Fraud and non-profit organizations: what you need to know
By ATB Financial 11 August 2020 3 min read
Fraud can have debilitating effects, from financial to reputational, on any business or enterprise. But for non-profit organizations, fraud losses can be even more difficult to absorb.
When organizations focus on providing community and service rather than gaining profit, financial losses due to fraud can be overwhelming–and result in negative reputational risk. As a result, your non-profit organization could see a loss of donors, grantors, and hard-earned good will.
When perpetrated by insiders, the impact of fraud can be doubly devastating. Many non-profit organizations have few staff members and operate mainly on trust, from the executive through to volunteers, they can be wide open to opportunistic people.
Here are some tips to help keep your doors open to your stakeholders and the communities you are serving–but closed to fraudsters.
Steps to reducing the opportunity for fraud to occur
One of the most important ways to reduce fraud is to educate your people about fraud and its impacts to the organization. Understanding how fraud happens better equips you and your staff to identify red flags and deal with them in an appropriate fashion.
Experts agree that the three key elements to fraud are opportunity, motivation and rationalization (although plain greed also plays a part). Where you, as a non-profit organization, have the most control is by reducing the opportunity for fraud to occur. Here’s the first step:
Step 1: Exert control
Having fewer staff resources can make implementing internal controls more challenging, perhaps making non-profits highly vulnerable targets for fraud actors. By prioritizing the implementation of internal rules and procedures within your organization, can help ensure the integrity of financial reporting and overall, prevent fraud.
Size isn’t a barrier to having strong internal controls: even small sized non-profit organizations with few staff can implement these simple, fundamental steps:
- Segregation of duties–Ensure you have separate checkpoints for any financial transaction. For example, have two signers on cheques. The person writing a cheque should not be the one signing it.
- Regular bank account reconciliation–This provides you the opportunity to detect any unusual activity in a timely fashion. Always reconcile payments with a matching invoice. Do it daily to increase the chances of recovering any lost funds.
- Implement cash-handling procedures–Keep cheque books, cash, bank statements, and any other financial data locked in a secure place. Consider shifting to electronic payment methods instead of paper cheques.
Step 2: Implement anti-fraud training
- Establish a fraud-awareness culture by training all staff, from front line to executive levels.
- Keep people up to date on the most common frauds and red flags associated with each fraud type.
- Clearly communicate your organization's policies and procedures on fraud prevention and detection.
- Have a whistle-blowing policy in place that staff and/or volunteers can access anonymously.
Step 3: Use cyber security technology
Effective cyber security involves people, as well as programs. Safeguarding your IT infrastructure can help prevent theft of important information such as donor and member details, financial, donor and employee data. Follow these steps:
- Implement an IT security policy to restrict access to servers, networks, laptops, external drives, etc.
- Practice password hygiene.
- Implement regular email monitoring, and regular system monitoring for those who work offsite or after hours.
- Invest in accounting software that can send automated alerts to a senior leader when discrepancies are detected.
Step 4: Use sound business practices
As a non-profit, you operate like a business to achieve your goals. To increase accountability, conduct audits at no notice on all business accounts.
Like a business, you should have and implement a formal code of conduct for all staff and volunteers. The code should include a strict expense policy that associates, board members, employees and volunteers are aware of.
Ensure you conduct background checks on each individual before bringing them on board. This one little step can help avoid major disruptions down the road.
Trust the process
Non-profit organizations are known to be highly susceptible to fraud risks as they rely heavily on volunteers and community members. By taking a few steps right away, you can mitigate the risk of your organization falling victim to fraud.