Fraud within nonprofits is something that may get overlooked by many as nonprofits don’t necessarily seem like a target for such a crime, or any crime for that matter. But in reality, fraud within the industry is rising. More than 13 percent of total reported fraud cases in America take place at nonprofits, according to the Association of Certified Fraud Examiners (ACFE).
ACFE also claimed in a 2016 report that the median loss for all cases was $150,000. This figure does not begin to consider the reputational injury and effect on donations that fraud may cause. While this is a sad fact to consider, there are a number of things that can be done to detect and prevent further fraud and other crimes from happening.
What Can Be Done to Prevent Fraud?
In reality, you can only control and monitor so much. But there are still steps that can be taken to limit, prevent, and protect against fraud. Traditional financial audits, whether in the nonprofit or for-profit sectors, are not created to sniff out fraud. An organization victimized by phony invoices, for example, may still fail to uncover substantial fraud until irregular activity is detected by an organization’s financial institution.
According to the ACFE, external audits only detect about 3 percent of the frauds reported to it and includes that external audits should not be relied on as an organization’s main fraud detection method. The most effective way to deal with embezzlement and fraud is to prevent it before it starts through a number of internal controls. Outside review by an experienced counsel hired to evaluate internal controls should be employed and tasked with looking for irregularities.
Board members and executive-level employees at a nonprofit must communicate that behavior not consistent with the overall mission of an organization will not be allowed. When it comes to financial matters, the board is responsible for outlining compliance procedures.
Next, an organization must develop policies that create a culture of compliance and ensure that all employees are educated about the possibility of fraud. There should be a code of ethics made that includes fraud policies and how to respond to hints of fraud and embezzlement.
Also, it’s important to outline operational procedures regarding payment disbursements and the receipt of funds with compliance controls. These procedures must be personalized to fit the size of an organization, but any size of an organization can still use financial controls. There should be plenty of financial diversification of authority and roles and tasks of employees as possible so that all financial transactions are reviewed by multiple parties, thus boosting compliance and transparency.
Lastly, a nonprofit insurance program should be purchased in order to financially protect a nonprofit. As mentioned above, $150,000 per loss on average can be the difference between a nonprofit moving forward with a limp or having to close down. There are specific types of nonprofit insurance program that can help to provide specially made protection, such as social services insurance, which acts as a financial backstop for nonprofits. Having this in your corner can help to pick up the pieces following a financial loss due to fraud or embezzlement.
About Tangram Insurance Services
Located across the Golden Gate Bridge, just outside of San Francisco, Tangram Insurance Services is a full-service Managing General Underwriter and Program Manager offering specialty programs. We focus on industry-relevant coverage, competitive pricing, and practical business and risk management solutions for your clients. Since we are not all things to all people, we make sure to create outstanding custom-built solutions that matter to those businesses, and the brokers who serve those industries. Contact us at (888) 744-9810.
