How to Prevent Financial Fraud in Your Nonprofit

Fraud can be expensive. A 2018 global report from the Association of Certified Fraud Examiners (ACFE), which garnered data from 23 different industries and 125 different countries, found $7 billion in total losses, amounting to $130,000 per individual case. For a nonprofit, a case of fraud could be devastating, especially if you’re working with a stringent budget.

It’s important to know exactly where your money is going and who is handling it; this is one of the few ways you can be aware of fraudulent activity. A whopping 22 percent of all cases caused more than $1 million in damages, with corruption the most common scheme in every global region. Considering small businesses lose twice as much per fraud scheme, with a median of $104,000, it’s more important than ever to make sure that your nonprofit is covered. Every single nonprofit is impacted by the act of fraud. Here’s how to prevent financial fraud in your nonprofit, courtesy of the Huffington Post:

Common Schemes

Fraud can be traced down to a certain pattern. The most common schemes include:

  • Check tampering – When you steal funds by altering checks illegally.
  • Billing – When you inflate invoices or utilize funds for personal purchases. For example, if one makes a shell company and does not actually distribute goods.
  • Expense reimbursement – When you seek reimbursement for inflated funds.
  • Corruption – When you misuse your influence and violate the nonprofit’s policies. Bribery is a good example of this.
  • Payroll – When you make the nonprofit pay for something that was fictitious. For example, if an employee was taking in extra hours that they aren’t actually working, it would be considered payroll fraud.

Red Flags

Fraud happens at any level in a nonprofit, whether it’s entry level, mid or senior level. While most fraud happens below the executive level, those executives that do commit fraud have a more devastating impact on the organization. To top it off, fraud can happen whether the individual is a first-timer or a repeat offender. Some red flags include when an individual is living way beyond their needs, financial difficulties, or any usually close relationships with vendors or customers. Other red flags include control issues, a lack of willingness to share duties, or suspicious activities.

Effective Safeguards

It doesn’t take a lot to start preventing fraud. Many measures are inexpensive and can be quickly implemented. Other measures can rock the core of your organization, but sometimes it’s necessary to do so. Some effective safeguards include:

  • Implement an anonymous reporting system
  • Create a culture of compliance
  • Segregate financial duties
  • Require backup documentation
  • Rotate employees and mandate vacation time
  • Audit committees

By putting any of these plays into motion, your nonprofit can effectively tackle the act of fraud. While these measure won’t grant you immunity from fraud, they’ll help better prepare you if it does end up happening.

As a final line of defense against fraud, make sure to have the right insurance in place. At David G. Sayles Insurance Services, our Glen Rock Small Business Insurance program can be tailored to provide solutions for the nonprofit sector, which will ensure that all of your operation’s specific exposures are covered.

About David G. Sayles Insurance Services

At David G. Sayles Insurance Services, we strive to protect the investments of homeowners like you. Our comprehensive policies are customized for you to provide the exact coverage you need. For more information, contact us today at (800) 439-0292.