Every two years, the Association of Certified Fraud Examiners (ACFE) puts out a biennial study designed to examine the costs, methods, victims, and perpetrators of occupational fraud, and includes 23 major industries and data from 125 countries. The latest report is the 2020 Report to the Nations and the 2022 report is expected later this year.
How Fraud Impacts Nonprofits
While fraud in the nonprofit sector isn’t as prevalent as in for-profit entities — comprising just 9% of fraud cases according to the study – the results are still troubling. The study reports 191 fraud cases in the nonprofit sector resulting in $75,000 in median losses and $639,000 in average losses.
The ACFE identified the following cases where fraud typically occurred:
- Corruption, including Conflicts of Interest, Bribery, Illegal Gratitudes and Economic Extortion — 41%
- Billing — 30%
- Expense reimbursements — 23%
- Cash on hand —17%
- Noncash on hand — 16%
- Skimming — 15%
- Check and payment tampering — 14%
- Cash larceny and payroll — 12%
- Financial statement fraud — 11%
- Register disbursement schemes — 3%
Nonprofit Fraud Exposure
The top three areas of fraud exposure include:
- Less oversight and the lack of necessary internal controls — 35%
- Lack of management review — 19%
- Override of internal controls — 14%
The study shows that of the perpetrators at nonprofits:
- 39% were owners/executives
- 35% were a manager or a supervisor
- 23% involved an employee
Internal perpetrators often display certain behavioral red flags that can tip off an organization to possible fraudulent activities, such as:
- an unusually close association with a vendor
- a sudden increase in the organization’s purchases, and/or control issues
- a general unwillingness to share duties
- displays of suspiciousness/defensiveness
- refusal to take vacation time
- large bills that are broken into multiple smaller invoices
According to the study, fraud is most often discovered through:
- A tip/complaint — 40%
- An internal audit — 17%
- A management review — 13%
- A complete accident — 7%
- The examination of documents — 6%
According to the Nonprofit Risk Management Center, many nonprofits make a critical mistake and assume that all fraudulent events will be caught by auditors. The fact is that by the time a fraud scheme is uncovered, the financial and reputational damage has likely been done.
Fraud Prevention and Mitigation Tips
Fraud is an unfortunate possibility for any organization – but the following fraud considerations can help protect your nonprofit:
- Leadership commitment –The top of your organization must create and enforce an environment and culture emphasizing ethical behavior. Having a code of conduct itself cut the median fraud loss from $205,000 per incident to $100,000.
- Anonymous reporting – one of the top ways to prevent fraud is to create the perception of inevitable detection. This begins with having a way for employees and board members to report concerns without being identified. Forty percent of frauds are uncovered by a tip/complaint, and median losses were nearly doubled at organizations without hotlines
- Internal controls and review procedures – involve more than one individual in all accounting functions and make sure an independent individual is reviewing financial information such as bank and credit card statements. Separation of duties is vital for nonprofits when it comes to fraud prevention.
- Policies and procedures – Implement effective and well documented accounting processes and procedures Also include antifraud actions such as developing a risk mitigation policy that includes insurance.
Through leadership commitment, identifying potential gaps in internal controls and developing a proactive fraud detection program nonprofits can significantly reduce their exposure to fraud.
If you have any questions, please reach out to an experienced RINA professional.