How safe is your nonprofit?
Part 2: How do you prevent fraud?

Written by
Elizabeth Stasiowski

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At Insource we strive to make sure your nonprofit has everything it needs to operate efficiently and safely.

With this in mind, we’ve created a series of blogs around keeping your nonprofit safe, covering important aspects of Finance, HR, and Technology.

Last month we talked about how fraud could affect your nonprofit. Read below about how you can prevent fraud.

What is necessary to commit fraud and how can we see it coming?

Three things are typically necessary for fraud to occur:

  • Pressure– Fraudsters may have financial pressures such as a gambling problem, drug addiction, or difficulty paying their bills
  • Rationalization– Fraudsters justify their actions by claiming they were treated unfairly by the organization or are stealing from a large, faceless entity. Or fraudsters justify their actions because they believe they are stealing for a noble purpose – to help their family, etc.
  • Opportunity– There are gaps in the internal control structure that allow fraud to occur.

What and how are people stealing from us?

There are many ways that fraudsters steal from their organizations:

  • Physical property – Stealing Computers, cameras, other equipment, etc.
  • Organizational checks – Taking blank checks and using a signature stamp or forged signature, or using checks to pay personal expenses, but recording them as business expenses (utilities, telephone bills, etc.)
  • Incoming donation checks – Taking donations made out to your organization, depositing them into an off-the-books business bank account, and using organizational letterheads to send thank-you notes to donors.
  • Improper checks – Checks made out to fictitious vendors or employee reimbursements paid without backup receipts. These are generally signed by busy executive directors who don’t look while signing them.
  • Personnel – Payments made to fictitious employees, unauthorized raises, or non-submission of payroll taxes.

The warning signs

Most employees who commit fraud exhibit tell-tale signs that are easily identifiable.

An employee might:

  • Send requests for reimbursements that do not contain original receipts
  • Refuse to take a vacation, work overtime, or want to take work home with them
  • Exhibit signs of or discuss financial hardship or personal issues
  • Have excessive personal spending that does not seem reasonable based on salary
  • Have an unusually close relationship with vendors

Also, an organization might:

  • Have an unusual and unexplainable drop in profits
  • Have Financial records that are disorganized, or missing vendor contracts
  • Have Inventory or petty cash is unexpectedly missing
  • Have Vendors who do not appear to have legitimate websites or contact information

How can we prevent this?

Prevention is always better than cure. So, what are the general steps your nonprofit can take to protect itself from fraud?

  1. Hire the right people – Be sure to conduct thorough background checks.
  2. Develop a formal fraud policy and code of conduct – Get employees to sign documents confirming they understand the rules and responsibilities of their position regarding fraud and fraud prevention.
  3. Prosecute offenders – If your nonprofit becomes a victim of fraud, follow the law.
  4. Establish internal controls that are both preventative and detective in nature – Internal controls can be very effective. We talk more about these below
  5. Require vacation and job rotation (if possible) – This allows others to see into the processes of your organization’s money handlers.
  6. Create a whistleblower policy – This should be confidential and ideally managed by a 3rd party
  7. Educate employees and volunteers – It’s important to train others not only on the controls processes but how to detect fraud as well.
  8. Institute appropriate personnel policies and procedures – Make sure all personnel policies, particularly around earnings are applied equally and fairly.

What are internal controls?

Internal controls are financial management practices that are systematically used to prevent misuse and misappropriation of assets, such as those that occur through theft.

Where should you start?

There are three main tenants to Internal Controls:

  1. Custody of Assets – Cash and the means of transferring it should be locked up.
  2. Separation of Duties – Multiple people should be involved in most or all transactions.
  3. Transparency – Create a flow chart or map of how money moves through the organization, and who is responsible at each stage. External auditors and consultants can help with this.

Here are some internal controls that you can implement today:

  • Lock the office door when no one is present to monitor the space and conduct regular fixed asset inventories.
  • Keep all cash and blank checks in a locked drawer. Make sure to deposit cash and checks as soon as possible after the receipt of them.
  • Only reimburse employees for expenses that are approved in advance in writing; do not process reimbursement checks lacking original backup receipts; require prior approval for credit card expenditures over a certain amount.
  • Have someone other than the bookkeeper open mail, log incoming checks, review and approve payroll, and sign checks.
  • Conduct a periodic review of the list of all vendors receiving money from the organization.
  • Require double signatures on checks over a certain amount (that amount is up to you).
  • Encourage whistleblowing if fraud or theft is suspected and say all whistleblowers will be treated confidentially.
  • Conduct random internal “audits” or inspections of some of the following:
    • Cleared checks for appropriate payees and signatures
    • Agreements of receipts to deposit slips
    • Journal entries (Making sure there is an explanation for each.)
    • Bank reconciliations
    • All new vendors added in a preceding period and their confirmations of validity

Although it is certainly unrealistic to assume one can completely eliminate the risk of fraud; you can take effective steps in minimizing the risk.

If you are worried about fraud in your nonprofit, It might be time to outsource with Insource!

We are happy to talk through your current financial processes and try to help you find the best way forward. Get in touch with Insource today, and let’s see what we can do.

Email us at insource@insourceservices.com or call us on (781) 235-1490.