How high on your list is fraud prevention? If yours is like most not-for-profit organizations, it’s a threat, but buried beneath many other important obligations. With limited resources, few formal processes and internal controls, and outdated software and systems, many not-for-profits find fraud deterrence difficult to implement and overwhelming to monitor. But with methods for theft becoming more sophisticated and, quite frankly, easier, it is imperative for organizations to elevate deterrence to the top of the proverbial “to-do” list. Not only are the potential financial implications of fraud very significant, the financial cost to reputation, donor trust, and credibility are immeasurable.
The Association of Certified Fraud Examiners (ACFE) reports that not-for-profit organizations lose approximately 5% of their annual revenue to occupational fraud. While seemingly not a significant amount, the impact even a small loss has on a not-for-profit can be devastating.
In its “Occupational Fraud 2022: Report to the Nations", the ACFE examined the costs, methods, victims, and perpetrators of more than 2,100 occupational fraud cases. It uncovered that not-for-profit organizations were the victims in 9% of reported cases, suffering a median loss of $60,000, and up to 18-months wasted in uncovering activity.
The reason ACFE cites for the fraudulent activity in not-for-profit organizations is that they have fewer internal controls than companies in other industries. Leadership is often focused on courting donations or overseeing the administration and distribution of funds to take notice of anything that might be amiss. Not-for-profit organizations are acutely challenged by deficits in staffing, relying on individuals who may not be adequately trained, placing an over-dependence on volunteers, and a lack of security protocols that expose vulnerabilities.
In addition to inside threats, because they obtain sensitive donor information including but not limited to credit card and bank accounts, not-for-profit organizations are also a prime target for cyber-attacks that steal data and other confidential information to use for their monetary benefit or extort for financial gain.
Perpetrators need only 1) the opportunity to steal and conceal; 2) the motive, such as financial pressure due to a divorce, debt, or addiction; and 3) the ability to perceive and rationalize their behavior as deserving for working more and being paid less. The ACFE report found that 85% of all fraudsters displayed behavioral red flags such as living beyond their means or demonstrating unusually close association with a vendor or customer. The report also notes that the longer the tenure of the employee, the higher the loss.
How do they do it? The ACFE highlights three categories of occupational fraud:
1. Asset/Cash Misappropriation, which necessitates an employee stealing or misusing the employer’s resources for personal gain. It occurs when cash or other assets (i.e. computers) are intentionally taken off premises — stolen — by an employee. This is the most common form of occupational fraud.
2. Financial Statement Fraud involves a perpetrator intentionally causing a material misstatement or omission in an organization’s financial statements and rerouting the money elsewhere.
3. Corruption includes bribery, conflicts of interest, and extortion. For instance, vendor kickbacks are facilitated through inflated or fraudulent invoices that are paid and then divided between both parties (vendor and employee).
In addition to those three, there are other favored not-for-profit fraud methods:
Although not-for-profit organizations are more susceptible to fraud, safeguarding their assets isn’t as difficult as it seems.
First, mitigate risk by learning to identify the signs, such as unclear invoices, unknown vendors, large invoice totals with unknown origin or approval, and sudden increases in volume and/or totals on vendors’ invoices, that should raise a red flag.
Second, proactively setting, communicating, training, and measuring clear policies and a code of conduct for ethical behavior establishes a firm foundation of intolerance and consequences (i.e. termination, arrest, reimbursement). Some other effective steps and internal controls include:
More comprehensive accounting automation reduces the likelihood that errors or fraud occurs as a result of manual processing and limited or no separation of duties. Benefits also include easier monitoring of transactions, facilitating accurate invoice processing, streamlining expense report approval, and reliable reviews of the organization’s real-time financial status.
MAXIS® by Freed Maxick is a high-tech outsourced accounting solution for nonprofits that automates processes and creates a strong internal control environment. Because it’s cloud-based, it has better reliability, timeliness, and security. Outsourcing the accounting function also provides proper segregation of duties and an outside layer of oversight to the books and records of the organization. Cloud-based tools have better reliability, timeliness, accessibility, and security. The technology is updated frequently to ensure seamless continuity of business with faster data recovery.
Can it work for your organization? Schedule a complimentary consultation with Holly Hejmowski, Director of Assurance and Advisory Practice, at Holly.Hejmowski@freedmaxick.com.