Not-For-Profits
Favored Fraudsters' Targets
A new study reports that approximately $40 billion is lost to fraud at not-for-profit (NFP) organizations each year. This figure is especially startling as it represents funds generated not in efforts to prevail against the pressures of market competition and regulatory scrutiny that for-profit companies face, but rather donated funds, given with the intention of supporting worthy causes.
Additional findings: The typical nonprofit fraud is committed by a female and results in $50,000 in losses. However, the largest frauds against nonprofits are committed by male managers and average $100,000.
Main Types of Fraud
Dominant varieties of fraud threatening NFPs include...
- Outright theft of donations—both cash and checks.
- Payroll manipulation. Due to lax internal controls, employees of NFPs are often able to put "ghost" employees or relatives on the payroll or continue to pay terminated employees and divert the funds.
- Personal use of the NFP's credit cards. Misrepresenting expenses. Disbursements for such nebulous services as “consulting” or “training” are often outright embezzlements.
- Bid-rigging or contracting without bidding. Without controls requiring competitive bidding for contracts for computer services, landscaping, food services, etc., dishonest NFP managers are able to award contracts to friends and relatives or accept kickbacks from vendors.
- Stealing funds earmarked for beneficiaries. Especially in small NFPs such as group homes for disabled infdividuals, dishonest workers are often able to steal cash disbursed for client expenses, such as outings, educational services, etc. and never arranging for the intended services to be provided.
Protective Measures
- Education employees about the harm that perpetrating fraud or abuse would cause them, the organization, its charitable mission and their clients.
- Purchase fraud-loss insurance. While most insurance companies require that someone other than the treasurer review monthly financial statements, and that an annual audit be performed, these measures are not only worth the benefits of the insurance, but are essential operational steps, regardless of third-party dictates.
- Require independent directors. Three states (California, Maine, and New Hampshire) require that independent directors serve on the board.
- Prohibit personal loans to board members or NFP executives. Strengthen board oversight, especially by the audit committee. NFPs currently lacking an audit committee should form one immediately.
- Require all personnel to undergo a detailed employment screening.