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.

Anti-Fraud Training

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.