The issue of fraud in nonprofit organizations is not new. A search of recent news articles were fraud has occurred immediately brought up several articles. Does this mean fraud is an overwhelming problem for nonprofit organizations? Probably not. It does occur. The 2008 study by the Association of Certified Fraud Examiners (ACFE) cited 959 fraud cases being investigated in that year. Of those cases, 14.4% or approximately 137 cases, involved non-profit organizations with a median loss of $109,000 (Keller & Owens). Given that there are approximately 1.5 million nonprofit agencies in the United States, this is not a high percentage of agencies. However, especially in this financial economy, nonprofits are still at risk of being victims of fraud and it is beneficial for nonprofit boards to recognize what puts them at risk.
As many of us know, budgets in nonprofit organizations have been tight for several years as a result of the economic downturn. Some of the ways that nonprofits have managed to stay afloat during this time may increase the organizations vulnerability to fraud. An article written by Terri McKnight, CPA that deals directly with minimizing fraud in nonprofits outlines four areas where nonprofits may be especially vulnerable. The first area is the decrease in staff that may occur when budgets and funding is tight. By decreasing the staff, you may be removing people who provide accountability or checks in regards to financial purchases and accounting. The second area has the same consequence as the first – streamlining organization operations. By streamlining operations, an agency may be accidentally removing checks and balances. Before streamlining the Board and CEO need to ask – are these two people/positions really being redundant (or doing the same thing) or does one help to hold the other accountable? While it may seem redundant for a second person to review all accounts payable and receivable, it is actually a good practice to assure that fraud is not taking place. The third risk factor for nonprofits experiencing fraud is also related to budget constraints. For those of us working in the public or nonprofit sector, we are well aware that it has been several years since we have received any type of raise or bonus. With a cost of living that has not slowed down with the fallen economy, employees may be experiencing personal financial hardships that make it more likely they will commit fraud at work. And finally there is the issue of fraud through the IT department and outside hackers. Many small nonprofits may not have the appropriate security measures on their network and computer systems to prevent even the most novice hacker from accessing account information. These are only some of the reasons how agencies may be at-risk of fraud. As you can tell, there are many different places fraud can come from both inside and out of the organization.
Keller & Owens. Preventing and Detecting Fraud in Not-for-Profit Organizations. http://www.kellerandowens.com/resources/FraudBooklet.pdf
McKnight, Terry. Minimizing Fraud Opportunities at Your Nonprofit. http://www.nonprofitaccountingbasics.org/minimizing-fraud-opportunities-your-nonprofit-organization