It you list the 10 worst things that can happen to a nonprofit organization, fraud will be at or near the top. Fraud is a serious issue for nonprofit leaders, for several important reasons.
First, organizations that serve the public do not want to lose funds to the wrongdoing of nefarious people. This is doubly true in smaller nonprofits, where even the smallest fraud can have a big impact on stretched budgets.
Fraud has serious, ongoing consequences for nonprofits. Once public, fraud casts a pall over all the good things you do for months or years to come. It can also drive a wedge between your nonprofit and your most important donors. Furthermore, your board of directors is likely to insist on stringent new controls, something your group might ill afford. You can also expect to spend a lot of time and money repairing your group’s image in the community.
Fortunately, proactive measures can help nonprofit leaders minimize fraud. It won’t be free, but it’ll be a lot less expensive than damage control.
Spell out responsibilities
The past three decades have seen a variety of high-profile cases of fraud at large nonprofit organizations. Small organizations aren’t immune to the trend, either. Overall, the nonprofit community is second only to the financial sector in the amount lost to fraud.
The first step in reducing fraud risk is properly defining organizational roles. This includes clearly delineating who is authorized to make expenditures of a given size. Segregating duties is important because it minimizes the likelihood of people conducting wrongful activity out of ignorance. Michele Berger, an attorney who advises nonprofits, recommends that no single employee be responsible for handling cash, issuing checks or reconciling financial reports. What’s more, two signatures should be required on every check you write.
Check people’s backgrounds
People with shady financial histories should not be working for your organization. Background checks also reveal poor credit histories or large amounts of debt, which can make people prone to future wrongdoing.
Some nonprofits subject board members to even more scrutiny than they apply to employees, for good reason: Boards hold the future of entire organizations in their hands.
We’re also seeing a growing trend of organizations conducting background checks on volunteers. To be sure, this step might not be necessary or every person who volunteers a few hours each week. But it’s critical for those who put in much longer hours or who serve in key positions. And it’s absolutely necessary for folks who handle money.
Establish a finance committee
While there’s no a need to establish a committee for every operational topic, setting up a finance committee is a wise move for well-managed nonprofits. Such a committee can help to offset the fact that many nonprofits — especially smaller ones — lack the financial talent in-house to tackle complex financial issues.
At a minimum, the committee should meet once a month and include your group’s executive director, treasurer, the top financial employee and other interested people. The work of such a committee can go a long way toward properly evaluating financial risks to your organization and developing safeguards to mitigate them.
Conduct annual audits
Audits get a bad rap because people associate them with the Internal Revenue Service. But they are crucial to economic accountability, which is why they should be done at least once a year. An audit committee established by your organization’s board of directors can review your group’s financials and examine your anti-fraud practices.
An audit committee can examine which financial reporting areas are susceptible to misstatement, and which operational areas are prone to misappropriation of assets. Some organizational audit committees conduct surprise audits to ensure that any false records are not altered in advance. In addition, groups of significant size or assets will want to conduct a second round of audits — using an external firm — as a matter of course.
Build the right culture
Astute nonprofit leaders have a zero-tolerance policy for unethical behavior, and they will continuously reinforce that code of conduct among all stakeholders. This underscores the need for robust training of volunteers, employees and board members.
Many organizations have even established anonymous hotlines to encourage whistle-blowing — thus reinforcing their commitment to financial soundness, organizational honesty and integrity.
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- Gerry Zack and Laurie De Armond, "Nonprofit Fraud: It’s a People Problem, So Combat It with Governance," Nonprofit Quarterly
- James Leisner, "Nonprofits Face Special Challenges in Protecting Against Fraud," Stonebridge Business Partners