Four Eyes On Everything!

I continue to be amazed reading about nonprofits as victims of fraud or theft. Girl scout cookie money stolen, church collections under deposited, prom and wedding dresses and a fedora purchased from corporate accounts: the incidents just keep coming.

Nonprofits, particularly smaller ones, face a great number of challenges. They often operate with limited resources, have fewer financial controls, tend to be more trusting of staff and volunteers, have ongoing staff turnover, and many are not well versed in financial matters. The Center for Audit Quality noted, “Fraud cannot occur unless and an opportunity is present.”

Some red flags often ignored:

  • An employee living beyond their means
  • An employee unwilling to share job duties or take a vacation
  • Vendors who are not “recognizable” outside the accounting department
  • Bank accounts not reconciled timely and reviewed by a second responsible party
  • Thinking the auditor will catch it
  • Volunteers having access to confidential data, such as banking information
  • Missing documents

A recent report indicated that 34.5 percent of fraud involves cash. How is the fraudster operating? Some usual schemes:

  • Stealing from cash on hand: petty cash funds, cash register banks, church collections, and donation cans are all subject to cash theft.
  • Creating fake vendors or fake employees and writing checks to them
  • Creating fake or duplicate checks, then writing, cashing,and recording them in accounting records as vendor payments
  • Falsifying financial reports and documents: altering or back-dating documents
  • Submitting false expense reimbursement requests
  • Paying personal expenses from organization accounts

The list is not all-inclusive, and, perhaps even more shocking, in a large number of reported frauds, the fraudster has been with the organization for years. Seniority didn’t matter.

Self-defense

So how can a nonprofit defend itself? Fraud prevention does not necessarily require a large budget or a full-time risk manager. Smaller organizations can follow some simple steps to create an anti-fraud environment:

  • Establish an anonymous reporting system.
  • Create a culture of compliance, where nothing gets overlooked and no one gets ignored or criticized for coming forward.
  • Require supporting documents for EVERYTHING!
  • Control the use and access to credit and debit cards.
  • Segregate duties as much as possible; require vacations be taken and those duties be handled by another staff member or volunteer.
  • Rotate duties, particularly for volunteers.
  • Establish and train a board audit committee to review safeguards throughout the organization on a regular basis.
  • Train board members who may be less savvy. Someone on the board should have the skills, knowledge, and expertise to handle financial issues.
  • Reconcile bank accounts immediately each month. Understand that “uncleared” anything may be a problem that should be addressed immediately.
  • And my personal favorite: four eyes on everything. Require two signatures on checks and two people counting all cash being handled.

A recent report indicates that about 40 percent of nonprofit frauds do not get reported to law enforcement. Nonprofits fear damage to their reputations, negative publicity, and the resulting loss of funding. So what should be the protocol when a fraud or theft is discovered? The organization should have a standard response plan that should address:

  • Who gets notified of the situation: the board, the attorney, the insurance agent, the bank?
  • How is an investigation handled?
  • Who addresses the other employees and volunteers?
  • Who addresses the public, donors, and the media?

Planning ahead and documenting the process should be a standard practice for every nonprofit.Good, consistent internal control systems can help to provide reasonable, if not absolute, assurance to the organization. Still, no organization is immune.

If you have any questions regarding nonprofits as victims of fraud or theft, please reach out to your HBK Adviser.

About the Author(s)

Kathleen has over 40 years of experience providing auditing, accounting, tax and consulting services to privately held businesses and not-for-profit organizations. She specializes in preparing tax-exempt status applications, consulting on charitable regulations, and providing outsourced management and accounting services. She routinely consults with organizations that receive federal and state funding. Kathleen as worked with a wide variety of nonprofit organizations, including membership organizations, public charities, private foundations, and special improvement districts. She frequently addresses conferences and meetings, and business and governmental organizations on nonprofit-related issues. Her community service includes positions on several boards, including currently as vice-chair of the Union County Education Services Foundation and previously the Two Hundred Club of Union County and the United Way of Union County.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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