Common Fraud Schemes within
Not- for-Profit Organizations
Part 2
By Ashley Lamberton, CPA
Fraud in the workplace continues to be a great concern for many organizations. Not-for-profit organizations can be particularly vulnerable to this problem, so it's important to know what to look for and have checks and balaces in place.
Fraud schemes can generally be grouped into two main categories: internal and external. Internal schemes are more common within not-for-profit organizations for a variety of reasons including the types on transactions (donations), financial expertise of organization and volume of volunteers.
The two primary ways that fraud schemes are perpetrated within not-for-profit organizations are asset misappropriation and fraudulent financial reporting.
One common type of asset misappropriations is known as skimming. Skimming occurs when a person takes cash or checks received by the organization and uses the money for personal use. They will take a small portion of cash or a few checks at a time while leaving the remainder in order to go unnoticed. Not-for-profit organizations are particularly susceptible to skimming schemes since fundraising events often include cash transactions. Not-for-profits are also susceptible to skimming in the form of checks because they often operate under acronyms. Checks payable to the organization's initials can be easily altered and deposited to a personal account. For example, NPO can be easily altered to reflect N. P. O'Neil.
Other schemes commonly perpetrated by employees of not-for-profit organizations involve the creation of fictitious vendors and fraudulent invoices that result in disbursements to these fictitious vendors. Employees with access to the organization's checkbook may issue checks made out to these vendors they've created to pay their personal expenses. They might also make out checks payable to themselves to be used for their personal gains or sometimes to finance addictions. The organization's credit cards or the credit card numbers of donors may also be used to purchase personal goods or for personal gain.
Since not-for-profit organizations are sensitive to negative publicity, fraudulent financial reporting is another common fraud scheme. A couple of examples of fraudulent financial reporting include failing to disclose significant related party transactions or non-compliance with debt covenants. The books may also be held open past the year end to inflate revenues or misclassify donations or expenses to mislead both donors and the board of directors.
The best way to prevent fraud and to protect your organization's assets is to have strong internal controls in place.The staff at Winter, Kloman, Moter & Repp, S.C. would love to discuss possible internal controls that your organization could implement to prevent fraud from occurring.