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Not-For-Profit News
June, 2012

Fraud in Nonprofit Organizations

by Matthew Los, CPA

 

Despite their honorable missions and dedication to helping others, nonprofits are not immune to fraud. According to the Association of Certified Fraud Examiners (ACFE), last year 14.3% of all fraud was committed within a not-forFraud-profit organization. In an economic climate that makes every dollar precious, no nonprofit wants to lose revenue to fraud. Protecting an organization against fraud before it happens and active, ongoing monitoring for fraud and abuse have become extremely important in today's environment.

 

So how does a nonprofit organization prevent fraud? The answer is that the organization needs to implement strong internal controls to make fraud more difficult. Internal controls are safeguards put in place to protect an organization's assets.

 

Nonprofits face special challenges in this area for the following reasons:

  1. Nonprofits typically have nonreciprocal transactions, such as charitable contributions, that are easier to steal than other sources of revenue where there is consideration exchanged.
  2. Management may have little financial background and may be trying to stretch limited resources to cover multiple program demands while serving hundreds or even thousands of clients.
  3. Board members may be supportive and passionate about the agency and its mission, but not well-versed in financial statements, cash flow and internal controls.
  4. Nonprofits often have many volunteers working in the organization who are privy to confidential information.
  5. Nonprofits are highly susceptible to the effects of negative publicity and therefore, are reluctant to report, or even discuss, when fraud occurs.

 

There are practical steps that can be taken to address these challenges. A large part of the solution hinges upon some members of the board of directors stepping up. The organization should have a strong, active finance committee. This committee should meet monthly and consist of the executive director, treasurer, the organization's top financial person and other interested board members. Monthly committee meetings provide an opportunity for open communication about important issues.

 

The finance committee should be the committee that recommends internal controls to implement. Below are just a few internal controls to consider implementing if they are not already in place:

 

  • Protect checks in a secure area with limited access.
  • Require backup documentation - all checks and cash disbursements must be accompanied by an invoice showing that the payment is justified.
  • If possible, the invoices or disbursement requests should be authorized by a manager who will not be signing the checks.
  • Only pay from original invoices.
  • Limit the number of bank accounts and authorized check signers.
  • Do not pre-sign checks.
    • Many nonprofits do this if the executive director is going on vacation.
  • Keep blank checks and signature stamps locked up.
  • Insist on timely prepared and reviewed bank reconciliations.
  • Consider requiring certain board members to co-sign checks of significant amounts (e.g. $2,500 or $5,000).
  • Scrutinize all expense reports before reimbursement, including those of management.
  • Insist on a budget for the next year before the year starts.
  • Compare current results to the budget and investigate variances.
  • Do not accept just a statement of operations (equivalent to a profit and loss statement), or just a statement of financial position (equivalent to a balance sheet in the business world). You need both. There is a relationship between these financial statements. If accounts receivable, prepaid expenses, accounts payable or accrued expenses are misstated or overlooked, your statement of operations will be affected as well.

 

The staff at Winter, Kloman, Moter & Repp, S.C. would love to discuss with you possible internal controls that your organization could implement to prevent fraud from occurring.

Contact us:

www.wkmr.com 

 

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At Winter, Kloman, Moter & Repp S.C., our not-for-profit team provides quality audit, accounting, tax, and consulting services to a variety of not-for-profit agencies, government funded businesses, private foundations, and assorted charitable organizations. Our experienced team has helped many not-for-profit organizations throughout Southeastern Wisconsin grow and thrive including:

  • Human Service Agencies
  • Cultural & Arts Organizations
  • Charitable & Religious Organizations
  • Educational & Day Care Institutions
  • Professional & Trade Associations
  • Assisted Living Facilities
  • HUD/WHEDA Housing Projects
  • Government-funded For-Profit Businesses

We concentrate on helping you best manage public or donated funds, analyzing how to get the most from your resources and helping you implement your plans to stretch every dollar. Our team of professionals understands your complex financial reporting needs, and will help you to accurately report your finances in an understandable way. We provide the independent audit and accounting services required by many of your funding sources by taking a value-added approach, implementing ever-changing tax reporting requirements, providing information technology consulting, and working with every aspect of your organization to support your success.

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Fraud in Nonprofit Organizations
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