Nonprofit organizations require a lot of bookkeeping and transparency. As funds come into the nonprofit, the nonprofit needs to make sure that those funds are directed where they should be. And when funds are allocated incorrectly, it could mean that the organization could experience some major setbacks.
What exactly is misappropriation of funds?
Misappropriation of funds sounds like embezzlement. But it can happen more innocently than you might think. When running a nonprofit organization, certain funds are often earmarked for a specific use. A donor might give an animal shelter funds for a specific dog or cat. A government grant may give a community garden funds for a specific project. When these funds are used for something else within the organization, it’s considered to be misappropriation.
Misappropriation often happens because a nonprofit organization has too much money in one area and not enough money in another. For instance, the community garden may find that its project only cost $30,000, but the government granted it $50,000. It’s tempting to use that $20,000 for other things, such as supplies, but the nonprofit organization cannot do that.
How can you protect yourself against misappropriation?
From the start, nonprofit organizations should avoid taking donations for specific things. In the case of the animal shelter above, a nonprofit organization can state that funds will go first to an animal that they were donated to, but will then go into other areas of the shelter if that animal’s care has already been paid. This avoids issues of misappropriation.
Likewise, a nonprofit organization can make it clear that a fundraiser is for a specific thing, but that anything in excess will go to the nonprofit organization’s general operating costs.
But for things like government grants, the funds are usually there for a specific purpose, and this cannot be avoided. Better bookkeeping and accountability is necessary to make sure that every dollar is tracked, and that funds aren’t used that shouldn’t be used.
Of course, misappropriation can also happen for darker reasons: it can be embezzlement. That happens when the funds are used for things that benefit an individual rather than the nonprofit.
What happens if misappropriation is discovered?
Misappropriation is fraud. That means that the fines and penalties associated with it can be strict. However, it can happen due to poor internal controls, or it can happen due to direct negligence and malice. Intent and the severity of the misappropriation does matter. If the misappropriation was something like funds being accidentally moved around, it’s possible that the IRS will simply ask that returns be amended and that the funds be corrected. If it’s a case of clear embezzlement, it’s possible the nonprofit will lose its nonprofit designation, as well as other legal consequences.
Misappropriation of funds is something that every nonprofit organization needs to worry about. Even if you’ve secured your bookkeeping, it’s always possible a board member could start embezzling on their own, and that will be something you need to deal with. Commercial nonprofit insurance is key to covering your organization from such losses.
About David G. Sayles Insurance Services
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