Whenever I talk with CPA's and they find out I have worked with boards and small nonprofits within a short period either a question or comment goes like this... Isn't it amazing how much fraud goes on with small nonprofits?
Why is that? Sloppy books, underpaid workers, not a check and balance system, too much trust on one or a few, unchecked process for banking and deposits.
According to a 2006 Report to the Nation on Occupational Fraud & Abuse, ACFE: "The medium loss for a business with fewer than 100 employees was $190,000 per fraud scheme." The report goes on to say tha an estimated 5% of annual revenues are lost to fraud. This report was not specific to nonprofits rather to all businesses.
According to my CPA friends almost all of these loses can be prevented and should going a few things. Good Stewardship invites accountability.
1) Set the tone at the top.
2) Create anonymous fraud hotline and publicly emphasize to your staff how important it is for everyone to join the fight against fraud. Assure employees that the hotline is anonymous and that they will be protected from retaliation.
3) Communicate your intentions to strengthen internal controls (then do it and get expert help).
4) Host fraud training sessions to emphasize that fraud will not be tolerated and that the consequences of fraud impact everyone.
5) Be the first person to open bank statements. Scan the transactions that have cleared the bank and review the enclosed check for unusual activity.
6) Consider personally signing all checks or having a cosigner for checks above a determined threshold.
7) Take note of what is happening both inside the office and outside. Look for odd work schedules, staying late or coming in early where there may be opportunities where no one else around and access to mail, credit cards or banking information. Is someone experiencing significant stress like divorce or spouse's job loss or serious medical problems?
These seven steps can and should help greatly reduce the potential for fraud within your organization. If you suspect any of this it is much better to deal with it quickly and get help. My CPA friend tell me that few are punished and are usually let go only to go do it to another company or nonprofit and do it again. Do not expect to hear about the billions of dollars lost each year due to lack of controls and misuse by a few in both nonprofits and for profits. I have seen in it in lots of different types of businesses it happens wherever the opportunity presents itself with poor stewardship principles. Stewardship for your own financial security as well as stewardship of the donors for the trust put in you and your organization. If you have had experience with this and would like to add comments please share with us.
If your organization has cash receipts received in mail or collected that is 90%+ of the fraud according to ACFE. While most of it is small stuff it add up to be big dollars. Work to avoid cash or at the least have two or more handle it together for accountability and then secure it quickly in drop box with time lock like the convenience stores do. My CPA friends tell me that having outside pair of eye balls on receivables to look for odd changes or odd write offs may be good place to start. Misplaced stock or other certificates of investments are common for small nonprofits and it would easy to create a statement to look like an investment was that wasn't. Investment committees should verify with custodians outside of the statement provided by the bookkeeper or admin person.