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Non-profits and Fraud: Are They the Victims or Fraudsters?

Posted on March 22, 2012
Written By Tricia Cook 


Fraud can affect anyone – even those organizations trying to make our communities better, like local non-profits.  But are non-profits the victims or the fraudsters?

When we think of a non-profit organization, we probably think of one that is helping disaster victims, homeless or underprivileged children, or cancer patients, but do we think of fraud?  According to the Association of Certified Fraud Examiners 2010 Report to the Nations, non-profits have a median loss of $90,000 annually due to fraud.  This type of loss can have a major effect on an organization, and to those who donate to, or receive assistance from, the non-profit.

Why are non-profits often victims of fraud? There are a few elements inherent in the organization of a typical non-profit that leaves them vulnerable to fraud schemes:

  • There is a high level of trust from management and board members because of the nature of the organization – doing good, helping others, etc.
  • Few paid staff means that many jobs are done by one person, resulting in loss of the checks and balances that can prevent fraud.
  • A large number of volunteers come in and out of the organization, exposing the non-profit to many people who may or may not undergo background checks.
  • Limited financial controls in place, in part due to the understaffed office.
  • Reliance on audits to catch fraud, instead of having internal controls in place to offer daily protection against internal/external scams.

So how can a non-profit combat fraud with these limited resources?

  • Set the proper tone at the top
  • Do background checks on those involved in running the organization (paid employees and volunteers)
  • Segregate duties, especially in the finance department. For example, even with limited staff, make sure the same person isn’t doing accounts payable and receivables without outside approvals.
  • Put policies and procedures in place to have random checks for fraud, surprise audits, or regular changes to job responsibilities.
  • Provide a means of anonymous communication to report fraud – a hotline or even a comment box.

But be mindful that not all non-profits are victims when it comes to fraud schemes.  Beware of those organizations that are just there to make a buck.  Research non-profits extensively before donating to an organization – you should know where and how your money will be used, and what the group is doing to ensure that your donations won’t be part of that $90,000 lost annually to non-profits due to fraud.

Tricia J. Cook is a senior forensic analyst with the forensic accounting and litigation services department at Piercy Bowler Taylor & Kern CPAs. She sifts through financial transactions to resolve allegations or evaluate suspicions, interpreting that transactional data and then organizing that information into easy to understand reports for use by counsel, or for presentation in a court-of-law. She can be reached at tcook@pbtk.com or 702-384-1120.

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