According to recent data, fraud has been on the incline for both not-for-profits and for-profit businesses, bringing some victims to the brink of collapse. That said, not-for-profit organizations tend to be at greater risk of fraud because they have fewer resources available to help prevent fraud and recover from a loss. This sector is particularly vulnerable due to a lack of oversight and specific internal controls.
The 2020 ACFE Report to the Nations reviewed 191 cases of not-for-profit fraud. It found the median loss for these organizations to be $75,000, and the average loss was a whopping $639,000! That is a big chunk of change for a not-for-profit.
The report also identified the top three weaknesses not-for-profits face when it comes to fraud prevention controls:
- lack of internal controls (35%)
- lack of management review (19%)
- ability to override existing internal controls (14%)
When it came to fraud detection, the report found the following:
- Tip complaints accounted for 40% of fraud cases discovered
- Internal audits accounted for 17% of cases
- Management review accounted for 13% of cases
- 7% of cases were accidentally discovered
- Examination of documents accounted for 6% of cases
Given this data, we can see that tips are the most common fraud detection method among not-for-profit organizations. That’s a good thing because awareness, along with intelligence and diligence, are needed to minimize a not-for-profit’s risk of fraud. Following are some guidelines for preventing fraudulent activities within your not-for-profit:
Implement Internal Controls
One of the best practices for minimizing fraud risk is implementing internal controls. Internal controls are strict rules and procedures implemented by an organization. They provide reasonable assurance that an organization is operating ethically, transparently, and in accordance with the established industry standards.
Although the small size of an organization’s office staff limits the extent of separation of duties, specific steps can be taken to separate incompatible duties. The basic premise is that no one employee should have access to both physical assets and the related accounting records, or all phases of a transaction.
One of the most critical areas of separation is cash, where a bookkeeper handles incoming checks, prepares the deposit slip, posts receipts to customer accounts, and receives and reconciles the monthly bank statement. The result is the danger that intentional or unintentional errors could be made and not detected.
Establish a Fraud Hotline
Studies show that most frauds are known to someone in a defrauded organization. Additionally, they are revealed after a tip is received from someone with knowledge about the fraud. However, an employee may not report suspicions or knowledge of fraud if they do not know how to report them. This is especially true if the perpetrator is someone high up in the organization or the employee reports to them.
An effective fraud hotline should have the following features:
- It should be available 24/7. Studies show that 40% of calls to fraud hotlines are made at night or on weekends. Employees typically will not call during normal work hours to report on coworkers or supervisors. Additionally, they often will not call back if their first call is not answered.
- The hotline must allow anonymous calls to protect confidentiality so that employees will not fear possible retaliation if they are identified as the whistle-blower.
- Employees should be made aware of the hotline’s availability and the reasons why they should use it. Organizations can accomplish this via informational posters, memos, or brochures.
Implement mandatory anti-fraud training for staff members, managers, and board members to minimize the risk of fraud. Anti-fraud training educates and equips not-for-profit stakeholders with the ability to detect, report, and prevent fraud. Trainees will learn:
- What is fraud and constitutes fraudulent activity?
- Consequences of committing fraud
- How to report fraudulent acts
- Effect of fraud on victims
Most Common Fraud Schemes
According to ACFE 2020 Report to the Nations data, 86% of fraud schemes are due to Asset Misappropriation. In this instance, the perpetrator steals or misuses an organization’s resources. The median loss in this type of fraud is $100,000.
The second most common fraud scheme is Corruption. A perpetrator misuses their influence in business transactions violating their duty to the employer to gain a benefit. The median loss in this type of fraud is $200,000.
The third most common fraud scheme, Financial Statement Fraud, is also the most damaging. This involves the intentional misstatement or omission of material information in an organization’s financial reports. The median loss in Financial Statement Fraud is $954,000.
Examples of Financial Statement Fraud schemes include:
- Improper Revenue Recognition
- Side Agreements
- Failure to Record Sales Provisions or Allowances
While fraud has the potential of causing a lot of damage to not-for-profits, the good news is organizations can take proven steps to prevent it.
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