directors regularly reviews financial statements, bank reconciliations, and significant transactions.
5. Clear Policies and Procedures - Develop and enforce written policies for handling finances, including expense reimbursement and procurement procedures.
6. Fraud Training - Educate staff and volunteers on recognizing and reporting fraudulent activities.
7. Secure Technology - Implement secure accounting software with access controls to prevent unauthorized access and modifications.
8. Bank Reconciliation - Reconcile bank statements monthly, and have someone other than the person who handles cash or writes checks perform this task.
9. Approval Processes - Require multiple levels of approval for significant expenditures and new vendors.
10. External Oversight – Engaging a CPA firm to outsource your accounting function, review internal control polices and procedures, or perform annual audits.

By implementing these strategies, small not-for-profits can create a robust internal control environment.

The MAXIS solution for nonprofit organizations

The dedicated not-for-profit accounting professionals at Freed Maxick can implement some very simple controls to ensure that money earned by the organization actually benefits its overall charitable mission. Using MAXIS® by Freed Maxick, a cloud based, high-tech outsourced accounting solution, a strong internal control environment can be achieved. By automating processes, better reliability and timeliness are achieved. Accounting automation also reduces the likelihood that errors and/or fraud are occurring and protects the organization by monitoring transactions and providing a streamlined process for invoice and expense report approval.

Outsourcing the accounting function for nonprofits also provides proper segregation of duties an outside layer of oversight to the books and records or the organization. And the technology is updated frequently to ensure seamless continuity of business with faster data recovery and more security.

MAXIS can help to mitigate opportunities for nonprofit fraud, and maintain donor trust, community reputation, and organization credibility. Schedule a complimentary consultation with Holly Hejmowski, Director of Assurance and Advisory Practice, at Holly.Hejmowski@freedmaxick.com.

View full post