In the previous blog, we discussed how to recognize fraud in a nonprofit organization. But I’m sure you’ve heard the saying “an ounce of prevention is worth a pound of cure.” By preventing fraud in the first place, the organization does not risk the publicity and shame that comes from being in the spotlight for poor financial practices. Nonprofits understand that protecting against fraud is important. One of my favorite ways of teaching nonprofits (and local and state employees) about preventing fraud came from Vermont. Recently in Montpelier, VT a state auditor invited confessed embezzlers to come and talk with municipal, state and nonprofit employees about ways to detect and prevent fraud. Who better else to ask then those that did it? Let’s discuss some ways that we can prevent fraud in nonprofits before it happens.
I didn’t have access to confessed embezzlers (unfortunately, there are few teenagers caught at this that I would have been able to talk with) but I did find some great internet resources. Most of the information I am going to suggest came from an article by James Leisner with Stonebridge Business Partners. The link to the article should appear at the bottom of this blog. The structure of nonprofits with a Board of Directors and a CEO sets up a great opportunity for there to be checks and balances between the two. This means there are two sides of protecting against fraud. On the Board side, Leisner recommends setting up a finance committee that oversees the organizations business department. Some tasks that this committee would need to take on to make it most effective include: Assessing how the agency may be at risk for fraud, monthly review of financial statements and trends (for example: did the electric bill double for a reason, or did someone pay their personal bill with the agency bill?), monitoring cash flow, as well as accounts receivable and payable, and conducting an audit with accounts/accounting agencies not associated with the organization. Finally, it is important that this committee constantly report the results of their finds – whether positive or negative – back to the board as a whole.
Outside of the finance committee, there are additional safeguards a Board can institute that help prevent fraud within the agency. While Leisner gives a LONG list of options, I’ve narrowed that down to my own personal Top 5. So here they are:
1) Limit the number of bank accounts the agency has, including the number of authorized signers. Never pre-sign checks! (I know we shouldn’t have to say that, but…)
2) Require two signatures on expenses over a certain amount. Dependent on the size of the nonprofit that amount may be $1,000 or $10,000. But it’s always good to have another set of eyes reviewing large purchases not only for fraud, but also for procurement practices.
3) Don’t be afraid to ask questions and don’t be shy. If it doesn’t make sense to you, it may not make sense to someone else. Ask questions until the answer is clear to you.
4) Recruit board members for functional diversity. Have at least one, but if possible two or three, members on your board with strong financial backgrounds.
5) Identify one board member that organizational employees (or other Board members) can anonymously report suspicions of fraud to. After all, the majority of fraud is found by someone within the agency in the course of day-to-day business.
Diligence on the part of the Board and the operations finance managers can help prevent fraud from occurring in the first place. There are many resources out there on how you can prevent fraud in your nonprofit. Remember, fraud not only costs an organization money through the loss of stolen funds, but also in reputation, decreased fundraising, and the legal expenses associated with recovering the loss. This is one function a Board need to be proactive with an not reactive!
Leisner, James. Nonprofits Face Special Challenges in Protecting Against Fraud. http://www.stonebridgebp.com/fraud-forensics/library/nonprofits-face-special-challenges-protecting-against-fraud